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TMI Blog2004 (8) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... of law have been referred for the assessment years 1977-78 and 1978-79: "3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the claim under section 80J was rightly disallowed to the assessee? 4. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the assessee-firm, while running the cold storage plant, was neither manufacturing nor producing any article?" Briefly stated the facts giving rise to the present references are as follows: The applicant had paid salary of Rs. 12,000 to its partner, Sri Yadav Kishan Goel, and the same was added back while computing the income of the applicant in terms of section 40(b) of the Act. Shri Goel was a partner in the applicant's firm as a representative of the Hindu undivided family being its karta. The salary of Rs. 12,000 had been paid to him by the applicant for his services rendered by him in his individual capacity. Treating the salary as a payment to the partner, the Income-tax Officer had disallowed the said amount while computing the income of the applicant under section 40(b) of the Act. In the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the salary paid to an individual whether he represents himself or any other person in a firm as partner. He relied upon the following decisions: (1) Roshik Lal and Co. v. CIT [1998] 229 ITR 458 (SC); (2) National Wire Manufacturing Co. v. CIT [2002] 253 ITR 496 (Guj); (3) Rm. Appavu Chettiar Sons v. CIT [2002] 256 ITR 289 (Mad); (4) Tola Ram Sons Dal Mill v. CIT [2003] 130 Taxman 602 (All); (5) Industrial Linings v. CIT [2003] 263 ITR 315 (Guj); and (6) CIT v. Golden Touch [2003] 263 ITR 261 (Mad). Having heard learned counsel for the parties, we find that it is not in dispute that Shri Yadav Kishan Goel was a partner in the applicant-firm representing his Hindu undivided family in the capacity of a karta. He had been paid salary of Rs. 12,000 every year. Section 40(b) of the Act deals with the amount which is not deductible while computing the income chargeable under the head "Profits and gains of business or profession". Clause (b) of the Act during the relevant assessment year disallowed the payment of salary to any partner. In the case of Dhirendra Mohan Gupta [1991] 188 ITR 19, this court was called upon to answer the following questions of law: "(1) Whether, on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apex court was considering the question as to whether interest paid on the deposit made by a partner in his individual capacity while being a partner as karta representing his Hindu undivided family was deductible under section 40(b) of the Act or not. The apex court had held as follows: "Clause (b) of section 40 is based upon and is a recognition of the basic nature of the relationship between a firm and its partner. In CIT v. R. M. Chidambaram Pillai [1977] 106 ITR 292 this court observed: 'Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. "Firm" is a collective noun, a compendious expression to designate an entity, not a person. In income-tax law, a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his personal capacity like any other partner. The provisions of the Partnership Act and the Income-tax Act relating to partners and partnership firms will apply in full force in respect of such a partner. If any remuneration is paid or a commission is given to a partner by a partnership firm, section 40(b) will apply even if the partner has joined the firm as a nominee of an Hindu undivided family. The Hindu undivided family or its representative, does not have any special status in the Partnership Act... The assessment of a firm will have to be made strictly in accordance with the provisions of the Income-tax Act. The law has to be taken as it is. Section 40(b) applies to certain payments made by a firm to its partners. Neither the firm nor its partners can evade the tax law on the pretext that although in law he is a partner, in reality he is not so. He may have to hand over the money to somebody else. That may be his position qua a third party. But the firm has nothing to do with it. It has paid the commission to one of its partners. It cannot get any deduction in its assessment for that payment, because section 40(b) of the Act expressly prohibits such deduction." The apex cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here that the hon'ble Supreme Court in the case of Delhi Cold Storage Pvt. Ltd. v. CIT [1991] 191 ITR 656, has held that in common parlance, "processing" is understood as an action which brings forth some change or alteration of the goods or material subjected to the act of processing and in a cold storage, vegetables, fruits and several other articles which require preservation by refrigeration are stored. While, as a result of long storage, scientific examination might indicate loss of moisture content, that is not sufficient for holding that the stored articles have undergone a "process" within the meaning of section 2(7) of the Finance Act, 1973, and therefore, running of a cold storage was not an industrial company. Section 80HH of the Act provides deduction in respect of profits and gains from industrial undertaking or hotel business established in backward area. For the purpose of claiming deduction in this section, one of the prerequisite conditions is that the gross total income of an assessee should include profits and gains derived from an industrial undertaking or the business of a hotel. The apex court has already held that running a cold storage is not an industria ..... X X X X Extracts X X X X X X X X Extracts X X X X
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