JUDGMENT R.K. Agrawal, J.
1. By two separate references, one for the asst. yr. 1976-77 which has been registered as IT Ref. No. 31 of 1982 and the other for the asst. yrs. 1977-78 and 1978-79 which has been registered as IT Ref, No. 215 of 1983, the Tribunal has referred the following two common questions of law under Section 256(1) of the IT Act (hereinafter referred to as the Act) for opinion to this Court :
"1. Whether, on the facts and circumstances of the case, the salary allowed to Yadav Kishan Goel was adable under Section 40(b) of the IT Act, 1961 ?"
"2. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessee is not entitled for the claim under Section 80HH of the IT Act, 1961 ?"
Following two more questions of law have been referred for the asst. yrs. 1977-78 and 1978-79 :
"3. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the claim under Section 80J was rightly disallowed to the assessee ?
"4. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessee-firm, while running the cold storage plant, was neither manufacturing nor producing any article ?"
2. Briefly stated the facts giving rise to the present references are as follows :
The applicant had paid salary of Rs. 12,000 to its partner Sri Yadav Kishan Goel and the same was added back while computing the income of the applicant in terms of Section 40(b) of the Act. Shri Goel was partner in the applicant's firm as a representative of the HUF being its Karta. The salary of Rs. 12,000 had been paid to him by the applicant for his services rendered by him in his individual capacity. Treating the salary as a payment to the partner, the ITO had disallowed the said amount while computing the income of the applicant under Section 40(b) of the Act. In the appeal filed by the applicant before the CIT(A), the order of the ITO was upheld. The second appeal filed before the Tribunal has also been rejected.
The applicant runs a cold storage at Moradabad and had claimed that it was an industrial undertaking in a backward area and since it had satisfied all the conditions laid down in Section 80HH(2) of the Act, it was entitled to the benefit of the aforesaid section. The ITO rejected its claim as according to him the applicant was not engaged in the manufacture of articles and hence the necessary conditions were not satisfied and therefore the claim cannot be allowed. In the appeal filed by the applicant, the CIT upheld the order of the assessing authority, which order has been confirmed in further appeal by the Tribunal. During the asst. yrs. 1977-78 and 1978-79 the applicant's firm had constructed two separate cold storage chambers and claimed the benefit of Section 80J of the Act. The claim has been negatived by the authorities including the Tribunal.
3. We have heard Shri Vikram Gulati, learned counsel for the applicant and Sri A.N. Mahajan, learned standing counsel appearing for the Revenue.
4. The learned counsel for the applicant submitted that Sri Yadav Kishan Goel was a partner in the applicant-firm representing his HUF. The salary which was paid to Sri Goel was not in his individual capacity but as Karta of the HUF and, therefore, the status of the two being different, it is an allowable deduction and, therefore, the provisions of Section 40(b) of the Act are not attracted. He relied upon the following decisions :
(1) Dhirendra Mohan Gupta v. CIT, 1990 UPTC 1286 (2) Brij Mohan Das Laxman Das v. CIT, (1997) 223 ITR 825 (SC) (3) Suwalal Anandilal Jain v. CIT, (1997) 224 ITR 753 (SC) (4) CIT v. Trilok Nath Mehrotra and Ors., (1998) 231 ITR 278 (SC).
Shri A.N. Mahajan, learned counsel for the Revenue, submitted that even though Sri Goel was representing his HUF as a partner in the applicant-firm but the salary which was paid to him was on account of his individual contribution. The firm only recognises the individual as a partner even though he may be representative of any other person. Thus, the provisions of Section 40(b) of the Act would be attracted in respect of the salary paid to an individual whether he represents himself or any other person in a firm as partner. He relied upon the following decisions :
1. Rashik Lal & Co. v. CIT, (1998) 229 ITR 458 (SC)
2. National Wire Manufacturing Co. v. CIT, (2002). 253 ITR 496 (Guj)
3. R.M. Appavu Chettiar Sons v. CIT, (2002) 256 ITR 289 (Mad)
4. Tola Ram Sons Dal Mill v. CIT (2003) 130 Taxman 602 (All)
5. Industrial Linings v. CIT (2003) 263 ITR 315 (Guj)
6. CIT v. Golden Touch, (2003) 263 ITR 261 (Mad).
Having heard the learned counsel for the parties, we find that it is not in dispute that Shri Yadav Kishan Goel was a partner in the applicant-firm representing Ms HUF in the capacity of Karta. He had been paid salary of Rs. 12,000 every year. Section 40(b) of the Act deals with the amount which is not deductible while computing the income chargeable under the head Profits and gains of business or profession. Sub-section (b) of the Act during the relevant assessment year disallowed the payment of salary to any partner.
