TMI Blog1998 (9) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... vidual accounts of S/Sh. Mohan Lal Arora, and Mohinder Pal Arora who are partners in the firm in their representative capacity. 2. There cannot be any contract of service between the firm and its partners and consequently, there can be no question of a partner of a firm being an employee thereof. The salary paid to a partner represents the special share of the profits and retains the character of the income of the firm. (189 ITR 51 Mad. High Court)." 2. The case was fixed for hearing for 15-9-1998. Neither the assessee nor his authorise representative attended the proceedings. The case is, therefore, decided on merits in accordance with rule 24 of the Income-tax (Appellate Tribunal) Rules, 1963. 3. The Ld. DR relied on the order passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under :- "The assessee firm has paid salary amounting to Rs. 41,600 to Sh. Mohan Lal Arora and Sh. Mohinder Pal Arora both of whom were partner in the firm in their HUF capacity. The assessee has claimed that the salaries are allowable and provisions of section 40(b) cannot be applied because of the following facts :- Salary has been paid to these two persons in consideration of their individual and personal skill and efforts and not by virtue of their partnership in the firm in HUF/ representative capacity because :- (i) There is no mention of amount or basis of salary in the partnership deed (copy attached in paper book as S.No. 14). (ii) Salary has not been paid to other five partners which means that Sh. Mohan Lal Arora and Sh. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as karta representing his HUF, interest paid by the firm on deposits made by him with the firm in his individual capacity is deductible while computing the income of the firm chargeable under the head 'Profit gains of business or profession' even for periods prior to April, 1985 from which date Explanation 2 to section 40(b) was inserted in the I.T. Act, 1961. In the above referred case, the worthy SC has referred to decision of Rajasthan High Court in the case of Gajanand Poonam Chand Bros. v. CIT [1988] 174 ITR 346. In that case the worthy Rajasthan High Court has referred to the definition of 'Person' in clause (31) of section 2, it pointed out that the definition shows clearly that an individual, HUF and a firm are distinct person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 a partner for taking part in the conduct of the business must be regarded as a portion of the profits being made over as a reward for the human capital brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st paid to a partner, who is a partner representing his HUF, on the deposit of his personal/individual funds, does not fall within the mischief of clause (b) of section 40. In this view of the matter, we agree with the view taken by the Rajasthan High Court in Gajanand Poonam Chand and Bros. case [1988] 174 ITR 346 that Explanation 2, in the context of clause (b) of section 40, is declaratory in nature. Accordingly, we allow this appeal, set aside the judgment of the High Court and answer the question referred under section 256 in the affirmative ie. in favour of the assessee and against the revenue." 7. Keeping in view the above discussions, the appeal filed by the revenue is dismissed and order passed by the Ld. CIT(A) on this issue is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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