One M/S. Rm. Appavu Chettiar Sons, Madurai, Which v. The Learned Senior Counsel Appearing For The

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 06-02-2002 Coram: The Honourable Mr. Justice V.S. SIRPURKARandThe Honourable Mr. Justice K. RAVIRAJA PANDIAN T.C. No.1030 OF 1988 and T.C. No.165 OF 1989 M/s. RM. Appavu Chettiar SonsMadurai :: Applicant :versus: The Commissioner of Income-taxMadurai :: Respondent Tax Case Reference under Sec.256(1) of the Income-tax Act, 1961by the Income Tax Appellate Tribunal, Madras ôBö Bench in R.A.No.551 ( Mds.) of 1987. : JUDGMENT V.S. SIRPURKAR, J. Two questions have been referred by the Income TaxAppellate Tribunal, Madras. They are:ô1. Whether on the facts and in the circumstances of thecase the disallowance of salary payments amounting toRs.1,92,000/- to the partners of the assessee-firm by invokingsection 40(b) of the Income-tax Act, 1961 is right in law? 2. Whether on the facts and in the cirumstances of thecase the disallowance of interest payments amounting toRs.8,412/- to the partners of the assessee-firm in theirindividual capacity by the assesseepartnership by invokingsection 40(b) of the Act is justified in law?ö At the beginning of his arguments, the learned senior counselappearing for the assessee categorically stated that he was notarguing the second question. We are, therefore, only concernedwith the first question here which relates to the salary paymentsmade to the partners of the assessee firm. 2. One M/s. RM. Appavu Chettiar Sons, Madurai, which is a partnership firm, is the assessee. In the relevantassessment year 1983-84, the assesseeÆs accounts showed thatsalary payments were made to the tune of Rs.1,92,000/- to thepartners of the assessee firm in their individual capacity by theassessee partnership firm. The assessee had claimed this amountas the allowable expenditure relying on Explanation (2) toSec.40(b) of the Income Tax Act, 1961 (hereinafter referred to asôthe Actö). That was disallowed by the Income Tax Officer. Inthe appeal before the Commissioner (Appeals) also the saiddisallowance was upheld. The Commissioner (Appeals) followed thedecision of the Madras High Court in the case of DwarakadasRameshwar Goenka v. Commissioner of Income Tax (127 ITR 397).Therefore, an appeal came to be preferred before the Income TaxAppellate Tribunal. The Tribunal followed their earlier orderwhich they had passed relating to the assessment year 1982-83 asregards the same assessee and held that it was bound by thedecision in Dwarakadas Rameshwar GoenkaÆs case, cited supra andthe contrary decision of the Andhra Pradesh High Court in NTREstate v. CIT (157 ITR 285) was not binding. The Tribunal alsochose to follow the later decision of the Madras High Court inVenkatesh Emporium v. CIT (137 ITR 593) as also the decision inA.S.K. Rathnaswamy Nadar Firm v. CIT (58 ITR 312). TheTribunal held that the earlier order passed by itself was basedon the direct authorities of the two decisions of the Madras HighCourt, which were binding on the Tribunal, and, therefore, theTribunal upheld the disallowance of salary payments to the tuneof Rs.1,92,000/- as also the interest payment of Rs.8,412/-.Ultimately, the two questions came to be referred, which we havequoted above, out of which, we would be concerned only with thequestion regarding the salary payment. 3. The learned senior counsel appearing for the assesseevery painstakingly chartered the history of Sec.40(b) of the Actas it stood then and more particularly invited our attention tothe language of the relevant provision which is as under: ô40.Amounts not deductible.- Notwithstanding anything to the contrary in sections 30 to 39,the following amounts shall not be deducted in computing theincome chargeable under the head æProfits and gains of businessor professionÆ.- ... (b) in the case of any firm, any payment of interest,salary, bonus, commission or remuneration made by the firm to anypartner of the firm; 3. The learned senior counsel appearing for the assesseevery painstakingly chartered the history of Sec.40(b) of the Actas it stood then and more particularly invited our attention tothe language of the relevant provision which is as under: ô40.Amounts not deductible.- Notwithstanding anything to the contrary in sections 30 to 39,the following amounts shall not be deducted in computing theincome chargeable under the head æProfits and gains of businessor professionÆ.- ... (b) in the case of any firm, any payment of interest,salary, bonus, commission or remuneration made by the firm to anypartner of the firm; Explanation 1.- Where interest is paid by a firm to anypartner of the firm who has also paid interest to the firm, theamount of interest to be disallowed under this clause shall belimited to the amount by which the payment of interest by thefirm to the partner exceeds the payment of interest by the Explanation 2.