Tc/265/2001 Of The Commor. Of Income Tax v. M/S.rajam Ramaswamy & Sons

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 27.6.2006 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANAND THE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A).No.265 of 2001 The Commissioner of Income TaxTamil Nadu-IV,Madras...Appellant M/s. Rajam Ramaswamy & Sons188, Poonamallee High RoadChennai. ..Respondent Appeal under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Madras 'A' Benchdated 14.7.1999 in ITA No.1619/Mds/1993 for the assessment year 1989-90 against the order of the Commissioner of Income Tax (Appeals) IX,Madras-34 in IT Appeal No.470/CC V(IPV)/1/1991-92 dated 15.2.93against the order of Asst. Commissioner of Income Tax, City Circle V(Inv) Madras-34 in GI 2301/R/1989-90 dated 31.1.92. For Appellant: Ms. Pushya Sitaraman, Sr.S.C.J U D G M E N T(Delivered by P.D.DINAKARAN, J.) The above tax case appeal is directed against the order of theIncome-tax Appellate Tribunal dated 14.7.1999 made in ITANo.1619/Mds/1993 for the assessment year 1989-90. 2. The assessee filed its return for the assessment year 1989-1990. The claim of the assessee for a sum of Rs.1,30,000/- paid tothe partner was disallowed by the Assessing Officer under Section 40(b) of the Income Tax Act and was added as the income of the firm.On appeal, the Commissioner of Income Tax (Appeals), following hisearlier year's order, allowed the appeal directing the AssessingOfficer to delete the addition, which was, on further appeal,confirmed by the Income Tax Appellate Tribunal. 3. Aggrieved by the same, the Revenue has filed the aboveappeal raising the following question of law. "Whether on the facts and circumstances of the case, theAppellate Tribunal was justified in holding that thepayments made to the partners a sum of Rs.1,30,000/- by the https://hcservices.ecourts.gov.in/hcservices/ assessee firm were not disallowed under Section 40(b) ofthe Income Tax Act, 1961?" 4. Before proceeding further, it is apt to refer the provisioncontained in Section 40(b) of the Act, so far as it is necessary forthe purpose of this case. 40. Amounts not deductible.--Notwithstanding anything tothe contrary in sections 30 to 38, the following amountsshall not be deducted in computing the income chargeableunder the head "Profits and gains of business orprofession",-- (a) ... (b) in the case of any firm assessable as such,-- (i) any payment of salary, bonus, commission orremuneration, by whatever name called (hereinafter referredto as remuneration) to any partner who is not a workingpartner; or (ii) any payment of remuneration to any partner who is aworking partner, or of interest to any partner, which, ineither case, is not authorised by, or is not in accordancewith, the terms of the partnership deed; or (iii) any payment of remuneration to any partner who is aworking partner, or of interest to any partner, which, ineither case, is authorised by, and is in accordance with,the terms of the partnership deed, but which relates to anyperiod (falling prior to the date of such partnership deed)for which such payment was not authorised by, or is not inaccordance with, any earlier partnership deed, so, however,that the period of authorisation for such payment by anyearlier partnership deed does not cover any period prior tothe date of such earlier partnership deed; or (iv) any payment of interest to any partner which isauthorised by, and is in accordance with, the terms of thepartnership deed and relates to any period falling afterthe date of such partnership deed in so far as such amountexceeds the amount calculated at the rate of eighteen percent. simple interest per annum; or (v) any payment of remuneration to any partner who is aworking partner, which is authorised by, and is inaccordance with, the terms of the partnership deed andrelates to any period falling after the date of suchpartnership deed in so far as the amount of such payment to (iv) any payment of interest to any partner which isauthorised by, and is in accordance with, the terms of thepartnership deed and relates to any period falling afterthe date of such partnership deed in so far as such amountexceeds the amount calculated at the rate of eighteen percent. simple interest per annum; or (v) any payment of remuneration to any partner who is aworking partner, which is authorised by, and is inaccordance with, the terms of the partnership deed andrelates to any period falling after the date of suchpartnership deed in so far as the amount of such payment to all the partners during the previous year exceeds theaggregate amount computed as hereunder:-- (1) in the case of a firm carrying on a professionreferred to in section 44AA or which is notified for thepurpose of that section--(a) on the first Rs.1,00,000 Rs.50,000 or at the of thebook-profit or rate of 90 per centin case of a loss of the book-profit,whichever is more; Provided that in relation to any payment under this clauseto the partner during the previous year relevant to theassessment year commencing on the 1st day of April, 1993,the terms of the partnership deed may, at any time duringthe said previous year, provide for such payment. Explanation 1.