2003 (11) TMI 36 - HC - Income Tax

Partner's Remuneration Non-Deductible under Income-tax Act

The High Court of MADRAS held that remuneration paid by an assessee-firm to a partner, acting as karta of a Hindu undivided family, was not deductible ... Whether the Tribunal was right in holding that the remuneration paid by the assessee-firm to one of its partners who was a partner in his capacity as karta of the Hindu undivided family was not taxable in computing the total income of the assessee-firm and that the provisions of section 40(b) of the Income-tax Act are not attracted. - payment so made cannot be regarded as being items of expenditure so far as the firm is concerned - The question is answered in negative and favour of the Revenue and against the assessee. Issues:1. Whether the remuneration paid by the assessee-firm to one of its partners, who was a partner in his capacity as karta of the Hindu undivided family, is taxable in computing the total income of the assessee-firm under section 40(b) of the Income-tax Act.Analysis:The High Court of MADRAS addressed the issue of whether the remuneration paid by the assessee-firm to one of its partners, acting as karta of the Hindu undivided family, was taxable under section 40(b) of the Income-tax Act for the assessment year 1982-83. The Tribunal had held that the remuneration paid was not taxable, contrary to the Assessing Officer and the appellate authority's view. The Tribunal accepted the assessee's appeal, considering the payment as a permissible deduction. The court referred to a previous decision in A.S.K. Rathnaswamy Nadar Firm v. CIT [1965] 58 ITR 312, emphasizing that section 40(b) prohibits any payment of salary, bonus, commission, or remuneration made by a firm to any partner of the firm, regardless of the partner's role within the firm.The court cited the case of Rashik Lal and Co. v. CIT [1997] 229 ITR 458, where it was established that a partner in a firm does not act in a representative capacity, and section 40(b) applies even if the partner joined the firm as a nominee of a Hindu undivided family. The introduction of Explanation 2 under section 40(b) excluded only interest paid by the firm to a partner in a representative capacity for the benefit of another person. The court concluded that the earlier decision in CIT v. Surendra Manilal Mehta [1985] 154 ITR 264 (Mad) was inconsistent with the Supreme Court's ruling in Rashik Lal and Co. v. CIT [1997] 229 ITR 458 and must be considered impliedly overruled.The court emphasized that a partner in a firm is defined by their status as a partner, and any remuneration received must be for services rendered within the partnership, not as an expert. The statutory prohibition under section 40(b) cannot be circumvented by describing the partner as an expert. Therefore, the court ruled in favor of the Revenue and against the assessee, holding that the remuneration paid to the partner was not deductible as expenditure for the firm.In conclusion, the High Court of MADRAS clarified that under section 40(b) of the Income-tax Act, any remuneration paid by a firm to its partner, irrespective of the partner's role or expertise, is not deductible as expenditure for the firm. The court emphasized the partner's defined status within the firm and the statutory prohibition against such payments, ruling in favor of the Revenue in this case.