Section 40(b) disallowance applies to partner salary for HUF representation; CBDT low-tax-effect circular did not bar the claim.

Salary paid to a partner representing a Hindu undivided family was treated as falling within section 40(b), because representation of the family did not confer a separate partner status for the purpose of allowing such payments; the amount was therefore disallowable in favour of Revenue. A CBDT circular on low tax effect did not operate as an absolute bar to departmental action, as it contained exceptions, and the objection based on that circular was not entertained at the stage after reference without prior notice to Revenue. The question was answered against the assessee and in favour of Revenue.

---

---

Issues: (i) Whether salary paid to partners representing their Hindu undivided families was deductible or liable to disallowance under section 40(b) of the Income-tax Act, 1961. (ii) Whether the assessee could successfully rely on the CBDT circular limiting departmental pursuit where the tax effect was stated to be below the prescribed monetary limit.

Issue (i): Whether salary paid to partners representing their Hindu undivided families was deductible or liable to disallowance under section 40(b) of the Income-tax Act, 1961.

Analysis: The controlling principle applied was that a Hindu undivided family, or its representative, does not possess a distinct status in partnership law for the purpose of allowing such salary payments. On that basis, salary paid to partners in their individual capacity while representing Hindu undivided families falls within the mischief of section 40(b).

Conclusion: The salary paid to such partners was required to be disallowed under section 40(b), in favour of Revenue.

Issue (ii): Whether the assessee could successfully rely on the CBDT circular limiting departmental pursuit where the tax effect was stated to be below the prescribed monetary limit.

Analysis: The circular was treated as not creating an absolute bar against the Revenue proceeding in every case below the monetary limit, as it contained exceptions. The objection was also not entertained at the stage after the reference had already been made without prior notice to the Revenue.

Conclusion: The circular-based objection was rejected.

Final Conclusion: The referred question was answered against the assessee and in favour of the Revenue, and the salary paid to partners representing their Hindu undivided families was held to be disallowable under section 40(b).

Ratio Decidendi: Salary paid to a partner representing a Hindu undivided family is disallowable under section 40(b) of the Income-tax Act, 1961 because such representation does not confer a separate partner status for the purpose of allowing the payment.

---