- Where an individual is a partner in afirm on behalf, or for the benefit, of any other person (suchpartner and the other person being hereinafter referred to asæpartner in a representative capacityÆ and æperson sorepresentedÆ respectively),- (i) interest paid by the firm to such individualor by such individual to the firm otherwise than as partner in arepresentative capacity, shall not be taken into account for thepurposes of this clause; (ii) interest paid by the firm to such individualor by such individual to the firm as partner in a representativecapacity and interest paid by the firm to the person sorepresented or by the person so represented to the firm, shall betaken into account for the purposes of this clause. Explanation 3. - Where an individual is a partner in afirm otherwise than as partner in a representative capacity,interest paid by the firm to such individual shall not be takeninto account for the purposes of this clause, if such interest isreceived by him on behalf, or for the benefit of any otherperson.ö 4. The learned counsel drew our attention to the decision of the Apex Court in Brij Mohan Das Laxman Das v. CIT(223 ITR 825) and pointed out that though the above amendment hadbecome effective from 1-4-1985. The Apex Court had specificallyheld that even for the period anterior to 1st April, 1985, anyinterest paid to a partner representing his Hindu UndividedFamily, on deposit of his personal/ individual funds, does notfall within the mischief of clause (b) of Sec.40. The learnedcounsel further pointed out that the Apex Court had upheld theview taken by the Rajasthan High Court in Gajanand Poonam ChandAnd Bros. v. CIT (174 ITR 346) that the explanation in thecontext of Sec.40(b) is declaratory in nature (and henceoperative retrospectively). It is also pointed out by thelearned counsel that this decision was later on followed andupheld by the Apex Court in Suwalal Anandilal Jain v. CIT (224ITR 753). Therefore, according to the learned counsel, theposition of law which emerges is that the payment of interest toa partner representing a Hindu Undivided Family is not hit byclause (b) of Sec.40 and does not become disallowable expenditureunder that section and secondly, that the said provision isretrospective in nature being declaratory. The learned counselalso explains that though in the subsequent decision in RashikLal And Co. v. CIT (229 ITR 458) the Supreme Court expressedthat the amendment was not retrospective, it was immediately declared by the Apex Court in the subsequent decision in Commissionerof Income Tax v. Kanji Shivji And Co. (242 ITR 124) that those observations in Rashiklal case, cited supra, regarding theamendment not being retrospective were obiter and, therefore, thelegal position that emerges is that the aforementioned provisionunder Explanation 2 to (clause (b) of Sec.40 is alsoretrospective. From all this, the learned senior counsel urgesthat what is obtained in case of ôinterest paymentö has also tobe applied in respect of the ôsalary paymentsö to the partners.In this case, according to the learned senior counsel, theamounts pertained to the year 1983-84 and if the interest paymentwas not made disallowable then, same logic must apply to thesalary payments. 5. The learned senior counsel then took us to the section as it stands and pointed out that even the salary paid toa partner has been held not to be hit by Sec.40(b). For thisproposition, the learned counsel relies on two decisions of theAndhra Pradesh High Court, they being N.T.R. Estate case, citedsupra and Ramakrishnaiah B. Narayana & Co. v. CIT (209 ITR156). The learned counsel urges that even without relying uponthe present form of the section, the Andhra Pradesh High Courthas held categorically in these two decisions that what appliesto the interest payable to the partners also applies to thesalary payable to the partners where such a partner is a partneron behalf of a Hindu Undivided Family. 6. In the case of N.T.R. Estate case, cited supra, the Division Bench was concerned with the explanations to Sec.40(b)and was considering the question of disallowance of interest aswell as the salary paid to the partners. After discussing thecaseload, the Division Bench came to the conclusion that theeffect of the explanations was: (a) if a person is a partner in a firm in a representative capacity and if such partner lends to thepartnership Moines belonging to him individually, then theinterest paid to such partner on the monies lent by him is notliable to be added back under section 40(b) of the Act; and (b) similarly, if a person is a partner in his individual capacity and if such partner lends to the partnership moniesbelonging to the Hindu joint family of which he is the ôkartaö,then the interest paid on the monies lent by the joint family isnot liable to be added back under section 40(b) of the Act. Ultimately, a finding was recorded that the interest paid by theassessee firm to its partners on the monies lent by them in theirindividual capacity is not liable to be disallowed underSec.40(b) inasmuch as the partners were acting in arepresentative capacity so far as the partnership interest isconcerned. It is then the following observations appeared in thejudgment: ôIn our opinion, the same principles as are mentionedabove in connection with the payment of interest by a partnershipfirm to its partners are also applicable in regard to the paymentof salary to a partner. In order to determine whether the salarypaid to a partner should be allowed as a deduction in computingthe income of the partnership firm, it is necessary to examinewho is the real recipient of the salary paid to the partner.