The Commissioner Of Income Tax, Chennai v. M/S.srinath Productions

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 06.02.2006 Coram : THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.490 of 1999 The Commissioner of Income Tax,Chennai...Appellant Vs M/s.Srinath Productions,No.154, Usman Road,T.Nagar, Chennai-600 017. ..Respondent Appeal under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras, 'B' Bench inI.T.A. No.3315 (Mds) 90 dated 29.01.1999, for the assessment year1987-88. For Appellant : Mrs.Pushya Sitaraman For Respondent : No appearance JUDGMENT (Judgment of the Court was delivered by P.P.S.Janarthana Raja, J.) The present appeal is filed under Section 260-A of the IncomeTax Act, 1961 by the Revenue, in I.T.A. No.3315 (Mds) 90 dated29.01.1999, passed by the Income Tax Appellate Tribunal, Madras "B"Bench raising the following substantial question of law. "Whether on the facts and circumstances of thecase, the Appellate Tribunal was justified inholding that the payments made to the partners asum of Rs.5,20,000/- by the assessee firm werenot disallowed u/s 40 (b)of the Income Tax Act?" https://hcservices.ecourts.gov.in/hcservices/ 2.The facts leading to the above question of law are as under: i)The assessee is a firm engaged in the production offeature films. The relevant assessment year is 1987-88. Theassessee firm had come into existence during the year and it is thefirst year of the assessment in this case. The assessee filedReturn of income, declaring a total income of Rs.12,20,975/- for theassessment year under consideration. During the year, the assesseefirm had paid Rs.5,00,000/- to Shri T.Rama Rao on account ofDirector's remuneration and Rs.20,000/- to Shri T.Banerjee onaccount of Technician's remuneration, totalling Rs.5,20,000/-towards remuneration. Shri T.Rama Rao and Shri T.Banerjee werepartners in the assessee firm and the said amount of Rs.5,20,000/-was claimed as deduction. The Assessing Officer, was however ofthe view that the above payment was hit by the provisions of Section40(b) of the Income Tax Act, since the persons to whom thesepayments were made, happened to be the partners of the assessee'sfirm. The Assessing Officer, therefore disallowed the deduction onthis account and completed the assessment. ii)Aggrieved by the order, the assessee filed an appeal tothe Commissioner of Income Tax (Appeals). The Commissioner ofIncome Tax (Appeals) allowed the appeal filed by the assessee anddirected the Assessing Officer to delete the tax made on thisaccount. Aggrieved by the order of the C.I.T. (A), the Revenuefiled appeal to the Income Tax Appellate Tribunal. The Income TaxAppellate Tribunal relied on the Andhra Pradesh High Court Judgmentreported in 169 ITR 678 in the case of C.I.T. Vs. Chitra Kalpana andheld that the assessee firm is entitled to deduction towards paymentof remuneration. 3.The learned counsel for the Revenue submitted that theTribunal was not right in deleting the disallowance made by theAssessing Officer by holding that the payment were made not onaccount of partner but for the specific services and hence, it wasallowable. No representation on behalf of the respondent assesseein spite of the notice served. 4.The issue in this case is covered by this Court Judgmentin the case of Commissioner of Income Tax Vs. Packwell (Karnataka)Industries, reported in 267 ITR 452, which held as follows: "On principle as well, it is not possible toaccept the argument that the statutoryprohibition is to be ignored or diluted byregarding a partner to whom remuneration is paidas a person who besides being a partner is https://hcservices.ecourts.gov.in/hcservices/ 4.The issue in this case is covered by this Court Judgmentin the case of Commissioner of Income Tax Vs. Packwell (Karnataka)Industries, reported in 267 ITR 452, which held as follows: "On principle as well, it is not possible toaccept the argument that the statutoryprohibition is to be ignored or diluted byregarding a partner to whom remuneration is paidas a person who besides being a partner is https://hcservices.ecourts.gov.in/hcservices/ something more or something different when hedeals with the firm. A partner in a firm isvery much a partner and it is that status whichdefines his rights and also imposes on him theobligation to render all the services that he iscapable of for the advancement of the objects ofthe firm. Such a person cannot seek to avoid theeffect of the prohibition made in the statue bydescribing himself as an expert. Any expertisethat he may possess is required to be madeavailable to the firm as a partner and even ifremuneration therefor is permissible in terms ofthe partnership deed, nevertheless, havingregard to the statutory provision whichprevailed until the law was amended in 1992,payment so made cannot be regarded as beingitems of expenditure so far as the firm isconcerned. The question is answered in favourof the Revenue and against the assessee." 5.In view of the foregoing conclusions, we answer the abovequestion in favour of the Revenue, against the assessee. No costs. Sd/Asst.Registrar /true copy/ Sub Asst.Registrar km 1.The Asst. Registrar,Income Tax Appellate TribunalBench "B" Rajaji Bhavan, III Floor,Besant Nagar, Chennai -90. 2.The Secretary Central Board of Direct Taxes, New Delhi. 3.The Commissioner of Income Tax (Appeals)Chennai -34. 4.The Deputy Commissioner of Income TaxSpecial Range IV, Madras. 5.The Commissioner of Income Tax,Tamil Nadu IV, 121 Uttamar Gandhi Salai,Nungambakkam, Chennai 600 034. +1cc to Mr.Pushya Sitaraman, Advocate Sr 5110 TEJ (CO)km/16.2. Tax Case (Appeal) No.490 of 1999