5. In the case of Dhirendra Mohan Gupta (supra), this Court was called upon to answer the following questions of law ;
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the salary paid by the firm to Shri Puran Chand formed part of the share of profit and the same was assessable as the income of his HUF on whose behalf he was a partner in the firm even though the firm had paid salary to him for the personal services rendered by him.
If the answer to question No. 1 is in the affirmative--
(2) Whether the Tribunal was right in holding that the amount of salary paid to Sri Puran Chand Gupta by the firms could not be allowed as a deduction in the assessment of his HUF as salary paid by the HUF to him."
The Court has held as follows :
"The first question referred under Section 256(1) is no longer 'res integra' so far as this Court is concerned. In Laxman Das v. CIT, (1982) 138 ITR 628 (All) : 1982 UPTC 901, a Bench of this Court has considered an identical question arising on identical facts. The Bench followed the earlier decisions of the Supreme Court in CIT v. D.C. Shah (1969) 73 ITR 692 (SC) and Prem Nath and Ors. v. CIT (1970) 78 ITR 319 (SC) : 1970 UPTC 1381 (SC) and distinguished the later decision of the Supreme Court in CIT v. R.M. Chidambaram Pillai, (1977) 106 ITR 292 (SC). The Division Bench decision is binding upon us. No contrary decision either of Supreme Court or of this Court is brought to our notice. We may also notice that first question referred by the Tribunal itself says that the salary was paid to the Karta for the personal service rendered by him. The judgment of the Tribunal also shows that this salary paid to him was earned by Karta not on account of any detriment to the family assessment but in consideration of his personal service. If so, the first question must be answered in the negative, i.e., in favour of the assessee and against the Revenue. We hold that the salary income of Karta of these HUF assessees cannot be included in the share income of the respective HUF."
Thus the Court came to the conclusion that the salary was earned by the Karta not on account of any detriment to the family assessment but in consideration of his personal service and, therefore, the salary paid by the firm to the partner was not assessable as income of HUF on whose behalf he was a partner in the firm.
In the case of Brij Mohan Das Laxman Das (supra), the apex Court was considering the question as to whether interest paid on the deposit made by a partner in his individual capacity while being partner as Karta representing his HUF was deductible under Section 40(b) of the Act or not. The apex Court had held as follows ;
"Clause (b) of Section 40 is based upon and is a recognition of the basic nature of the relationship between a firm and its partner. In CIT v. R.M. Chidambaram Pillai (1977) 106 ITR 292 (SC), this Court observed (at p. 295) :
"Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. 'Firm' is a collective noun, a compendious expression to designate an entity, not a person. In IT law, a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as a portion of the profits being made over as a reward for the human capital brought in. Section 13 of the Partnership Act brings into focus this basis of partnership business."
The apex Court also quoted with approval the passage from Lindley on the Law of Partnership to the effect :
"In point of law, a partner may be the debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for, a man cannot be his own employer. The provisions in Chapter III in this view of the matter, of the Partnership Act, amply define and delineate the duties, obligations and rights of the partners vis-a-vis the firm."
In the case of Suwalal Anandilal Jain (supra), the apex Court had followed its earlier decision in Brij Mohan Das Laxman Das (supra). In the case of Trilok Nath Mehrotra (supra), the apex Court has held that the law is well settled by the several decisions of this Court that if the member of Hindu undivided Family in short HUF joined as a partner and is given salary for managing the firm or rendering other service to the firm, the salary will be his individual income, but if the salary is really a part of the return of the investment made by HUF in the partnership firm, the salary income would be added to the income of the HUF. In this case, the apex Court was considering as to whether the salary paid to a member of an HUF who has joined the partnership firm can be taxed in an HUF or not. In the case of Rashiklal & Co. (supra), the apex Court has held as follows :
"The HUF 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 HUF. 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 IT 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 HUF. The HUF 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 IT 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."
The apex Court relied on the decision in Dulichand Laxminarayan v. CIT (1956) 29 ITR 535 (SC) 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. After referring the definition of partnership firm, partner and firm name and after quoting excerpts of the judgment in Dulichand's case (supra), the apex Court had observed as follows :
"that the HUF 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 an HUF. In law, an HUF can never be a partner of a partnership firm. Even if a person nominated by the HUF joins a partnership, the partnership will be between the nominated person and the other partners of the firm."