ö Thereafter referring to the judgment of the Madras HighCourt in Somasundara Nadar Sons v. CIT (137 ITR 815), theDivision Bench observed: ôIn our opinion, the same principles as are mentionedabove in connection with the payment of interest by a partnershipfirm to its partners are also applicable in regard to the paymentof salary to a partner. In order to determine whether the salarypaid to a partner should be allowed as a deduction in computingthe income of the partnership firm, it is necessary to examinewho is the real recipient of the salary paid to the partner.ö Thereafter referring to the judgment of the Madras HighCourt in Somasundara Nadar Sons v. CIT (137 ITR 815), theDivision Bench observed: ôThe principle enunciated by the Madras High Court isthat the allowance or otherwise of interest shall have to bedetermined with reference to the real recipient of the interestand not merely with reference to the person formally receivingthe interest. We are in entire agreement with this view. Theprinciple of æreal recipientÆ is as much applicable to salary asit is to interest. In some cases, salary may be paid to apartner under the agreed terms and conditions between thepartners for services rendered by the partner individually inconnection with the business carried on by the partnership; insome cases, the payment of salary may have connection with theinvestment of capital by the Hindu joint family whom the partneris representing in the partnership. In a case, where a paersonis a partner in his individual capacity and salary is paid to himfor services rendered by him individually in connection with thebusiness carried on by the partnership, there can be littledispute that such salary paid to the partner falls to bedisallowed under section 40(b) of the Act. If it is, however,found that the person concerned is not a partner in thepartnership firm in his individual capacity but is a partner in arepresentative capacity (representing for instance the jointfamily of which he is either the karta or a member) and thepayment of salary has no real and sufficient connection with theshare held by the joint family through the partner concerned,then the salary paid to the partner for his individual servicescannot be disallowed in the computation of the income of thepartnership firm. If, however, the real recipient of the salaryis the joint family, although it was paid ostensibly to thepartner, then the salary paid falls to be disallowed undersection 40(b) of the Act. If it is established that the salaryor remuneration received by the karta of a joint family from afirm in which he is a partner in a representative capacity wasfor services rendered by him individually and that there was noreal and sufficient connection between the investment of thejoint family assets in the firm and the salary or remunerationreceived by the karta could not be treated as income of thefamily. It has to be treated as his individual income andassessed as such. ... In the present case, it is admitted that salary was paid to two of the partners of the assessee-firm forservices rendered by them individually, although they werepartners in a representative capacity as kartas of theirrespective joint families. It is further admitted that thesalary paid to the two partners was assessed in their individualhands, obviously accepting that there was no real and sufficientconnection between the partnership interest held by the jointfamily through the karta and the salary or remuneration paid tothe partner. In such circumstances, the same principles as areapplicable in the matter of disallowance of interest which wehave set out above are applicable in the matter of disallowanceof salary or remuneration paid to a partner. ...ö(emphasissupplied) salary was paid to two of the partners of the assessee-firm forservices rendered by them individually, although they werepartners in a representative capacity as kartas of theirrespective joint families. It is further admitted that thesalary paid to the two partners was assessed in their individualhands, obviously accepting that there was no real and sufficientconnection between the partnership interest held by the jointfamily through the karta and the salary or remuneration paid tothe partner. In such circumstances, the same principles as areapplicable in the matter of disallowance of interest which wehave set out above are applicable in the matter of disallowanceof salary or remuneration paid to a partner. ...ö(emphasissupplied) 7. The learned counsel also brought to our notice thesubsequent decision of the Andhra Pradesh High Court inRamakrishnaiah B. Narayana and Co., cited supra. This is also adecision by the Division Bench whereby the aforementioneddecision in N.T.R. Estate case was referred. However, theargument therein was that the decision in N.T.R. Case requirereconsideration in view of the Supreme Court decision in CIT v.R.M. Chidambaram Pillai (106 ITR 292). In that case, the ApexCourt had held that salary paid to a partner is nothing but ashare of profit and the explanation added to Sec.40(b)recognising the representative capacity of a partner referredonly to the payment of interest and that could not be applied tothe payment of salary. The Division Bench then went on to notethat after the decision of the Supreme Court in CIT v.BAGYALAKSHMI AND CO. (55 ITR 660), where the Apex Court had heldthat a Hindu Undivided Family cannot be a partner in a firm