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Issues: Whether remuneration paid by a firm to a partner, even when claimed to be for technical or expert services rendered in a different capacity, is disallowable under section 40(b) of the Income-tax Act, 1961.
Analysis: The controlling principle is that the statutory bar applies to payment made to a partner as a partner in any capacity, and the character of the payment cannot be altered by describing the partner as an expert or by splitting his role into separate capacities. The earlier view that such payment could escape the prohibition was held to be inconsistent with the law declared by the Supreme Court, which recognised that a partner in a representative or nominee capacity does not cease to be a partner for the purposes of the firm. Explanation 2, introduced later, was limited in scope and did not govern the assessment year in question.
Conclusion: The remuneration was hit by section 40(b) and was not allowable as a deduction; the question was answered against the assessee and in favour of the Revenue.
Ratio Decidendi: For the purpose of section 40(b), a payment to a partner is disallowable even if it is described as consideration for services rendered in another capacity, because a partner cannot avoid the statutory prohibition by asserting a separate role vis-a -vis the firm.
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