1984 (3) TMI 176

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....) of the Income-tax Act, 1961 (' the Act '), the ITO added Rs. 10,000 said to be paid as remuneration to Shri N. Balakrishna, one of the partners of the firm, having 7.5 per cent share. Obviously, this is a disallowance made under section 40(b) of the Act. As against the disallowance the assessee firm went in appeal before the AAC. It was contended before him that Shri N. Balakrishna is a cine artiste and had rendered professional service in that capacity in one of the pictures produced by the firm which is doing business as cinematographic film producers. The payment of Rs. 10,000 constitutes a legitimate business expenditure and even if some other cine artiste in the place or Shri N. Balikrishna happened to enact, he had to be paid and th....

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....t the AAC overlooked the fact that there was no stipulation in the partnership deed that the artistic or histrionic talents of Shri N. Balakrishna should be spared by him to the partnership firm and that he would not be remunerated for the same. It was further contended that the payment of Rs. 10,000 comes under business expenditure for specific work of an artiste not connected with his position as a partner and, thus, it is not a remuneration disallowable under section 40(b) as Shri N. Balakrishna has not rendered services as a partner. Shri C.V.K. Prasad, the learned counsel for the assessee submitted two-pronged arguments. Firstly, he contended that unless the amount disallowed constitutes, a payment out of the income of the assessee-fir....

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....t is analogous to section 40(b) of the Act. The Madras High Court held that before application of section 10(4)(b) two requirements must be satisfied. The first is that the income must be the income of the firm. The second is that out of the said income the payment must be made to a partner. Their Lordships found that the evil sought to be curtailed by enacting the provision of section 10(4)(b) is to prevent diversion of profits of a firm to the hands of its partners. Ultimately the Madras High Court held as per the head note of the decision as follows : ". . . In this case, the company was carrying on an independent business or distribution of films produced by various persons including the assessee-firm and hence the income which the com....

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....ble over it cannot be disallowed under section 40(b). If an authority is needed, it is found in Heastie v. Veitch & Co. [1934] 2 ITR 456 (CA). Under the said authority Sampath Iyengar in his book Law of Income-tax, Vol. 2, Seventh edn. revised by Justice S. Ranganathan, had to say the following Again, payments made to a partner for something altogether unconnected with the partnership business, for example, as remuneration due on an independent contract, would not come under this clause. If, for instance, in a partnership doing hotel business, one of the partners who is a wine merchant should supply wine, the cost of the wine supplied would be a deductible expenditure . . . ." Ultimately, it was argued that a partner acting in a picture pr....