andit is only the individuals who can form a partnership and thatrepresentative capacity of the individuals forming thepartnership would be no relevance to the other partners, certainhardships had arisen in cases where an individual was a partnerof the firm and the joint family advanced money to the firm andsuch interest paid to the joint family was being added back tothe profit of the firm. The Division Bench, however, observedthat recognising this hardship the section was amended and theexplanations to Sec.40(b) recognising the representative capacityof a partner in case of payment of interest was acknowledged.The Division Bench observed that there could not be partialrecognition of such representative capacity and once it wasrecognised that the real partner was the joint family, it wouldfollow that payment of salary could be regarded as a share of theprofit only if the salary was paid to the joint family itself andassessed in its hands in the status of a joint family. TheDivision Bench also relied upon the provisions of the Hindu Gainsof Learning Act, Act 30 of 1930 and observed: ôOnce the joint family is recognised as a the realpartner of the firm, the law has departed from the original position of recognising only the individual as a partner and,consequently it must also be recognised that the salary paid tothe individual not being part of the income of the firm, cannotbe taken as part of the share of profit of a partner. In thecircumstances, when section 40(b) refers to the salary paid to apartner, it cannot take into account the salary paid to theindividual as a representative of the joint family as he is not apartner in his individual capacity.ö The Division Bench, thus, confirmed the law laid down bythe Andhra Pradesh High Court in N.T.R. Estate case, citedsupra. 8. Both these decisions, however, came much prior to thedecisions of the Supreme Court in Brij Mohan case and Suwalalcase, cited supra, and for that matter even Rashiklal case, citedsupra. As such, the Andhra Pradesh High Court did not have theadvantage of the aforementioned decisions of the Supreme Court. The Division Bench, thus, confirmed the law laid down bythe Andhra Pradesh High Court in N.T.R. Estate case, citedsupra. 8. Both these decisions, however, came much prior to thedecisions of the Supreme Court in Brij Mohan case and Suwalalcase, cited supra, and for that matter even Rashiklal case, citedsupra. As such, the Andhra Pradesh High Court did not have theadvantage of the aforementioned decisions of the Supreme Court. 9. The learned Departmental Counsel very heavily reliedon RashiklalÆs case, cited supra, and pointed out that inRashiklal case, the Supreme Court has explained and reiteratedthe position of a Hindu Undivided Family is-a-is a partnershipfirm and has in very certain terms held that a Hindu UndividedFamily directly or indirectly cannot become a partner of apartnership firm because the firm is an association ofindividuals alone. The learned Judges of the Apex Court alsoclarified that all the provisions relating to the mutual rightsand liabilities are only applicable to the individual partnerswho are members of the firm and there was no way that a HinduUndivided Family could intrude into the relationship created by acontract between certain individuals. The only right of theHindu Undivided Family was possible to call upon its nomineepartner to render accounts for profits that he had made from thepartnership business but that would be something between thenominee and Hindu Undivided Family and the partnership firm wouldnot be concerned with what goes on between the nominee and theHindu Undivided Family. The learned Judges also referred toSec.13 of the Partnership Act, 1932 and observed that under thatprovision a partner was not entitled to receive any remunerationfor taking part in the conduct of the business and every partnerwas bound to attend diligently to the business and for doing hisduties, he cannot charge his CO-partners any sum or remuneration,whether in the shape of salary, commission or otherwise, onaccount of the trouble taken by him in conducting the partnershipbusiness. The learned Judges, however, observed that there couldbe a special contract to the contrary in which case, theprovisions of that contract would prevail. The learned Judges,therefore, came to the conclusion that Sec.40(b) of the Act would apply even where there is such a special contract and anycommission paid by a firm to its partners will not be permittedas deduction as business income of the firm. If a claim was madeby a nominee representing a Hindu Undivided Firm or any body ofpersons then the position of law would not be differ ent. Thelearned Judges again reiterated: apply even where there is such a special contract and anycommission paid by a firm to its partners will not be permittedas deduction as business income of the firm. If a claim was madeby a nominee representing a Hindu Undivided Firm or any body ofpersons then the position of law would not be differ ent. Thelearned Judges again reiterated: ôThe Hindu undivided family is not and cannot be apartner in a partnership firm. The remuneration or thecommission that is paid to the partner cannot be claimed to be aremuneration or commission paid to the Hindu undivided family.The partner may be accountable to the family