1991 (11) TMI 34 - HC - Income Tax

Court denies commission deduction to partner in partnership firm under Income-tax Act

The High Court affirmed the Income-tax Appellate Tribunal's decision to disallow a commission payment deduction to a partner in a partnership firm under ... Business Expenditure, Firm Issues:1. Allowability of commission paid by the assessee-firm to an individual partner under section 40(b) of the Income-tax Act, 1961.Analysis:The case involved a partnership firm engaged in the sale and purchase of commodities and mining lease operations. The firm paid commission to one of its partners, Rashiklal, based on an agreement. The primary question was whether this commission was allowable as a deduction under section 40(b) of the Income-tax Act, 1961. The Income-tax Officer initially disallowed the deduction, citing section 40(b) which restricts deductions for payments made to partners. The Appellate Assistant Commissioner, however, ruled in favor of the assessee, stating that the payment was made to Rashiklal in his individual capacity, not as a partner. The Appellate Assistant Commissioner considered the agreement and Rashiklal's individual tax return to support this conclusion.The matter was then escalated to the Income-tax Appellate Tribunal, where the Department relied on a Supreme Court decision highlighting the complexities of a Hindu undivided family joining a partnership. The Tribunal ultimately held that the payment to Rashiklal should be treated as a payment to a partner, thus disallowing the deduction under section 40(b). The Tribunal emphasized that the general presumption is that payments to a karta (manager) of a Hindu undivided family benefit the family as a whole. The Tribunal's decision was based on the premise that the payment to Rashiklal, even if in his individual capacity, would ultimately benefit his undivided family.The High Court, in its analysis, affirmed the Tribunal's decision, stating that the payment to Rashiklal, a partner who had invested joint family funds in the firm, should be considered a payment to a partner under section 40(b). The Court noted that the firm failed to provide evidence that the payment did not benefit Rashiklal's family. The Court also highlighted that the legal position regarding Rashiklal acting as a commission agent was not relevant in this case. Ultimately, the Court ruled in favor of the Revenue, upholding the disallowance of the commission payment deduction. Justice S. K. Mohanty concurred with the decision.In conclusion, the judgment centered on the interpretation of section 40(b) of the Income-tax Act, specifically regarding the treatment of commission payments to a partner in a partnership firm. The Court emphasized the general presumption that payments to a karta of a Hindu undivided family benefit the family and upheld the Tribunal's decision to disallow the deduction.