TMI Blog1991 (9) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... t, the sums of Rs. 54,796 and Rs. 51,963 paid by way of " majuri " to these two partners. The Commissioner was of the view that, since the job work for which " majuri " payments were made by the assessee-firm to these two partners was admittedly carried out on the machinery belonging to the assessee-firm and that they had done the "majuri" work for none else but the assessee-firm, it was obvious that the arrangement between the firm and these partners amounted to a device to reduce the taxable profits of the firm as such. Relying upon the ratio of the decisions of the Madras High Court in R. A. Goodsir and Co. v. CEPT [1948] 16 ITR 367 and the Kerala High Court in CIT v. Veeriah Reddiar [1969] 73 ITR 162, the Commissioner held that the " majuri " payments of Rs. 54,796 and Rs. 51,963 were nothing but " remuneration " for the labour work done for the assessee-firm by the two partners and such payments had to be disallowed by virtue of the provisions of section 40(b) of the said Act. An alternative contention was raised before the Commissioner that only the net surplus received by these two partners which can be termed as remuneration could be added to the assessee-firm's income. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of grey cloth for the assessee-firm were not hit by the provisions of section 40(b) of the said Act. A copy of the judgment of the Tribunal in Dhamanwala's case has been placed on the record of this case. In Dhamanwala's case, the Tribunal held as above in the context of the contention that the provisions of section 40(b) of the said Act being absolute in their terms as long as the payments were found to be made to a partner in whatever capacity, they were liable to be disallowed under section 40(b). The Tribunal held that the labour charges which were paid to Dhamanwala were an allowable deduction before the profits came into existence and were expenditure which was incurred for bringing into existence of the profits and could not be treated as profit itself. It was held that the labour charges so paid cannot be equated with the profits of the firm and therefore, there was no question of siphoning away the profits of the firm under the guise of salary or remuneration. We have referred to the findings of the Tribunal in Dhamanwala's case because the case seems to have been relied upon by the Tribunal in Trimurti Fabrics which in turn is relied upon for disposing of the assessee's-a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand, contended that the real question to be considered while deciding the aspect of applicability of section 40(b) of the Act was to determine whether the payment said to have been made to the partner was made for the purpose of earning profits or whether such payment amounted to appropriation of profits. He submitted that a distinction should be made between cases where labour work which is done by the partner is of the assessee-firm and cases where it is done for the assessee-firm. He submitted that if either under the contract or under the statutory provisions of the partnership law, it was incumbent upon the partner to do a particular work and, therefore, he is obliged to do that work, then and then alone the provisions of section 40(b) can be invoked in respect of salary or remuneration paid to such partner. However, when the partner renders service or does the service which he is not at all obliged or supposed to do under the terms of the contract or under the statutory provision, then payment made to him for any work done for the firm would stand on the same footing as any expenditure incurred while paying similar amounts to outsiders for similar work. The controver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature enumerated, to any partner of the firm. Explanation 2 which has been added clarifies that interest paid by the firm to an individual who is a partner in a firm in a representative capacity shall not be taken into account for the purpose of the said clause. The wording of the provisions of section 40(b) clearly indicates that they are intended to cover all the payments of the nature described to a partner of the firm by the firm and do not indicate that only such payments as are made to a partner in his capacity as a partner and not other payments made to such partner are covered by the said provision. There is nothing in the said provision to indicate that any category of salary, remuneration, etc., though paid by a firm to a person who is a partner were to fall outside the scope of the above provision. The provisions of sections 12 and 13 of the Indian Partnership Act which deal with relations of partners to one another, inter alia, provide that subject to contract between the partners, each partner is bound to attend diligently to his duties in the conduct of the business and a partner is not entitled to receive remuneration for taking part in the conduct of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endent concerns for agency business, held that the said provision made no distinction between payments by way of interest, commission, salary or remuneration made to a partner as a partner and made to him in a different character and, therefore, the sums paid by way of commission to them were not permissible deductions. We find ourselves in respectful agreement with the said ratio. In CIT v. Veeriah Reddiar [1969] 73 ITR 162, the Kerala High Court expressed its complete agreement with the interpretation of the provisions of section 10(4)(b) given by the Madras High Court in Goodsir's case [1948] 16 ITR 367. In Harihar Cotton Pressing Factory v. CIT [1960] 39 ITR 594, a Division Bench of the Bombay High Court, while considering the question whether rebates allowed to the partners could be treated as commission or not, construed the provisions of section 10(4)(b) of the Act of 1922, holding that ( at page 608 ) : 'the prohibition is absolute and makes no distinction between payments made to a partner as such and payments made to him in a different character, as for example, as the owner of an independent business ". We find ourselves in complete agreement with the said proposition. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, there is no question of any person having become partner in the assessee-firm in any representative capacity. The decision was based on the premise that it was well-settled that there was no impediment in a Hindu undivided family becoming a partner of a firm through its representative and the income derived by such representative person as a partner would really be the income of the Hindu undivided family and really derived by the Hindu undivided family. It was, in this context, that the court held that, if he advances amounts from his individual account when he is a partner as representative only of the Hindu undivided family, the interest is not paid to him qua partner but as a stranger. The principle laid down by the decision of this court in Chhotalal's case [1984] 150 ITR 276 [FB], has received statutory recognition by the addition of the Explanation to clause (b) of section 40 of the said Act. Thus a representative partner would not be a partner in his individual capacity and, therefore, obviously, in his individual capacity, he would not be governed by the expression " partner " in section 40(b). The Full Bench, while referring to the question of payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... majority decision turned upon a very different set of facts as the payment having been made by virtue of the statutory appointments by the Central Government to the board of management were not treated as remuneration paid by the firm to a partner. In any event, for the reasons which we have already given, in our view, it is not possible to accept the proposition that, when an individual is a partner, his capacity can be split up for ascertaining whether a particular remuneration is admissible or not for the purpose of section 40(b) of the Act. The Acting C. J. Mathur, who gave a dissenting judgment, in our respectful opinion, was right when he held that, after the incorporation of section 10(4)(b) in the Act of 1922, it was immaterial in which capacity the payment was made to the partner. Reliance was then placed on behalf of the assessee on the decision of the Madras High Court in CIT v. Gemini Productions [1977] 110 ITR 847, wherein, under an agreement entered into between the assessee-firm and one of its partners, a limited company, the company had to advance to the firm a sum of Rs. 20 lakhs without interest and was entitled to the sole and permanent distribution and exploi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re made to them for such work could not be disallowed and that they were permissible deductions in computing the income of the firm. The High Court, after referring to the relevant provisions of the Partnership Act, held that every partner is bound to attend diligently to his duties in the conduct of the business and is not entitled to receive remuneration for taking part in the conduct of the business of the firm, and observed that inasmuch as a partner is bound to attend to his partnership business without anticipating any commission or other remuneration, any contract providing for the payment of commission or other remuneration may have as its object the diverting of the firm's income Into the hands of the partners. It has then held that, 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. Proceeding further, the High Court held ( at page 683 ): " One principle flows from out of this. That is, wherever a partner, being under a legal obligation, or duty-bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the net profit which is required to be stopped from being siphoned off. He submitted that the non obstante clause of section 40(b) indicates that section 28 was kept out of its sweep since the opening words referred to sections 30 to 38 of the Act. He also submitted that, having regard to the other provisions of the Act, namely, section 40A(2) and section 67, it will appear that only at the stage when profits are accrued and are sought to be siphoned away in the manner enumerated in section 40(b) that the deductions would become impermissible. In our view, there appears to be no warrant for the proposition that, since the opening words of section 40(b) of the Act refer in the non obstante clause only to sections 30 to 38, section 28 is to be kept out of the purview of section 40 and, therefore, the deductions should be allowable under the general principles under section 28 on the ratio of the Supreme Court in Badridas Daga v. CIT [1958] 34 ITR 10. In Badridas Daga's case [1958] 34 ITR 10, the Supreme Court held that, when a claim is made for a deduction for which there is no specific provision in section 10(2) of the Act of 1922, whether it is admissible or not will depend on wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch as contained in clause (b) of section 40 cannot be bypassed by reference to the fact that profit and loss of a business are to be ascertained on commercial principles. It was contended on behalf of the assessee by Mr. Mehta that ample safeguards are provided for in sub-section (2)(a) of section 40A in the event of excessive payments made by the firm. It will be seen that the provisions of section 40A have effect notwithstanding anything contained to the contrary in any of the provisions of the Act relating to the computation of income under the head " Profits and gains of business or profession ". Sub-section 2(a) and (b), inter alia, provide that, where the assessee incurs an expense in respect of which payment was made or is to be made to any person including a partner of the firm and the Assessing Officer is of the opinion that such expense is excessive or unreasonable having regard to the fair market value of the goods, services, etc., for which the payment is made, so much of the expenditure as is considered excessive or unreasonable shall not be allowed as a deduction. The provisions of sub-section (2)(a) of section 40A cannot be construed so as to read that the deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted and it is only the real or net remuneration which may fall to the share of the partner that would be hit by the provisions of section 40(b) and not the entire payment which may include the expenditure for the work done for the firm. We are, therefore, of the view that the amount of payment which can be arrived at after deducting the expenses incurred for the work done which remains as net remuneration in the hands of the partner, would alone be impermissible as deduction under section 40(b) and not the entire amount paid to the partner. Therefore, where payments are made as in the present case and a contention is raised that the payment is not in its entirety for remuneration but includes the expenditure required to be incurred for the work of the firm, it would be necessary for the authorities to examine the extent of such expenditure incurred and to find out what is the real amount of remuneration or salary which remains in the hands of the partner so as to attract the provisions of section 40(b) of the Act. In the instant case, it appears that, though an alternative contention was raised before the Commissioner that only the net surplus derived by the two partners coul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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