for the moniesreceived by him from the partnership. But, in the assessment ofthe firm, the partner cannot be heard to say that he has notreceived the commission as a partner of the firm, but in adifferent capacity. ... A partner does not act in arepresentative capacity in the partnership. He functions in hispersonal capacity like any other partner. The provisions of thePartnership Act and the Income-tax Act relating to partners andpartnership firms will apply in full force in respect of such apartner. If any remuneration is paid or a commission is given toa partner by a partnership firm, section 40(b) will apply even ifthe partner has joined the firm as a nominee of a Hindu undividedfamily. The Hindu undivided family or its representative, doesnot have any special status in the Partnership Act. ... Theassessment of a firm will have to be made strictly in accordancewith the provisions of the Income-tax Act. The law has to betaken as it is, Section 40(b) applies to certain payments made bya firm to its partners. Neither the firm nor its partners canevade the tax law on the pretext that although in law he is apartner, in reality he is not so. He may have to hand over themoney to somebody else. That may be his position qua a thirdparty. But the firm has nothing to do with it. It has paid thecommission to one of its partners. It cannot get any deductionin its assessment for that payment, because section 40(b) of theAct expressly prohibits such deduction.ö This was a case where the Supreme Court was consideringthe question of commission paid to a partner Rashiklal whichpayment was claimed as a deduction. The Supreme Court relied onthe decision in Dulichand Laxminarayan v. CIT (29 ITR 535) tohold that a firm was not a æ personÆ and as such it was notentitled to enter into a partnership with another person or anindividual. After referring to the definitions of æPartnershipfirmÆ, æPartnerÆ and æFirm nameÆ and after quoting the excerptsof the judgment in Dulichand case, cited supra, the Supreme Courtobserved: ôthat the Hindu undivided family cannot be in a betterposition than a firm in the scheme of the Partnership Act. Thereasons that led this court to hold that a firm cannot join a partnership with another æ individualÆ will apply with equalforce to a Hindu undivided family. In law, a Hindu undividedfamily can never be a partner of a partnership firm. In law, aHindu undivided family can never be a partner of a partnershipfirm. Even if a person nominated by the Hindu undivided familyjoins a partnership, the partnership will be between thenominated person and the other partners of the firm.ö The Court then took the stock of the judgements in BrijMohan case and Suwalal case, cited supra, as those cases werereferred to suggest therein that interest paid to a partner inhis representative capacity was outside the purview of Sec.40(b)of the Act because of the explanation. The Court specificallypointed out on this as follows: ôHowever, in the case before us, no question of paymentof any interest is involved. A commission was paid by the firmfor the services rendered by the partner. Such commission cannotbe paid because of the provisions of section 13 of thePartnership Act in the absence of a special contract. Even if aspecial contract exists, section 40(b) of the Income-tax Actprohibits allowance of such commission as deduction from thebusiness income of the firm.ö The Court then took the stock of the judgements in BrijMohan case and Suwalal case, cited supra, as those cases werereferred to suggest therein that interest paid to a partner inhis representative capacity was outside the purview of Sec.40(b)of the Act because of the explanation. The Court specificallypointed out on this as follows: ôHowever, in the case before us, no question of paymentof any interest is involved. A commission was paid by the firmfor the services rendered by the partner. Such commission cannotbe paid because of the provisions of section 13 of thePartnership Act in the absence of a special contract. Even if aspecial contract exists, section 40(b) of the Income-tax Actprohibits allowance of such commission as deduction from thebusiness income of the firm.ö Thus, in so far as the argument of representativecapacity was concerned, the Supreme Court restricted thatrepresentative capacity only to the interest as per the expresslanguage of the explanation to Sec.40(b). At more than oneplaces, the Apex Court has specified that the position of paymentof interest may be different because of the explanation but thatcannot apply to a commission or remuneration paid by the firm tothe partners. Thus, it is obvious that in Rashiklal case, citedsupra, the Supreme Court rejected the claim for the deduction ofthe commission paid to the partner on two counts, viz.: (i) That the said payment could not be deducted merelybecause the partner represented a joint Hindu family and thepayment would have to be viewed as payment to the partnerhimself; (ii) The explanation covered only interest and that thecommission or the remuneration could not be read on par withinterest which could not be disallowed by reason ofexplanation (2). 