(Delivered by Hon'ble F.I. Rebello, Chief Justice) Income Tax Appeal No.113 of 2010 is in respect of the Assessment Year 2005-06 and Income Tax Appeal No.112 of 2010 is in respect of Assessment Year 2006-07. These are appeals by the Revenue against the orders of ITAT. They had framed several questions. In our opinion, questions 3, 4 and 5 are purely questions of fact and considering the concurrent findings recorded by the CIT (A) as also ITAT and questions 3, 4 and 5 as framed, no substantial question of law arises therein and consequently, those questions do not arise.
Insofar as questions 1 and 2 are concerned, in our opinion, question no.1 will cover both the questions and the appeals are admitted on the said question, which reads as under in both the appeals:-
"1. Whether the learned Income Tax Appellate Tribunal has erred in law and in facts in ignoring the conditions laid down in the provisions of Section 40 (b) (i) of the Income Tax Act, 1961 and explanation 4 thereto with regard to the disallowance of salary paid to partners in HUF capacity."
The assessee is a partnership firm. The assessee has been paying salaries to their working partners, Sri Ambuj Rastogi and Sri Raj Kishore Rastogi, who are partners in the firm in their capacity as Karta's of these respondents HUF.
The AO noticed that the aforesaid two partners were working in the assessee-firm as individuals and that no services were being rendered to the firm by the HUFs. Further, no employer and employee relationship was established between the firm and the above HUFs and deduction of salary, as such, in terms of the Income Tax Act, 1961 (in short ''the Act') is allowable only when employer and employee relationship is established and, therefore, disallowed the salary paid to the aforesaid two partners.
On appeal, the CIT (A) deleted the addition following a number of decisions of the Income Tax Appellate Tribunal, which have been set out by the CIT (A) in its order.
In the second appeal, ITAT relying upon the judgments in ITO Vs. National Automobiles (2005) 93 TTJ (Jd) 641 and ACIT Vs. Patel Quarry (2004) 90 TTJ (Ahd.) 215, held that the salary paid to a partner representing HUF having rendered services to the firm is allowable in the hands of firm notwithstanding the fact that such partner is a salaried working partner in some other firms and accordingly, dismissed ground No.1 of the appeal and upheld the order of the CIT (A).
The question for our consideration is "whether the salary paid to a working partner, who is represented in the partnership firm as Karta of HUF, is allowable as a deduction while computing the income of the assessee-firm.
For that purpose, we may gainfully reproduce the relevant provisions of the Act, as they stand for the relevant Assessment Years. Section 40 (b) (i) of the Act reads as under:-
"40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-
(a) ... ... ...
(b) in the case of any firm assessable as such,-
(i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as "remuneration") to any partner who is not a working partner; or
(ii) ... ... ...
(iii) ... ... ...
(iv) ... ... ...
(v) ... ... ..."
Explanation 4.--For the purposes of this clause, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner."
Thus, it would be clear that in terms of the Income Tax Act as it stands for the relevant Assessment Years, the amount paid as salary, bonus, commission or remuneration would be an allowable deduction only if it is paid to a working partner. From the aforesaid, the question that arises for our consideration is as to whether the partner who represents an HUF as a Karta can be considered. Explanation 4, be said to be an individual.
To understand the issue, we may first consider the status of a Hindu Undivided Family. In Rashik Lal and Co. Vs. Commissioner of Income Tax, reported in (1998) 229 ITR 458, the Apex Court observed as under:-
"The Hindu undivided family is not and cannot be a partner in a partnership firm. The remuneration or the commission that is paid to the partner cannot be claimed to be a remuneration or commission paid to the Hindu undivided family. The partner may be accountable to the family for the monies received by him from the partnership. But, in the assessment of the firm, the partner cannot be heard to say that he has not received the commission as a partner of the firm, but in a different capacity.....A partner does not act in a representative capacity in the partnership. He functions in his personal capacity like any other partner. The provisions of the Partnership Act and the Income-tax Act relating to partners and partnership firms will apply in full force in respect of such a partner. If any remuneration is paid or a commission is given to a partner by a partnership firm, section 40 (b) will apply even if the partner has joined the firm as a nominee of an Hindu undivided family. The Hindu undivided family or its representative, does not have any special status in the Partnership Act....The assessment of a firm will have to be made strictly in accordance with the provisions of the Income-tax Act. The law has to be taken as it is. Section 40 (b) applies to certain payments made by a firm to its partners. Neither the firm nor its partners can evade the tax law on the pretext that although in law he is a partner, in reality he is not so. He may have to hand over the money to somebody else. That may be his position qua a third party. But the firm has nothing to do with it. It has paid the commission to one of its partners. It cannot get any deduction in its assessment for that payment, because section 40 (b) of the Act expressly prohibits such deduction."
