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TMI Blog2002 (2) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... 825, confirmed in Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753 and also subsequently confirmed in CIT v. Kanji Shivji and Co. [2000] 242 ITR 124 (SC). Learned counsel for the Revenue also agreed that the question was concluded by these judgments and it had to be answered in favour of the assessee. It is accordingly answered in favour of the assessee." We are, therefore, only concerned with the first question here which relates to the salary payments made to the partners of the assessee-firm. One RM. Appavu Chettiar Sons, Madurai, which is a partnership firm, is the assessee. In the relevant assessment year 1983-84, the assessee's accounts showed that salary payments were made to the tune of Rs.1,92,000 to the partners of the assessee-firm in their individual capacity by the assessee partnership firm. The assessee had claimed this amount as allowable expenditure relying on Explanation 2 to section 40(b) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). That was disallowed by the Income-tax Officer. In the appeal before the Commissioner (Appeals) also the said disallowance was upheld. The Commissioner (Appeals) followed the decision of the Madras High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esented' respectively),- (i) interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause. Explanation 3.--Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person." Learned counsel drew our attention to the decision of the apex court in Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 and pointed out that though the above amendment had become effective from April 1, 1985, the apex court had specifically held that even for the period anterior to April 1, 1985, any interest paid to a partner representing his Hindu und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld categorically in these two decisions that what applies to the interest payable to the partners also applies to the salary payable to the partners where such a partner is a partner on behalf of a Hindu undivided family. In the case of NTR Estate [1986] 157 ITR 285 (AP), the Division Bench was concerned with the Explanation to section 40(b) and was considering the question of disallowance of interest as well as the salary paid to the partners. After discussing the case law, the Division Bench came to the conclusion that the effect of the Explanations was: "(a) if a person is a partner in a firm in a representative capacity and if such partner lends to the partnership monies belonging to him individually, then the interest paid to such partner on the monies lent by him is not liable to be added back under section 40(b) of the Act; and (b) similarly, if a person is a partner in his individual capacity and if such partner lends to the partnership monies belonging to the Hindu joint family, of which he is the 'karta', then the interest paid on the monies lent by the joint family is not liable to be added back under section 40(b) of the Act." Ultimately, a finding was record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partner concerned then the salary paid to the partner for his individual services cannot be disallowed in the computation of the income of the partnership firm. If, however, the real recipient of the salary is the joint family, although it was paid ostensibly to the partner, then the salary paid falls to be disallowed under section 40(b) of the Act. If it is established that the salary or remuneration received by the karta of a joint family from a firm in which he is a partner in a representative capacity was for services rendered by him individually and that there was no real and sufficient connection between the investment of the joint family assets in the firm and the salary or remuneration paid to him, the salary or remuneration received by the karta could not be treated as income of the family. It has to be treated as his individual income and assessed as such . . . In the, present case, it is admitted that salary was paid to two of the partners of the assessee-firm for services rendered by them individually, although they were partners in a representative capacity as kartas of their respective joint families. It is further admitted that the salary paid to the two partners wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit only if the salary was paid to the joint family itself and assessed in its hands in the status of a joint family. The Division Bench also relied upon the provisions of the Hindu Gains of Learning Act (Act of 1930), and observed: "Once the joint family is recognised as the real partner of the firm, the law has departed from the original position of recognising only the individual as a partner and, consequently, it must also be recognised that the salary paid to the individual not being part of the income of the firm, cannot be taken as part of the share of profit of a partner. In the circumstances, when section 40(b) refers to the salary paid to a partner, it cannot take into account the salary paid to the individual as a representative of the joint family as he is not a partner in his individual capacity." The Division Bench, thus, confirmed the law laid down by the Andhra Pradesh High Court in NTR Estate's case [1986] 157 ITR 285. Both these decisions, however, came much prior to the decisions of the Supreme Court in Brij Mohan's case [1997] 223 ITR 825 and Suwalal's case [1997] 224 ITR 753, and for that matter even Rashik Lal's case [1998] 229 ITR 458 (SC). As such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amily is not and cannot be a partner in a partnership firm. The remuneration or the commission that is paid to the partner cannot be claimed to be a remuneration or commission paid to the Hindu undivided family. The partner may be accountable to the family for the monies received by him from the partnership. But, in the assessment of the firm, the partner cannot be heard to say that he has not received the commission as a partner of the firm, but in a different capacity.... A partner does not act in a representative capacity in the partnership. He functions in his personal capacity like any other partner. The provisions of the Partnership Act and