9911796707
TMI Blog1988 (12) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... for the year under consideration i.e., asst. yr. 1985-86 the ITO observed that the assessee had made a payment of Rs. 10,800 as salary to one of its partners Shri Bhogilal P. Desai aforesaid. By applying the provisions of s. 40( b) of the IT Act, 1961 (the Act) the ITO disallowed the salary payment to the partner of the appellant firm and the order was also maintained by the learned CIT(A) in appeal. 4. Before us the learned counsel, heavily relying upon the decision of the Andhra Pradesh High Court in the case of NTR Estate vs CIT (1985) 49 CTR (AP) 85 : (1986) 157 ITR 285 (AP) and of Gujarat High Court in the case of L. Chhotalal Co., vs CIT urged that the authorities below should have allowed the salary payment to Shri Bhogilal P. Desai, partner because, the said partner in his individual capacity had written the books of the appellant firm. On the other hand the learned Departmental Representative supported the order under appeal and again relying upon the Full Bench decision of the Gujarat High Court in the case of Chhotalal Co., submitted that the salary payment to the partner of the appellant firm has rightly been disallowed by the authorities below. The learned Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment) Act, of 1984 will be effective from the asst. yr. 1985-86. It is well to bear in mind that in the Statement of Objects and Reasons introducing the Taxation Laws (Amendment) Bill, 1984, it has been specifically mentioned that the amendments introduced in the Bill are intended mainly to streamline procedures in the interest of better work management, avoid inconvenience to tax payers, reduce litigation, remove certain anomalies in and rationalise some of the provisions of these enactments and counteract tax avoidance and tax evasion. We consider that the present amendment to s. 40( b) of the Act through Explns. 2 and 3 above referred to is to avoid inconveniences to tax payers reduce litigation 2 and 3 introduced by the Taxation Laws (Amendment) Bill, 1984, should be followed with respect in the preceding assessment years also in order to avoid unnecessary litigation. It cannot be gainsaid that the legislature was fully aware of the conflict of judicial opinion in this matter among the various High Courts in the country and the present amendment to s. 40(b) through Explns. 2 and 3 is brought about to set at rest the controversy. We see no reason to hold that the principle sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... salary to a partner but in that behalf they had clarified that in order to determined whether the salary paid to a partner should be allowed as a deduction in computing the income of a partnership firm, it was necessary to examine who was the real recipient of the salary paid to the partner. If the recipient was a partner as a Karta of an HUF and the payment of salary had no connection with the share held by the joint family through the partner concerned, then a salary paid to the partner for his individual services could not be disallowed in the computation of the income of the partnership firm. It was further observed that if however the real recipient of the salary was the joint family although it was paid ostensibly to the partner, then the salary paid falls to be disallowed under s. 40 (b) of the Act. 6. In the case of Chhotalal Co., the Full Bench of the Gujarat High Court though considering the question of interest paid by the firm by one of its partners from his individual funds when the said partner was a Karta of his HUF their Lordships had an occasion to signify the distinction between the payment of interest on monies advanced by a partner and the salary paid by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordships of the Full Bench of the Gujarat High Court were concerned with the question of deductibility of interest payments by the firm in the computation of its business profits, on the advances made by one of its partners, Shri C.S Virani from his individual funds, when the said Shri Virani was partner in the firm in his representative capacity as 'Karta' of his HUF. The question of allowability of any salary to the said partner or any other partner for that matter, was not directly in issue before their Lordships and, therefore, expression of any opinion by their lof on a point (allowability of salary payment to a partner) which did not directly arise for the consideration of their Lordships partakes of the character of "Obiter Dicta", which was not binding on this Tribunal. Mr. Trivedi added that contrary to the above position the Andhra Pradesh High Court, in the case of N.T.R., Estate, was directly concerned with the justification of allowability of salary, paid by the firm to two of its partners, from business profits of the firm, and therefore, the decision of a High Court directly on the point-in-issue must be followed instead of mere 'obiter' of the binding High Court. Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on necessary to judgment and as such having greater authority than "obiter dictum". True, an "obiter dictum", as such, is not binding as a precedent—but keeping in view the very spirit behind Art. 141 of the Constitution of India, even an obiter dictum of Jurisdictional High Court is worth of great respect and considerable weight by all Tribunal and Courts functioning in subordination to that Jurisdictional High Court. On the point presently before us we fail to dissuade ourselves from observing that the opinion expressed in Chhotalal Co's case on the point of salary- payment by a firm to its partner goes far beyond the barriers or limts of a mere "obiter dictum", as would be evident from the discussion to follow. 10. In Chhotalal Co's case the question referred to the Gujarat High Court for its opinion no doubt was whether the Tribunal was justified in law in confirming disallowance of Rs. 13,594 for the asst. yr. 1970-71 and Rs. 1,37,606 for asst. yr. 1971-72 being interest paid to Shri S.C. Virani, individual aforesaid under s. 40(b) of the Act. We have already mentioned the relevant facts of the case and need not repeat them once again. When the matter came up before a D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stressed once again that their Lordships, as has been stated above, were considering the very scope of s. 40(b) of the Act and though the question of payment of salary to the partner by the firm was not directly in-issue before them yet, the way the very scope of s. 40(b) had fallen for the consideration of their Lordship it could not be said that question did not relate to the materials fact-in-issue. The observation made by their Lordships on the point of payment of salary of the partner by the firm while considering the scope of s. 40(b) cannot be by-passed on the ground of the same being simply 'obiter dictum'. These are worthy of great respect and considerable weigh, which we, in all humility, feel ourselves justified to attach to and follow. 12. No doubt the question of payment of salary by the firm to two of its partners, was very must directly there along with the question of payment of interest on advances made by the said partners, before the Andhra Pradesh High Court in the case of NTR Estate. But in order to record their opinion over the point of payment of salary their Lordships hd first to consider the very scope of s. 40( b) with reference to the three Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er camouflaged as his salary, bonus, commission, remuneration or interest. A partner is bound to find the necessary finance for the partnership and, hence, any interest on capital supplied by the partner is not deductible". When a Karta of an HUF joins a firm as representative of HUF, the HUF itself does not become a partner. The Karta is the partner. He has no distinct and separate personality from that of the HUF and, therefore, monies invested by him from his individual account cannot be treated as distinct and separate for purposes of s. 40 (b). Even a firm under the partnership Act, 1932, has not been considered as distinct legal entity apart from the partners constituting it. The firm, as such, has no separate rights of its own in the partnership assets. The firm's assets are the properties or the assets of all the partners." 14. It may be observed that though on the point of interest payment the majority had dissented from the view taken by the Full Bench of the Gujarat High Court in Chhotalal Co.'s case yet on the point of salary payment by the firm to its partner(s) the Allahabad High Court had fully endorsed the view of Gujarat High Court, as mentioned above. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