Thus the Karta of the HUF, is a partner in the firm as an individual, as a HUF cannot be a partner in a partnership. The remuneration thus paid to the partner is in the capacity of an individual partner in the firm. The HUF is, therefore, not a partner. The amount is paid to the partner as a working partner, which fact cannot now be disputed.
We may then observe that the Supreme Court in Dulichand Laxminarayan v. CIT, reported in (1956) 29 ITR 535 (SC), has been pleased to hold that a firm is not a person, as such it was not entitled to enter into a partnership with any person or an individual.
The further observations in Rashik Lal & Co. (supra) may be set out as under:-
"A Hindu undivided family cannot be in a better position than a firm in the scheme of the Partnership Act. The reasons that led this court to hold that a firm cannot join a partnership with another ''individual' will apply with equal force to a Hindu undivided family. In law, a Hindu undivided family can never be a partner of a partnership firm. Even if a person nominated by the Hindu undivided family joins a partnership, the partnership will be between the nominated person and the other partners of the firm."
Our attention has, however, been invited to a Division Bench judgment of this Court in G.T. Cold Storage and Ice Factory Vs. Commissioner of Income-Tax, (2005) 275 ITR 340. Similar issue was raised before the Court in respect of assessment years 1977-78 and 1978-79. In the said case, the question for consideration was 'Whether on the facts and in the circumstances of the case, the salary allowed to Yadav Kishan Goel was addable under Section 40 (b) of the Income Tax Act, 1961? The learned Bench, after considering the said question, formulated the question. Insofar as this question is concerned, the learned Bench after examining various judgments including the judgments of the Supreme Court, was pleased to hold that the salary paid to the partner was not an allowable for deduction while computing the income chargeable under the head 'profits and gains of business or profession." It was then contended that the salary was received on behalf of the HUF. We may, however, reproduce Section 40 (b), as it then stood, which reads as under:-
"40 Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession", -
(a) .......... ............
(b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm.
Explanation 1.- Where interest is paid by a firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm.
Explanation 2.- Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as "partner in a representative capacity" and "person so represented" respectively), -
(i)interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause;
(ii)interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause.
Explanation 3.- Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person,"
It will be obvious that in the Section, as it then stood, the remuneration made by the firm or any partner of the firm was not allowable as deduction. That position is also the same now except that the salary paid to a working partner is allowable as deduction. Working partner has been defined in Explanation 4 to Clause (v) of sub-Section (b) of Section 40 of the Act to mean 'an individual'.
Considering the above, in our opinion and as the Section now stands, the judgment in G.T. Cold Storage (supra) would be of no assistance.
Thus, we hold that the judgments of the CIT (A) and ITAT lay down the correct law. Once it is held that a Hindu Undivided Family cannot be a partner but the Karta which he joins, is for all purposes an individual. As held in the case of Rashik Lal & Co. (supra), a partner cannot be heard to say that he has received the commission as a partner of the firm but in a different capacity. The income, received by a partner in a firm, even though as a Karta of HUF, is as an individual and as a working partner, then the deduction is allowable.
For the aforesaid reasons, we find no merit in these appeals filed by the revenue and they are, accordingly, dismissed.
Dated: 28th January, 2011 RKK/AHA (F.I. Rebello, CJ) (Pradeep Kant, J) Hon'ble Ferdino I. Rebello, CJ.
Hon'ble Pradeep Kant, J.
Dismissed.
For orders, see order of date passed on separate sheets.
Dt/-28th January, 2011 RKK/-(ITA-113/10) (F.I. Rebello, CJ) (Pradeep Kant, J)