After considering earlier decisions in the Brij Mohan Das and Suwalal Anandilal cases (supra), the apex Court specifically pointed as follows :
"Insofar as the argument of the individual capacity is concerned, the Supreme Court restricted the representative capacity only to the interest as per express language of the Explanation to Section 40(b). In the case of R.M. Appavu Chettiar Sons v. CIT, (2002) 256 ITR 289 (Mad), the Madras High Court has held that payment made in the nature of salary to a partner by a firm where such partner represented his HUF, would not be allowable under Section 40(b) of the Act. Similar view has been taken by the Gujarat High Court in the case of National Wire Manufacturing Co. v. CIT (supra) and in Industrial Linings v. CIT (supra). The Madras High Court has reiterated its view in the case of CIT v. Golden Touch (supra). This Court in the case of Tola Ram Sons Dal Mill v. CIT (supra) has also followed the decision of the Madras High Court in the case of R.M. Appavu Chettiar Sons (supra)."
6. We are in respectful agreement with the aforesaid decisions and, therefore, hold that in view of Section 40(b) of the Act the salary allowed to Yadav Kishan Goel was not allowable as deduction while computing the income chargeable under the head Profits and gains of business or profession.
7. So far as the second question is concerned, it may be mentioned here that the Hon'ble Supreme Court in the case of Delhi Cold Storage (P) Ltd. v. CIT (1991) 191 ITR 656 (SC), has held that "in common parlance, 'processing' is understood as an action which brings forth some change or alteration of the goods or material subjected to the act of processing and in a cold storage, vegetables, fruits and several other articles which require preservation by refrigeration are stored. While, as a result of long storage, scientific examination might indicate loss of moisture content, that is not sufficient for holding that the stored articles have undergone a 'process' within the meaning of Section 2(7) of the Finance Act, 1973, and therefore, running of a cold storage was not an industrial company."
8. Section 80HH of the Act provides deduction in respect of profit and gains from industrial undertaking or hotel business established in backward area. For the purpose of claiming deduction in this section, one of the prerequisite condition is that the gross total income of an assessee should include profit and gains derived from an industrial undertaking or the business of a hotel.
9. The apex Court has already held that running a cold storage is not an industrial undertaking.
10. The Calcutta High Court in the case of CIT v. East India Cold Storage (P) Ltd., (1996) 218 ITR 668 (Cal) has held that a cold storage does not come within the meaning of industrial undertaking under Section 80HH of the Act in view of the decision of the apex Court in the case of Delhi Cold Storage (P) Ltd. (supra).
11. Thus, we are of the considered opinion that running a cold storage does not come within the purview of industrial undertaking and, therefore, deduction under Section 80HH of the Act is not available.
12. So far as the remaining two questions are concerned, it is relevant to reproduce Section 80J(4) of the Act which reads as follows :
"80J(4)--This section applies to any industrial undertaking which fulfils all the following conditions, namely :
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;
(iii) it manufactures or produces articles, or operates one or more cold storage plant or plants in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of thirty-three years next following the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking;
(iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power."
From a reading of the above sub-section, it is clear that an industrial undertaking, in order to be entitled to the benefit of Section 80J should fulfil all the four conditions laid down under the sub-section. Clauses (iii) and (iv) would make it very clear that the cold storage plant or plants should be able to manufacture or produce articles and they should engage 10 or more workers in a manufacturing process if it is run with the aid of power. The Tribunal has found that there were no separate employees in first and second new chambers and it is difficult to hold that the assessee had engaged 10 or more workers in the first and second chambers constructed by it; therefore, the applicant was not able to prove that it had fulfilled conditions in Sub-sections (4)(iii) and (iv) of Section 80J of the Act.
In view of the findings recorded by the Tribunal that the applicant has not been able to fulfil the conditions of Clauses (iii) and (iv) of Section 80J(4) of the Act, it is not entitled for deduction under Section 80J of the Act.
13. Apart from it, this Court in the case of CIT v. Mahalaxmi Ice & Cold Storage (1996) 84 Taxman 493 (All) has held that a cold storage is not entitled to deduction under Section 80J of the Act. We are in respectful agreement with the aforesaid decision.
14. In view of the foregoing discussion, we answer all the four questions in the affirmative, i.e., in favour of the Revenue and against the assessee. However, the parties shall bear their own costs.