9911796707
TMI Blog1983 (1) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the respective HUFS, who were the partners of the assessee-firm, while salaries paid to them were for services rendered by them in their personal capacities and not on behalf of the HUF whom they represented as partners of the assessee-firm. The IAC (Assessment), however, held that since these persons were partners of the assessee-firm even according to the instrument of partnership, whether they were partners in individual capacity or they represented the HUFs of which they were the kartas was an immaterial consideration and, therefore, the provisions of section 40(b) of the Income-tax Act, 1961 (' the Act ') were applicable. The IAC (Assessment), therefore, disallowed the claim of deduction of these salary payments and added them back while working out the assessee's business income. When the matter went up in appeal, the Commissioner (Appeals) agreed with the IAC (Assessment) on this issue and refused to interfere. The assessee has, therefore, come up with the main common point of dispute in the present appeals before us. 3. The assessee's learned counsel, Shri Sharma at the outset pointed out that even though for the earlier assessment years the Tribunal had upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e preamble of the new partnership deed wherein it had been specifically mentioned that the business carried on by all the partners was inherited by them on partial partition of their respective HUF businesses which before the assessment year 1958-59 were being carried on by their HUFs and it was necessary to remove the misunderstanding that their share of profits from the firm was not their individual property but belonged to their HUFs. Our attention was also invited to the service agreements dated 1-7-1972, entered into by the assessee-firm and these five persons wherein also it had been clearly laid down that while the partner of the assessee-firm was the HUF, the service agreement is entered into by the assessee-firm on the one hand and the person concerned in his personal/individual capacity. Reference in this connection was made by Shri Sharma to the ruling of the Full Bench of the Hon'ble High Court in the case of CIT v. Ram Laxman Sugar Mills [1973] 90 ITR 73, wherein their Lordships by majority judgment held that since the payment had not been made with mutual consent or in pursuance of the contract of partnership, the remuneration paid to the partners who were members of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istinct persons, that is, employer and the employee, there cannot be a contract of service between a firm and one of its partners. He, therefore, vehemently argued before us that the so-called service agreement between the assessee on the one hand and the five persons, who were partners of the assessee-firm, meant nothing and the payment of the salary by the assessee to them represented a special share of the profits as laid down by their Lordships of the Hon'ble Supreme Court in the case of R.M. Chidambaram Pillai etc. Summing up, Shri Upadhyay vehemently argued before us that since even according to the instrument of partnership governing the two assessment years under appeal before us, the five persons to whom salary payments were made, were partners of the assessee firm, the payments were hit by the provisions of section 40(b) and were rightly not allowed as a deduction by the revenue authorities. 5. We have carefully considered the rival submissions. At the outset, it would be necessary to point out that in the case of Ram Laxman Sugar Mills, decided by the Full Bench of the Hon'ble High Court of Allahabad, the assessee-firm was taken over by the Central Government under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme Court in the case of R. M. Chidambaram Pillai laid down that the firm, even though having some attributes of personality, is not a legal person and since a contract of employment requires two distinct persons, namely, the employer and the employee, there cannot be a contract of service in strict law between a firm and one of its partners. Their Lordships further laid down that the payment of salary to a partner represents a special share of profits. Considering all this, we have no hesitation in coming to the conclusion that the capacity in which the five persons under consideration here, namely, S/Shri P.C. Gupta, N.M. Gupta, M.M. Gupta, and D.M. Gupta, were partners and whether in respect of the share of profits they were the beneficial owners or the HUF of which they were the kartas were the beneficial owners, are all immaterial considerations and they were partners of the assessee-firm in their personal capacity. It automatically follows, therefore, that the salary payments made to them are hit by the provisions of section 40(b). The claim of deduction of these salary payments, therefore, in our view, was not admissible and was rightly not allowed by the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir personal purposes. In these circumstances, according to Shri Upadhyay the disallowance out of car expenses, as made by the IAC (Assessment), was justified and was rightly upheld by the Commissioner (Appeals). 9. We have carefully considered the rival submissions. We agree with the learned departmental representative, Shri Upadhyay that even if one partner had his own car, the expenses of which were not debited in the account books of the firm, it was obvious that the other six partners must have been using the cars of the firm for their personal purposes and, therefore, disallowance out of the car expenses for estimated personal use of the partners will be justified, However, considering the totality of the facts and circumstances, we are of the opinion that the disallowance appears to be slightly excessive. The car expenses attributable to the personal use of the cars by the partners are, therefore, estimated at one fourth of the expenses. This means that for the assessment year 1975-76, the disallowance and add back will be one-fourth of the expenses claimed less what was added back by the assessee-firm itself while for the assessment year 1976-77, the entire one-fourth of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax a new item or a new source of income which was not disclosed by the assessee in the return or assessed by the ITO in the assessment order. Proceeding further, Shri Upadhyay submitted that the issue before the IAC (Assessment) as well as before the Commissioner (Appeals) was, what was the income liable to assessment from business and in the computation of income from business one of the matters to be considered was whether the interest on borrowed capital was rightly allowed as a deduction in working out the business income. He, therefore, submitted that the Commissioner was within his jurisdiction in setting aside the assessment and sending the matter back to the IAC (Assessment) on the issue of whether the interest on borrowings, which was claimed as a deduction, was admissible or not and if so, to what extent. 12. We have carefully considered the rival submissions. In view of the ruling cited by the learned departmental representative, it is not open to dispute that once an assessment comes before the first appellate authority, that is, either the AAC or the Commissioner (Appeals), as the case may be, his competence is not restricted to examining those aspects of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses which were claimed at Rs. 86,868. The assessee itself had disallowed and added back Rs. 5 000 out of these travelling expenses for estimated inadmissible expenses. The IAC (Assessment), however, considering the details of the expenses claimed, held that the estimate of Rs. 5,000 for expenses of inadmissible nature under this head was on the low side. He, therefore, raised the disallowance out of the travelling expenses from Rs. 5,000 added back by the assessee itself to Rs. 7,000. The Commissioner (Appeals) upheld the action of the IAC (Assessment) on this issue and refused to interfere. The assessee has, therefore, come up with the next point of dispute relating only to the assessment year 1975-76. 14. The assessee's learned counsel, Shri Sharma submitted to us that the assessee's estimate of expenses of inadmissible nature under the head ' travelling expenses ' was fair and reasonable and the revenue authorities were not justified in raising this estimate from Rs. 5,000 to Rs. 7,000. 15. On the other hand, the learned departmental representative, Shri Upadhyay submitted to us that even the disallowance of Rs. 5,000 by the assessee itself was on estimate and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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