10. The learned senior counsel tried to get out of thisposition by suggesting that the observations in Rashiklal case,cited supra, were treated to be obiter in a subsequent decisionin Kanji Shivji and Co. Case, cited supra. We must point outthat what was held to be obiter was not the whole law laid down in Rashiklal case, cited supra, but only the aspect ofretrospectively of the explanation (2) to Sec.4 0(b). The Courtclearly observed as: ôThe observations in Rashiklal case relating to the saidexplanation must therefore be treated as obiter dictaö. The Court also reiterated that the law laid down in BrijMohan case and Suwalal case, cited supra, continue to be thecorrect law. The only concerned issue was relating to theprospectively or retrospectively of explanation (2) to Sec.40(b)and only the view regarding the retrospectively alone which wascontrary to the earlier decided case which were held to beobiter. Therefore, the observation in Rashiklal case, citedsupra, regarding remuneration or commission paid to a partner bya firm being covered by Sec.40(b) was never doubted nor were heldto be obiter in the subsequent Supreme Court decision of KanjiShivji case, cited supra. Thus the law appears to be clear thatwhere there was a payment made in the nature of salary, it couldnot be covered by Explanation 2 to Sec.40(b). This precise viewwas followed by the Gujarat High Court in National WireManufacturing Co. v. CIT (171 CTR 376). 11. The Gujarat High Court, in National Wire 11. The Gujarat High Court, in National Wire Manufacturing Company case, after taking the stock of the SupremeCourt decisions in Brij Mohan case and Suwalal case, cited supranoted the established law regarding the interest paid to thepartner by the firm to be covered under Sec.40(b) and, therefore,not deductible. The Gujarat High Court also referred to itsearlier judgment in Yoganand Textiles case (202 ITR 869) whereinSec.40(b) was interpreted to mean that any payment to the naturedescribed made by the firm to any of the partners of the firmwould not be deductible. The Gujarat High Court also took noteof the stress given in the aforementioned judgment on the wordôanyö and concurred that the word being of wide import has to begiven its full meaning in the context of the provision. TheBench also agreed and confirmed the view that there is noindication whatsoever to differentiate between the nature ofremuneration or between the purpose for which remuneration wasgiven to any partner and held that the provision imposed anabsolute embargo against the deduction in respect of any of thepayments made by the firm of the nature enumerated to any of thepartner of the firm in the earlier judgment. RegardingExplanation 2 it was held that it was added to clarify thatinterest paid by the firm to an individual who is a partner in afirm in a representative capacity shall not be taken into accountfor the purpose of the said clause. The Division Bench alsoendorsed the view that there was nothing in the said provision toindicate that any category of salary, remuneration, etc. thoughpaid by a firm to a person who is a partner were to fall outsidethe scope of Sec.40(b). The Bench also took stock of the dictionary meaning of the words æsalaryÆ, æ commissionÆ andæremunerationÆ and pointed out that the three terms carry thesame basic meaning, i.e. to compensate for services rendered.The High Court, therefore, posed a question as to what would bethe difference in between the payment of interest and thecommission, remuneration, salary, etc. paid for the servicesrendered by the partner. The High Court then reiterated theearlier view expressed by the Supreme Court in RM ChidambaramPillai case, cited supra, and also then referred to Rashiklalcase, cited supra and noted the law laid down therein that if afirm cannot join with another on similar lines a Hindu undividedfamily also cannot join the partnership with another individualand that the Hindu undivided family being a fluctuating body ofindividuals cannot join a partnership with other individuals andif Karta of any other member of a Hindu undivided family joins apartnership firm he does it only as an individual and his rightsand obligations would be determined by the Partnership Act andnot by the Hindu law. The judgment then quotes the passage fromthe Rashiklal case, cited supra, and notes the law laid downtherein that the remuneration or commission that is paid to thepartner cannot be claimed to be a remuneration or commission paidto the Hindu Undivided Family. The Bench then holds: ôInsofar as the interest is concerned the same wouldstand on a different footing in view of the fact that it ispossible to trace the source of the funds. Therefore, the aspectof a partner having dual capacity, i.e. one as a partner in apartnership firm and the other qua the interest of the person whois represented by such partner is recognised because the questionthat could be posed and answered : interest is paid on whichfunds and who has invested those funds?ö ôInsofar as the interest is concerned the same wouldstand on a different footing in view of the fact that it ispossible to trace the source of the funds. Therefore, the aspectof a partner having dual capacity, i.e. one as a partner in apartnership firm and the other qua the interest of the person whois represented by such partner is recognised because the questionthat could be posed and answered : interest is paid on whichfunds and who has invested those funds?