the Income-tax Act relating to partners and partnership firms will apply in full force in respect of such a partner. If any remuneration is paid or a commission is given to a partner by a partnership firm, section 40(b) will apply even if the partner hilljoined the firm as a nominee of a Hindu undivided family. The Hindu undivided family or its representative, does not have any special status in the Partnership 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act prohibits allowance of such commission as deduction from the business income of the firm." Thus, in so far as the argument of the representative capacity was concerned, the Supreme Court restricted that representative capacity only to the interest as per the express language of the Explanation to section 40(b). At more than one place, the apex court has specified that the position of payment of interest may be different because of the Explanation but that cannot apply to a commission or remuneration paid by the firm to the partners. Thus, it is obvious that in Rashik Lal's case [1998] 229 ITR 458, the Supreme Court rejected the claim for the deduction of the commission paid to the partner on two counts, viz.: (i) That the said payment could not be deducted merely because the partner represented a joint Hindu family and the payment would have to be viewed as payment to the partner himself; (ii) The Explanation covered only interest and that the commission or the remuneration could not be read on par with interest which could not be disallowed by reason of Explanation 2. Learned senior counsel tried to get out of this position by suggesting that the observations in R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that there is no indication whatsoever to differentiate between the nature of remuneration and the purpose for which remuneration was given to any partner and held that the provision imposed an absolute embargo against the deduction in respect of any of the payments made by the firm of the nature enumerated to any of the partners of the firm in the earlier judgment. Regarding Explanation 2 it was held that it was added to clarify that interest paid by the firm to an individual who is a partner in a firm in a representative capacity shall not be taken into account for the purpose of the said clause. The Division Bench also endorsed the view that there was nothing in the said provision to indicate that any category of salary, remuneration, etc., though paid by a firm to a person who is a partner was to fall outside the scope of section 40(b). The Bench also took stock of the dictionary meaning of the words "salary", "commission" and "remuneration" and pointed out that the three terms carry the same basic meaning, i.e., to compensate for services rendered. The High Court, therefore, posed a question as to what would be the difference between the payment of interest and the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould stand on a different footing. Ultimately, the court came to the conclusion that there was no conflict between the decision relating to payment of interest on the one hand and decisions dealing with the payment of salary, commission or remuneration on the other hand. In short, the Gujarat High Court completely accepted the stand that the payment of salary could not be equated with the payment of commission. We see no reason to take a different view. In fact, if Explanation 2 to section 40(b) spoke only of the interest paid to the partners by the firm providing an escape route for such payments from the rigour of section 40(b) an interpretation cannot be handed out enlarging the scope and reading into the Explanation additional words like "salary", "commission", "remuneration", etc. At least when the Explanation was introduced, the legislative intent was only to provide for such an escape to the interest paid and it clearly excluded from the Explanation, the salary, commission, remuneration, etc., paid by the firm to the partners. Therefore, the word "interest" cannot be interpreted to mean any other payments like salary, remuneration, commission, etc., which, though are to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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." All this will go to show that there is no scope for salary paid to a partner by the firm being excluded from the operation of section 40(b) of the Income-tax Act. Learned counsel lastly argued, almost by away of a desperate argument, that the amendment made by the Finance Act, 1992, with effect from April 1, 1993, provides the remuneration paid to the partner, if the terms of the partnership deed provides for the same, is outside the purview of section 40(b). The relevant provisions are as under: "40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',- (a) not relevant; (b) in the case of any firm assessable as such,- (i) not relevant; (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or (iii) any payment of rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be retrospective on the ground that such Explanation was of declaratory nature. In Brij Mohan's case [1997] 223 ITR 825 (SC) and Suwalal's case [1997] 224 ITR 753 (SC) and though its retrospective nature was doubted in Rashik Lal's case [1998] 229 ITR 458 (SC), the Supreme Court in Kanji Shivji's case [2000] 242 ITR 124, clarified the situation to the extent that the observations in Rashik Lal's case [1998] 229 ITR 458 (SC) were obiter. Here learned counsel himself is conceding that it is not his case that the present amendments made in the year 1992 are of retrospective nature. Therefore, there will be no question of making applicable these amendments to the case in hand which pertains to the assessment year 1982-83. Once that situation is obtained, there would be no scope to hold that the Legislature intended to include even the remuneration and the salary on par with the interest paid to the partner by the firm so as to be out of the mischief of section 40(b). The law has to be read as it is and merely because subsequently the law underwent change in respect of the remuneration to the partner, it cannot be treated that the Legislature always had the intention to take out the re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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