TMI Blog1986 (9) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... any other business incidental thereto, in the name and style of " CHITRA KALPANA ". The partnership deed is not marked among the documents forwarded by the Tribunal. For the purpose of disposing of the reference, we found it necessary to peruse the partnership deed and note the terms and conditions governing the said partnership. We accordingly directed learned counsel for the assessee, Sri T. Anantha Babu, to make available a copy of the partnership deed. A copy is furnished to us. According to the deed of partnership, each one of the three partners contributed capital of Rs. 50,000. No interest is payable on the capital. The three partners are to share the profits and losses in equal shares. The first partner, M. Venkataramana, shall be in charge of the control and management of all the affairs and business of the firm. He is designated as the " managing partner ". It was agreed that the managing partner and N. S. Murthy shall operate the bank accounts of the firm jointly. The partnership deed contains other usual covenants which are not relevant for our purposes. For the income-tax assessment year 1971-72, the accounts of the partnership firm were closed on August 31, 1970, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed in accordance with the provisions contained in sections 30 to 43A. Sections 30 to 39 of the Act contain provisions relating to various deductions to be made in computing the income from business under section 28 of the Act. Section 40 of the Act provides that notwithstanding anything to the contrary in sections 30 to 39 of the Act, certain amounts shall not be deducted in computing the income chargeable under the head " Business ". We are concerned with clause (b) of section 40 of the Act which provides that, in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm shall not be deducted. The Revenue's contention is that the sums of Rs. 25,000 and Rs. 15,000 paid to the two partners, as mentioned above, are in the nature of remuneration paid by the firm to the partners and, consequently, the remuneration is not deductible, pursuant to section 40(b) of the Act. The plea of learned standing counsel for the Revenue, in short, is that section 40(b) of the Act is absolute in its terms. According to him, it makes no distinction between payments made by the firm to a partner by way of salary, bonus, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director of films and receives remuneration from various producers for directing films. The sum of Rs. 15,000 received by Bapu for directing the film produced by the partnership firm was paid to him not as a partner of the firm but as a professional director. Sri Anantha Babu, therefore, contends that the payments in the present case were made by the firm to the partners in their capacity other than as partners and, consequently, the provisions of section 40(b) of the Act are not applicable. Learned counsel relied on the decision of the Madras High Court in CIT v. Gemini Productions [1977] 110 ITR 847. Learned counsel also relied on a Full Bench decision of the Gujarat High Court in Chhotalal Co. v. CIT [1984] 150 ITR 276 and also on a Full Bench judgment of the Allahabad High Court in CIT v. Ram Laxman Sugar Mills [1973] 90 ITR 73. Learned counsel also relied on a decision of this court in CIT v. T. V. Ramanaiah Sons [1986] 157 ITR 300. Section 10(4)(b) of the 1922 Act corresponds to section 40(b) of the 1961 Act. Section 10(4)(b) was incorporated in the 1922 Act in the year 1939. The legislative history is sufficient to indicate that the provisions contained in section 40(b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emuneration may have as its object diverting the firm's income into the hands of the partners. Whether or not these arrangements are bona fide, section 40(b) of the Act steps in and makes all such payments not deductible in computing the income of the firm so that attempts in any case to siphon off the firm's profits by diversion into the partners' hands may be prevented. One principle flows from out of this. That is, wherever a partner, being under a legal obligation, or duty bound to conduct the partnership business without anticipating payment of salary, bonus, commission or remuneration as quid pro quo for his services and wherever a partner is under a legal obligation to provide capital for the business without anticipating any interest on the capital, except the return in respect of capital by way of his share in the firm's profits, the amounts paid to him by way of salary, bonus, commission or other remuneration and interest are made impermissible as deductions in computing the firm's income. Could the same principle be applied if payments are made by a firm to its partners in respect of services which the partner is not bound or under a duty to render ? Take for instance, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, fall to be disallowed pursuant to the provisions of section 40(b) of the Act. The decision of a Full Bench of the Allahabad High Court in CIT v. Ram Laxman Sugar Mills [1973] 90 ITR 73 is a direct authority in respect of the above proposition. In that case, the payments by way of remuneration were made to certain partners, not in pursuance of an agreement of partnership, but under directions of the Central Government. The partners acted as authorised controllers and performed certain functions for which remuneration was paid by the firm to the partners. The Allahabad High Court held that the payments so made by the firm to the partners are allowable as deduction although the amounts were paid by way of remuneration to the partners for services rendered. The distinction is that the services of authorised controller were rendered by the partners, without there being a legal or contractual obligation to so render and, consequently, the payments are not hit by the provisions contained in section 10(4)(b) of the 1922 Act. We are in complete agreement with the aforesaid distinction. The decision of the Madras High Court in CIT v. Gemini Productions [1977] 110 ITR 847 also affirms t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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