1985 (11) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of salary and interest paid to partners u/s 40(b) of the Income-tax Act.
2. Taxability of the amount received on devaluation of the rupee.

Summary:

Issue 1: Deduction of Salary and Interest Paid to Partners u/s 40(b)

The court addressed whether the salary and interest paid to Ram Ratanlal Rajgarhia and Maniklal Rajgarhia were correctly added to the firm's income under section 40(b) of the Income-tax Act for the assessment years 1965-66 to 1969-70. The assessee-firm argued that the Hindu undivided families (HUFs) of the two individuals were partners of the firm, and the payments were made to them as representatives of their HUFs. However, the court held that section 40(b) explicitly prohibits the deduction of salary and interest paid to partners. The court emphasized that a HUF cannot be a partner in a firm, and payments made to the partners in their capacity as individuals or representatives of HUFs must be added to the firm's total income. The court cited several precedents, including CIT v. R. M. Chidambaram Pillai [1977] 106 ITR 292 (SC) and CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123 (SC), to support its decision. Consequently, the salary and interest paid to the partners were correctly added to the firm's income, and the first question was answered in favor of the Revenue.

Issue 2: Taxability of Amount Received on Devaluation of Rupee

The second issue concerned whether the amount of Rs. 45,781 received on the devaluation of the rupee was a taxable receipt in the hands of the assessee for the assessment year 1967-68. The assessee contended that the amount was not taxable as it represented the balance with foreign parties and included amounts from earlier years. The Tribunal rejected this argument, stating that the amount was received in the relevant assessment year and could not be considered a capital receipt. The court agreed with the Tribunal, holding that the amount was a revenue receipt and thus taxable as income. The second question was also answered in favor of the Revenue.

Conclusion

The court concluded that the salary and interest paid to the partners were correctly added to the firm's income under section 40(b) of the Act, and the amount received on devaluation of the rupee was a taxable receipt. Both questions were answered in favor of the Revenue, and the references were disposed of with costs.