ö The Court then referred to its Full Bench decisionChhotalal & Co. v. CIT (150 ITR 276)and also noted theobservations made by P.S. Poti, C.J. Wherein the salary paymentwas treated on a different footing than the other payments.Though even there, the question of the finality of the law asdecided by Rashiklal case, cited supra, was questioned, theGujarat High Court answered the question that the observations inthat case were held to be obiter in Kanji Shivji case, citessupra, on an entirely different issue which was statedspecifically in Kanji Shivji case and which pertained only to thequestion of retrospectivity. It noted that the Apex Court itselfwas aware that the payment of salary, commission or remunerationshould stand on the different footing. Ultimately, the Courtcame to the conclusion that there was no conflict between theposition relating to payment of interest on the one hand andpositions dealing with the payment of salary, commission,remuneration on the other hand. In short, the Gujarat High Courtcompletely accepted the stand that the payment of salary couldnot be equated with the payment of commission. 12. We see no reason to take a different view. In fact, if Explanation 2 to Sec.40(b) spoke only of the interest paid tothe partners by the firm providing an escape route for suchpayments from the rigour of Sec.40(b) an interpretation cannot behanded out enlarging the scope and reading into the explanationadditional words like æsalaryÆ, æcommissionÆ, æremunerationÆ,etc. At least when the explanation was introduced, thelegislative intent was only to provide for such an escape to theinterest paid and it clearly excluded from the explanation, thesalary, commission, remuneration, etc. paid by the firm to thepartners. Therefore, the word æinterestÆ cannot be interpretedto mean any other payments like salary, remuneration, commission,etc. which, though are to be found to be in the main provisionof Sec.40( b), are not to be found in Explanation 2. As held inRashiklal case, cited supra, the assessment of a firm has to bemade strictly in accordance with the provisions of the Income-taxAct. The law has to be taken as it is. In that case, the ApexCourt refused to equate the æ interestÆ with the æcommissionÆpaid by the firm for the services rendered by the partners on theground that under Sec.13 of the Partnership Act, in the absenceof a special contract, commission would not have been payable andthat even such a special contract existed, Sec.4 0(b) prohibitedtreating of such commission as deduction from the business incomeof the firm. 13. Further, the argument that since Rashiklal hadjoined the firm not as an individual but in a representativecapacity and, therefore, the amounts paid to him could not becovered under Sec.40(b) was repelled by holding that thepartnership firm was a compendious way to describe theindividuals who are partners of the firm and other partners ofthe firm could have the contractual relationship with Rashiklalonly and if Sec.40(b) categorically disallowed any deduction ofpayment of commission to a partner, there would be no question ofallowing such payment to be deducted. The Court observed: ôTherefore, there is no scope for any argument that eventhough under the Indian Partnership Act, a Hindu Undivided Familynot being a æ personÆ cannot be a partner, the payment ofcommission to the nominee partner will be tantamount to paymentto HUF and, therefore, such payment will not come within themischief of the Partnership Act or Sec.4 0(b) of the Income-taxAct.ö ôTherefore, there is no scope for any argument that eventhough under the Indian Partnership Act, a Hindu Undivided Familynot being a æ personÆ cannot be a partner, the payment ofcommission to the nominee partner will be tantamount to paymentto HUF and, therefore, such payment will not come within themischief of the Partnership Act or Sec.4 0(b) of the Income-taxAct.ö The Apex Court has considered the whole gamut of apartnerÆs liability vis-a-vis the other partners as also hisposition vis-a-vis the Hindu undivided family which herepresents. The Apex Court then very specifically held: ôIf any remuneration is paid or a commission is given toa partner by a partnership firm, Sec.40(b) will apply even if the partner has joined the firm as a nominee of the Hindu undividedfamily. The Hindu undivided family or its representative doesnot have any special status in the Partnership Act. Although thepartnership firm is not a legal entity, it has been treated as anindependent unit of assessment under the Income-tax Act. Theassessment of a firm will have to be made strictly in accordancewith the provisions of the Income-tax Act. The law has to betaken as it is.