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TMI Blog1990 (9) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... -71 for which the previous year is from April 1, 1969, to March 31, 1970. There were two changes in the constitution of the assessee-firm during the year. Initially, the firm was constituted under a deed of partnership dated January 14, 1969, with Shri N. N. Sippy, Balbir Kapoor, Roop K. Sakraney and Ramesh G. Sippy as partners. This constitution continued up to November 18, 1969, when Shri Balbir Kapoor retired. With effect from November 19, 1969, Shri Amarnath Kapoor came in as partner in place of Shri Balbir Kapoor. This partnership is evidenced by a deed of partnership dated November 27, 1969. The remaining partners continued as such. Shri N. N. Sippy retired from the firm on December 31, 1969, whereafter, i.e., on and from January 1, 1970, and up to the end of the year i.e., March 31, 1970, the assessee firm continued with the remaining three partners. As a result of the retirement of Shri N. N. Sippy who had 50 per cent. share, the shares of the remaining partners got increased in proportion to their shares. The firm was constituted primarily with the object of exploiting the distribution of the picture "Dharti Kahe Pukar Ke" which was produced by Vaishali Films. A written a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pukar Ke" which, intern alia, included the consideration for handing over all the prints and the publicity material of the said picture by Shri N. N. Sippy to the assessee-firm. Janata Film Distributors of which Shri N. N. Sippy was the proprietor had deducted from the gross receipts sums of Rs. 59,995 during the first period i.e., up to November 18, 1969, and Rs. 14,386 for the second period, i.e., from November 19, 1969, up to December 31, 1969, in all amounting to Rs. 74,381. The Income-tax Officer disallowed the above sum as, in his view, this was the amount paid by the assessee-firm to Janata Film Distributors, a proprietary concern of the partner, Shri N. N. Sippy, and was hit by the provisions of section 40(b) of the Income-tax Act, 1961. He also disallowed the sum of Rs. 1,25,000 paid by the assessee-firm to Shri N. N. Sippy on his retirement in terms of the dissolution agreement dated February 4, 1970, holding the payment to be in the nature of capital expenditure. The Appellate Assistant Commissioner agreed with the Income-tax Officer on both the issues. On further appeal, however, the Tribunal accepted the claim. As regards disallowance of Rs. 74,381 under section 40( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of CIT v. Ram Laxman Sugar Mills [1973] 90 ITR 73 [FB], in support of the Tribunal's order. Section 40(b) of the Income-tax Act, 1961, reads as under: "Section 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',-.... (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm. " The Kerala High Court, in CIT v. Veeriah Reddiar [1969] 73 ITR 162 followed the Madras High Court in Goodsir (R. A.) and Co. v. CEPT [1948] 16 ITR 367. The ratio of these two decisions is that the prohibition in section 40(b) is in absolute terms. If payment of salary, interest, bonus or commission is found to be made by a firm to its partners as a matter of fact, the nature of the payment as also the capacity in which the said partner received it is of no consequence and the payment will be hit by section 40(b). However, the Allahabad High Court has drawn a distinction between the payment of remuneration by a firm to a partner as partner and payment in some other cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a partner. The very object of the total bar of payment of interest, salary, commission or remuneration to partner under section 10(4)(b) was to prevent diversion of the profits of the firm in the hands of its partners. Therefore, it must first be established that the payments were made by the firm to its partners out of its income. Referring to the facts of that case, viz., the company was carrying on an independent business of distribution of films produced by others also and that the payment made by the company to itself was a receipt in the course of its carrying on the business and as such was its income and not the income of the producers whose pictures the company was exhibiting, exploiting and distributing, it was held that the appropriation of the commission by the company never represented the income of the assessee-firm and could not, therefore, be said to constitute "payment of commission" within the meaning of section 10(4)(b) of the Act. A similar view has been taken by the Andhra Pradesh High Court in CIT v. Chitra Kalpana [1988] 169 ITR 678. In that case, the assessee-firm was carrying on the business of production, distribution and exploitation of films. It clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... picture "Dharti Kahe Pukar Ke" were entrusted to the assessee-firm on the express condition that the distribution would be done through Janata Film Distributors. The reason was obvious. While Janata Films had experience in the line of business, the assessee-firm had none. The assessee-firm came in, perhaps, mainly because of its financial involvement Moreover, Janata Film Distributors had not been paid any amount by the assessee-firm. It paid commission to itself out of gross collections on exhibition and/or distribution of the picture. The net amount of collection was transferred to the assessee-firm. Accordingly, we are in agreement with the Tribunal that the amount retained by Janata Film Distributors by way of commission under the agreement with the assessee-firm dated April 1, 1969, never represented the income of the assessee-firm. The assessee-firm had not made any payment to Janata Film Distributors and, therefore, the question of any disallowance under section 40(b) does not arise. The first question is, accordingly, answered in the affirmative and in favour of the assessee. It is pertinent to mention that a number of other decisions were cited on behalf of the Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal nature depends upon the nature of the transaction and not on the mere fact that the share of retiring partner or partners is acquired by the continuing partners. In view of the finding of the Tribunal which is not in dispute, it has to be taken that the sum of Rs. 1,25,000 was paid to Shri N. N. Sippy on two counts, namely, for giving up his interest (i) in the partnership firm as partner, and (ii) under the sub-distribution agreement dated April 1, 1969, in respect of the picture "Dharti Kahe Pukar Ke". It has already been held in earlier paragraphs that Janata Film Distributors of which Shri N. N. Sippy was a proprietor was retaining 5 per cent. of the gross collection in respect of the picture as commission and that the commission never represented the income of the assessee-firm. Consequently, to the extent the payment of Rs. 1,25,000 in the deed of retirement is attributable to the giving up by Shri N. N. Sippy of his right, title and interest under the sub-distribution agreement dated April 1, 1969, it will fall within the ratio of the Supreme Court decision in CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549. What was earlier done by the Janata Films, after December 31, 1969 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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