JUDGMENT
1. The Income-tax Appellate Tribunal, Delhi, has referred the following question of law under Section 256(2) of the Income-tax Act, 1961 (herein after referred to as "the Act"), for opinion to this Court :
"Whether remuneration paid as business adviser to a partner of the firm is covered under the provisions of Section 40(b) or not ?"
2. Briefly stated the facts giving rise to the present reference are as under :
3. The. reference relates to the assessment year 1984-85. The respondent-assessee is a registered partnership firm. It had entered into an agreement some time in January 1973, with M/s. Co-operative Co. Limited, Nawab-ganj, Saharanpur, wherein the respondent undertook to carry on business earlier carried on by the same company on certain terms and conditions.The business consists of manufacturing and sale of different brands of liquors. Some of the terms of the agreement are reproduced below :
"(i) The properties owned by the said company will continue to be the property of the company but the assessee could install and purchase new plant and machinery, etc., which could be taken back by the assessee on the expiry of the agreement;
(ii) For the purpose of business, necessary finance would be provided only by the assessee and the profit and loss of the business would belong to the assessee. The assessee was required to bear all the expenses including, director's remuneration payable by the company;
(iii) The assessee would not dismiss any employees of the company and new employees could be appointed on recommendation by the assessee;
(iv) The assessee shall pay a sum of Rs. 60,000 per year on which the assessee-company shall pay its own income-tax."
4. For the assessment in question the respondent-assessee claimed an amount of Rs. 24,000 being remuneration paid to the business adviser of the company and who happens to be one of the partners of the respondent-assessee, namely, Shri Sardar Nanak Singh. It may be mentioned here that Sri Sardar Nanak Singh was earlier managing director of the company and some time in January 1982, Sri Sardar Nanak Singh has resigned as managing director of the said company and also resigned from the directorship of the company, but the company persuaded him to be business adviser for the company for which remuneration was fixed at Rs. 2,000 per month by the board's resolution passed on January 16, 1982. As this remuneration was being paid by the respondent-assessee, the Assessing Officer invoked the provisions of Section 40(b) of the Act and disallowed the claim of the respondent-assessee which order was confirmed in appeal by the Commissioner of Income-tax (Appeals). Feeling aggrieved the respondent-assessee preferred an appeal before the Tribunal. The Tribunal has allowed the appeal and has held that no disallowance was called for, because the remuneration paid was under an agreement with the company and not with the assessee-firm. Besides remuneration was payable by the company for the services rendered to the company and it was only reimbursement which the firm has made and therefore the payment was not received by the partner under any agreement between the' partners or between the partnership firm and the partners. It consequently held that the provisions of Section 40(b) of the Act are not applicable.
5. We have heard Sri A. N. Mahajan, learned standing counsel for the Revenue. Nobody has appeared on behalf of the respondent-assessee. It has been stated by Sri Mahajan that the entire business of the company was taken over by the respondent-firm and under the agreement it was obliged to make payment of the expenses including the director's remuneration payable by the company. Thus, the payment to the business adviser who was one of its partners clearly attracted the provisions of Section 40(b) of the Act.
6. Having heard learned Counsel, we find that under the terms of the agreement reproduced above the respondent-assessee had taken on lease the entire business of the company. It was under an obligation to pay the salary of all the employees including the directors' remuneration and all other expenses. The profit and loss of the business belonged to the respondent-assessee. Thus it is a case where the business adviser was rendering services to the respondent-firm and not to the company. Since he was a partner in the respondent-firm, the provisions of Section 40(b) of the Act were clearly attracted. Payment has been made directly by the respondent-firm to one of its partners, namely, Sri Sardar Nanak Singh, for the advice rendered by him.
7. In this view of the matter, the Tribunal was not justified in holding that the provisions of Section 40(b) of the Act are not ttracted.
8. We accordingly answer the question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee. However, there shall be no order as to costs.