--Where an individual is a partner in a firmon behalf, or for the benefit, of any other person (suchpartner and the other person being hereinafter referred to as "partner in arepresentative capacity" and "person so represented",respectively),-- (i) interest paid by the firm to such individualotherwise than as partner in a representative capacity,shall not be taken into account for the purposes of thisclause; https://hcservices.ecourts.gov.in/hcservices/ (ii) interest paid by the firm to such individual aspartner in a representative capacity and interest paid bythe firm to the person so represented shall be taken intoaccount for the purposes of this clause. Explanation 2.--Where an individual is a partner in a firmotherwise than as partner in a representative capacity,interest paid by the firm to such individual shall not betaken into account for the purposes of this clause, if suchinterest is received by him on behalf, or for the benefit,of any other person. Explanation 3.--For the purposes of this clause, "book-profit" means the net profit, as shown in the profit andloss account for the relevant previous year computed in themanner laid down in Chapter IV-D as increased by theaggregate amount of the remuneration paid or payable to allthe partners of the firm if such amount has been deductedwhile computing the net profit. Explanation 4.-For the purposes of this clause, "workingpartner" means an individual who is actively engaged inconducting the affairs of the business or profession of thefirm of which he is a partner."... 5.1. In Commissioner of Income Tax v. Gemini Productions (110ITR 847), this Court, while dealing with the application of Section10(4)(b) of the Income Tax Act, 1922, corresponding to Section 40(b)of the Income Tax Act, 1961, held as follows. Explanation 4.-For the purposes of this clause, "workingpartner" means an individual who is actively engaged inconducting the affairs of the business or profession of thefirm of which he is a partner."... 5.1. In Commissioner of Income Tax v. Gemini Productions (110ITR 847), this Court, while dealing with the application of Section10(4)(b) of the Income Tax Act, 1922, corresponding to Section 40(b)of the Income Tax Act, 1961, held as follows. "For the application of section 10(4)(b) there must beincome of the firm and out of the said income the firmshould have made a payment by way of interest, salary,commission or remuneration to a partner of the firm. Inthis case, the company was carrying on an independentbusiness of distribution of films produced by variouspersons including the assessee-firm and hence the incomewhich the company received in the course of carrying ontheir business was the income of the company and not thatof the persons whose pictures they are exhibiting.Therefore, the requirement for applying section 10(4)(b),namely, that the amount out of which the commission waspaid must be the income of the firm of which the recipientis a partner, was absent in the instant case andappropriation of commission due to the company by it fromand out of the realisations from the exhibition anddistribution of films cannot be said to constitute "paymentof commission" to a partner attracting section 10(4)(b)." 5.2. Following the decision cited supra, the Andhra Pradesh HighCourt in Commissioner of Income Tax v. Chitra Kalpana (169 ITR 678),held as under. "Section 40(b) of the Income-tax Act, 1961, corresponds tosection 10(4)(b) of the Indian Income-tax Act, 1922.Section 10(4)(b) was incorporated in the 1922 Act in theyear 1939. The legislative history is sufficient toindicate that the provisions contained in section 40(b) ofthe Act are intended to prevent the siphoning off the firm'sincome to partners in order to reduce the tax liability inthe hands of the firm. Income earned by the firm can bediverted into partners' hands by making payments on accountof salary, bonus, interest, commission and otherremuneration. Section 40(b) of the Act takes care of suchattempts to avoid tax by making impermissible the deductionsclaimed by the firm as payments to partners on account ofsalary, bonus, interest, commission or remuneration,wherever a partner is under a legal obligation to providehis services or capital and yet charges a quid pro quo forsuch services or capital. Such payment made cannot beallowed while computing the firm's income because of section40(b). Where, however, a partner is under no legalobligation to provide any particular service or involvehimself in any particular activity, the payment made to himas a quid pro quo for such services and activities would notfall under section 40(b) of the Act. In other words, such apayment is a permissible deduction while computing theincome of the firm."(emphasis supplied) 6. On the facts of the case, it was found that payments were notin their capacity as partners, but were made for the specificservices rendered by them. Applying the ratio laid down in theaforesaid decisions, we have no hesitation to uphold the order of theTribunal in holding that the payments made to the partner, by theassessee firm, cannot be disallowed under Section 40(b) of the Act.Accordingly, the question of law is answered in the affirmative andagainst the revenue. The appeal is dismissed.kplSd/Asst.Registrar To 1.The Commissioner of Income TaxTamilnadu IVMadras. 2.The Income Tax Appellate TribunalMadras Bench (A)Chennai. 3.The CommissionerIncome Tax (Appeal) IXMadras-34. 4.The Asst. Commissioner of Income TaxCity Circle V (Inv) IMadras-34. AMB (CO)RSM/31.7.2006T.C.(A) No.265 of 2001.