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TMI Blog2003 (4) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... nte provisions of section 40 of the Act." The ground No. 2 above is misconceived as the assessment had been made under section 143(3). I proceed to deal with the other grounds hereunder. The assessee derives income from tobacco business. It claimed deduction for an amount of Rs. 29,000 paid to one of its partners, Shri Nagendra Prasad. Shri Nagendra Prasad admittedly is a partner in the assessee-firm in a representative capacity, i.e., as representing the HUF of which he is Karta. It is claimed that he drew a remuneration of Rs. 12,000 in his individual capacity. In other words, while he is a partner' in a representative capacity, he drew remuneration in his individual capacity. The Assessing Officer disallowed the claim for deduction of the said amount of Rs. 12,000 under section 40(b) of the Act on the ground that the remuneration was not drawn by a partner or a working partner, as Shri Nagendra Prasad is a partner in his representative capacity. He observed that the deduction allowable under section 40(b) is only for a remuneration paid to working partner and when a person is a partner in his capacity of Karta of HUF and remuneration is claimed to have been received in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the partners on the ostensible plea that while receiving interest from the firm the capacity of the partner is HUF, but while receiving remuneration the capacity of the same partner is individual though both interest and remuneration from part of business income and remuneration is paid only to a partner. Thus the intention of the legislature is sought to be diluted by this extended logic. The amendments are introduced to avoid double taxation but here they resort to such an exercise that neither the firm nor the partners pay the tax or pay only greatly reduced tax. One of the contentions of the assessee is that remuneration paid is for services rendered and it is not the distribution of profits. This is not correct. Sub-section (2)(a) of section 10 has been introduced to exclude in the case of a person, being a partner of a firm, which is separately assessed as such, his share in the total income of the firm. Similarly, Explanation (2) to section 15 has been introduced to clarify that any salary, bonus, commission or remuneration by whatever name called, due to, or received by a partner of a firm from the firm shall not be regarded as salary for the purpose of the firm shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e position I the Hindu Law regard to a coparcener, even when he is the Kartha entering into a partnership with others in carrying on business is well settled and the partnership is between the coparcener individually and his other partners and that the control and management is in the hands of the individual coparcener, who is a partner and not in the hands of the family. Similarly, in the case of Bhagyalakshmi Co., it was held by the Hon'ble Apex Court that a contract of partnership had no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates that rights and liabilities of the partners. These two decisions have reaffirmed the legal position and unequivocally established that when a coparcener of a HUF joins a partnership as a partner, representing the HUF, he occupies a duel position. Qua the partnership, he functions in his individual capacity. Qua the HUF, he acts in a representative capacity. 4.2 Regarding the nature and assess ability of remuneration paid to a person/coparcener representing his HUF in a business concern, the Hon'ble Apex Court in the case of Rajkumar Singh Hukum Chandji had an occas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tates that for the purposes of this clause, a working partner would mean an individual, who is actually engaged in conducting the affairs of the business or profession of the firm of which he is a partner. The said Explanation refers to a working partner as an individual, no matter in whatsoever capacity he has joined the partnership as a partner, but the only rider, which is vital for deductibility of the remuneration paid to the said partner under section 40(b) is that he is not a sleeping partner and is one, who is actually engaged in the conduct of the affairs of the business or profession of the firm of which he is a partner. There will be no warrant or justification for reading into the above provisions a stipulation that a partner representing his HUF in a firm and actually engaged in the conduct of the affairs of the business or profession of the said firm cannot be regarded as a working partner for the purposes of section 40(b) of the Act. I find that on identical set of facts, the Income-tax Appellate Tribunal, Hyderabad Bench and ITAT, Madras Bench vide their orders relied on by the learned representative have allowed the claim of remuneration to the partners, representi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtner represented his HUF. It was claimed that some commission was paid to him in his individual capacity and so it could not be regarded as a payment to a partner as the individual was not a partner and so the said payment could not be disallowed in terms of section 40(b) as it stood during the relevant period. This contention was negatived by the Apex Court with the following remarks-- "The application for registration of a firm has to be made under section 184 of the Income-tax Act. It is specifically provided that: (1) the partnership must be evidenced by an instrument in writing; (2) the individual shares of partners must be specified in that instrument; (3) the application for registration shall be signed by all the partners. The very fact that individual shares of the partners have to be specified and that such partners must personally sign the partnership deed and also the application for registration, go to show that even if a person joins a firm as a representative of a Hindu undivided family or any other body or association, within the firm his position is that of an individual. He may have an agreement with a third party to divide the profits received from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent unit of assessment under the Income-tax Act. The assessment of a firm will have to be made strictly in accordance with the provisions of the Income-tax Act. The law has to be taken as it is. Section 40(b) applies to certain payments made by a firm to its partners. Neither the firm nor its partners can evade the tax law on the pretext that although in law he is a partner in reality he is not so. He may have to hand over the money to somebody else. That may be his position qua a third party. But the firm has nothing to do with it. It has paid the commission to one of its partners. It cannot get any deduction in its assessment for that payment because section 40(b) of the Act expressly prohibits such deduction. The basic principle that a firm is a compendious mode of describing the persons constituting the firm must not be overlooked. It is the individuals constituting the firm who are its partners. The partner may be under an obligation to hand over the monies received by him to somebody else by virtue of sub-contract or any other arrangement. That will not change the character of the payment by the firm to its partner or the status of the partner in the firm. The firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slender that aid might be, the acquisition in question should be considered as a family acquisition, stands repelled by the decision of this court on Piyare Lal Adishwar Lal's case. Therein, one Sheel Chandra, who was the karta of his Hindu undivided family consisting of himself and his younger brother, furnished security his family properties for being appointed the treasurer of a bank. He would not have been appointed treasurer of the bank but for the security given. In that case also, it was contended on behalf of the Commissioner of Income-tax that the salary earned by Sheel Chandra was a family income and is liable to be taxed as such. That contention was negatived by this court. From that decision it follows that it is not any and every kind of aid received from family funds which taints an income as family income. Before an income earned by the exertions of a coparcener can be considered as a family income, a direct and substantial nexus between the income in dispute and the family funds should be established. The ratio of the decision of this Bench in Palaniappa Chettiar's case also leads to the same conclusion. Palaniappa Chettiar would not have become the director of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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