TMI Blog2000 (1) TMI 1004X X X X Extracts X X X X X X X X Extracts X X X X ..... tuted by the Finance Act, 1992 with effect from 1-4-1993. The assessment was completed on 30-10-1995 under section 143(3) accepting the claim. In the assessment order, the assessing officer started the computation of the total income from the figure of net profit as per the profit and loss account added the salary of ₹ 72,000 paid to H.P. Patel as well as certain other disallowables and then from the income of ₹ 1,88,266 so arrived at, deducted the salary paid to H. P. Patel in the following words : Less : Partners remuneration under section 40(b) as claimed 72,000 3. The assessee filed an appeal to the Commissioner (Appeals) against the other disallowables made in the assessment, but since the partner's salary was deducted as claimed, no appeal was taken, naturally, on this point. 4. The Commissioner was of the view that the assessment made was erroneous and was prejudicial to the interests of the revenue . He considered the allowance of the salary under section 40(b) of the Act to have been given by the assessing officer without application of mind. According to him, the deduction can be allowed only in respect of salary paid to a working partner who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully satisfied that it is so allowable under section 40(b). Reference was made in this connection to the following judgments : (i) Venkatakrishna Rice Mill (1987) 163 ITR 129 (Mad) (ii) CIT v. Govindram Seksaria Charity Trust (1987) 166 ITR 580 (MP) (iii) Manoharlal Nareshkumar v. Assistant Commissioner (1996) 89 Taxman 240 (Asr-Trib) It was contended that when the assessing officer had applied his mind to the issue, the mere fact that the Commissioner came to hold a different view of the matter would not confer jurisdiction upon him to act under section 263. 8. We are unable to accept the contention. There is nothing in the assessment order to show that the assessing officer had applied his mind to the question as to whether the salary paid to H.P. Patel was allowable under section 40(b) on the footing that he is a working partner. In the assessment order, the assessing officer merely granted the deduction as claimed. There is no discussion to show that he has applied his mind to the question. Therefore, in our view, the Commissioner was perfectly justified in invoking the powers under section 263. 9. Coming to the merits of the claim, the learned representative for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), as introduced with effect from 1-4-1993 is as under: '40. Accounts not deductible Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deductible in computing the income chargeable under the head Profits and gains of business or profession , (b) In the case of any firm assessable as such (i) any payment of salary, bonus, commission or remuneration, by, whatever name called (hereinafter referred to as remuneration ) to any partner who is not a working partner; Explanation 4. For the purposes of this clause, working partner means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner . 12. The facts are not in dispute. To recapitulate. H.P. Patel was a partner in the firm as Karta of the joint family. The other partner was Smt. M.H. Patel who is a lady. The salary of ₹ 6,000 per month was paid to H.P. Patel under clause (8) of the partnership deed which stated that he shall be the working partner. 13. The question is whether H.P. Patel falls within the meaning of the words working partner as contained in Explanation 4. It is wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, because section 2(23) of the Income Tax Act says that the expressions firm , partner and partnership shall have the meanings respectively assigned to them in the Indian Partnership Act, 1932, with the only exception that the expression partner would also include a minor admitted to the benefits of the partnership. Thus, if under the partnership law, an HUF as such cannot become a partner in a firm and it is only the person who represents the HUF, such as the Karta or the manager, who can in law be considered as a partner of the firm, it is difficult to agree with the contention of the learned senior Departmental Representative that since the HUF as such cannot be considered as a working partner, the payment made to Patel, the Karta, cannot be considered as a payment of remuneration to a working partner. In fact, an HUF cannot be considered a partner at all as we have explained earlier. It is only H.P. Patel, the Karta of the HUF in his individual capacity, who is the partner in accordance with the notions of the partnership law. He undoubtedly has put in efforts in the conduct of the day-to-day business of the firm and he has been remunerated for the same. If that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he firm is concerned, it cannot recognise any representative capacity under the partnership law and if the Karta of the joint family is a partner representing the joint family and on behalf of the joint family, it is only the Karta in his individual capacity who is the partner and not the joint family as such, was made by the introduction of Explanation (1) to (3) to section 40(b) by the Taxation Laws (Amendment) Act, 1984, with effect from assessment year 1985-86. By introducing these Explanations, the representative capacity of the Karta was sought to be recognised but that was only as far as payment of interest by the firm was concerned. Earlier, firms were experiencing difficulties because of the application of the strict legal position as described above and even though the interest was being paid to the Karta in his individual capacity in respect of amounts lent by him to the firm, the same was being disallowed under section 40(b) by applying the strict legal principle under the partnership law that though he represents his joint family, he was a partner only in his individual capacity and, therefore, whatever interest was paid, irrespective of the source of the funds, to him ..... X X X X Extracts X X X X X X X X Extracts X X X X
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