ö All this will go to show that there is no scope forsalary paid to a partner by the firm being excluded from theoperation of Sec.40(b) of the Income-tax Act. 14. The learned counsel lastly argued, almost by way ofa desperate argument, that the amendment made by Finance Act 1992with effect from 1-4-1993, provides the remuneration paid to thepartner, if the terms of the partnership deed provides for thesame, is outside the purview of Sec.40(b). The relevantprovisions are as under: ô40. Notwithstanding anything to the contrary insections 30 to 38, the following amounts shall not be deducted incomputing the income chargeable under the head æProfits and gainsof business or professionÆ,- (a) not relevant (b) in the case of any firm assessable as such,- (i) not relevant (ii) any payment of remuneration to any partner who is aworking partner, or of interest to any partner, which, in eithercase, is not in accordance with, the terms of the partnershipdeed; or (iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in eithercase,is authorised by, and is in accordance with, the terms ofthe partnership deed, but which relates to any period ( fallingprior to the date of such partnership deed) for which suchpayment was not authorised by, or is not in accordance with, anyearlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deeddoes not cover any period prior to the date of such earlierpartnership deed; or (iv) not relevant (v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordancewith, the terms of the partnership deed and relates to any periodfalling after the date of such partnership deed in so far as theamount of such payment to all the partners during theprevious exceeds the aggregate amount computed ashereunder:... ... ...ö From this the learned counsel says that the legislaturethough had directed the disallowance of such remuneration in theunamended provision of Sec.40(b), such remuneration will not nowbe hit by Sec.40(b) so as to be disallowed under that section.The argument is such remuneration or salary paid to the workingpartner has been brought on par with the interest paid by thefirm to the partner for which an escape route was provided videExplanation 2. The argument goes further to say that therefore,even in respect of the earlier period, we must interpretExplanation 2 so as to include the salary or as the case may bethe remuneration paid to the partner along with the interest paidby the firm to the partner. The argument is clearlymisconceived. 15. The learned counsel very fairly and candidly From this the learned counsel says that the legislaturethough had directed the disallowance of such remuneration in theunamended provision of Sec.40(b), such remuneration will not nowbe hit by Sec.40(b) so as to be disallowed under that section.The argument is such remuneration or salary paid to the workingpartner has been brought on par with the interest paid by thefirm to the partner for which an escape route was provided videExplanation 2. The argument goes further to say that therefore,even in respect of the earlier period, we must interpretExplanation 2 so as to include the salary or as the case may bethe remuneration paid to the partner along with the interest paidby the firm to the partner. The argument is clearlymisconceived. 15. The learned counsel very fairly and candidly submitted that it was not his case that the amendment made in1992 which had the effect of allowing the salary paid to theworking partner in terms of the partnership deed being aallowable expenditure was retrospective in nature. The onlyargument is that since the legislature has now treated suchsalary on par with and identically as the interest paid by thefirm to the partner, we should hold that the remuneration orsalary in this case for the assessment year 1982-83 is not hit bySec.40(b). 16. The argument is totally incorrect. In the first place, the interpretation of Explanation 2 with effect from1-4-1985 was held to be retrospective on the ground that suchexplanation was of declaratory nature. In Brij Mohan case andSuwalal case, cited supra and though itÆs retropestive nature wasdoubted in Rashiklal case, cited supra, the Supreme Court, inKanji Shivji case, cited supra, clarified the situation to theextent that the observations in Rashiklal case, cited supra, wereobiter. Here the learned counsel himself is conceding that it isnot his case that the present amendment made in the year 1992 areof retrospective nature. Therefore, there will be no question ofmaking applicable these amendments to the case in hand whichpertains to the assessment year 1982-83. Once that situation isobtained, there would be no scope to hold that the thelegislature intended to include even the remuneration and thesalary on par with the interest paid to the partner by the firmso as to be out of the mischief of Sec.40(b). The law has to beread as it is and merely because subsequently the law underwent change in respect of the remuneration to the partner, it cannotbe treated that the legislature always had the intention to takeout the remuneration of the mischief of Sec.40(b). In fact,Rashiklal case, cited supra, is a complete answer that thecommission also was completely covered by Sec.40(b) as it stoodthen. We do not see any merit in this contention and reject thesame. 17. We, accordingly, answer the reference against theassessee and in favour of the Department holding that theconcerned authorities were right in treating the payment ofsalary to the partners by the firm as hit by Sec.40(b) of the Actand disallowing those business expenditure. 18. In T.C. No.165 of 1989, the question regarding theassessment year 1982-83 is identical in nature except for thedifference in the amount claimed on account of payment of salary.Needless to say that this case will be governed in the samemanner as has been done in this judgment. We, accordingly,answer this reference also against the assessee and in favour ofthe Department. Index:yes/No(V.S.S.,J.) (K.R.P.,J.)Jai -02-2002