TMI Blog2000 (2) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... atter pertains to the assessment year 1973-74 for which the previous year ended on July 12, 1972. At the relevant time section 40 of the Income-tax Act, 1961, stood as under : "40. Amounts not deductible.---Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',---. . . (b) 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." Briefly the facts are that the assessee-firm consisted of four partners, one of whom was Smt. Gindori Devi. The capital account of Gindori Devi showed an opening balance of Rs. 35,859 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, the Tribunal following the decision of the Allahabad High Court in CIT v. Ram Laxman Sugar Mills [1973] 90 ITR 73 [FB], held that the payment could not be disallowed under section 40(b) of the Act. In Ram Laxman Sugar Mills' case salary was paid to some of the partners who were appointed to a board of management by the Central Government exercising its powers under the Essential Supplies (Temporary Powers) Act, 1946, owing to dissensions among the partners. It was held that this payment could not be disallowed under section 10(4)(b) of the Indian Income-tax Act, 1922, which corresponds to section 40(b) of the 1961 Act. The decision of the Allahabad High Court was based on the fact that payment of remuneration to the partners was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 ITR 911 (Delhi), the firm consisted of four partners. Three of the partners entered into partnership on behalf of their respective Hindu undivided families. The partners were kartas of their respective Hindu undivided families. The firm allowed salaries to these partners for the services rendered by them to the partnership firm as working partners. The partners claimed that the salaries paid to them were in their individual capacities for the services rendered by them while they were partners in the capacity as karta of their respective Hindu undivided families and the payment was not in that capacity. It was held that a Hindu undivided family cannot enter into a partnership. However, the karta of a Hindu undivided family can enter into p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all". Section 12 of the said Act further enjoins : "(a) every partner has a right to take part in the conduct of the business ; (b) every partner is bound to attend diligently to his duties, in the conduct of the business . . ." These provisions show that there is an element of mutual agency amongst the partners. The partners are supposed to work diligently and to the best of their abilities for the partnership. For doing his duties a partner is not supposed to charge his other partners any sum or remuneration in the shape of salary, commission, etc. Under the Income-tax Act section 40(b) is meant to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of any payment mentioned in the sub-section made to a partner. Explanation 2 which has been added subsequently clarifies that interest paid by a firm to an individual who is a partner in the firm in a representative capacity shall not be taken into account for purpose of the said clause. It follows that section 40 covers all payments of any kind whatsoever in the nature of salary, commission, remuneration, interest, etc., to a partner. It does not envisage any differentiation based on the nature of payment or the capacity of the partner concerned qua the payment. So long as it is a payment to a partner of the kind mentioned in the section it will be covered under the section and is not deductible. The concept of capacity of a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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