Madhya Pradesh High Court
R.J. Trivedi And Sons vs Commissioner Of Income-Tax on 10 December, 1990
Equivalent citations: [1991]188ITR299(MP)
JUDGMENT B.C. Verma, J.
1. The following question has been referred by the Income-tax Appellate Tribunal under Section 256(1) of the Income-tax Act, 1961, for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the salary paid by the assessee-firm to Shri R. J. Trivedi as coal mines agent, had to be disallowed under Section 40(b) of the Act ?"
2. The Tribunal submitted its statement along with the question referred to above. The assessee complained that a further statement would be necessary in order to answer the question. The matter was heard and, by order dated January 14, 1988, a direction was issued to the Tribunal to draw up a supplementary statement of case in the light of the observations made in that order. Accordingly, on November 4, 1988, the Tribunal submitted a supplementary statement.
2. The assessee in this case is R. J. Trivedi and Sons. It is a partnership firm. Shri R. J, Trivedi is one of its partners. Yet another firm bearing the name J. A. Trivedi and Brothers was the owner of Western Barkuhi Collieries and Ghorawari Hirdagarh Collieries. Between these two firms (viz., the assessee and the owners of the mines) an agreement was executed. The assessee-firm paid a sum of Rs. 11,713 and Rs. 13,320 to Shri R, J. Trivedi (its own partner). The assessee claims that this amount was paid to Shri R. J. Trivedi not as partner but as an agent of the owners of the collieries and, therefore, claimed deduction of all the amounts so paid as salary for the relevant year 1972-73. The Income-tax Officer disallowed the deduction in terms of Section 40(b) of the Act. The Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer. The Commissioner of Income-tax (Appeals) found, in paragraphs 19 and 20 of its order, that Shri R. J. Trivedi was not paid the amount of salary as an agent of the mine owners but as the partner of the assessee-firm. For this, the Commissioner of Income-tax (Appeals) strongly relied upon Clause 2 of the agreement between the assessee-firm and the mine owners. This order was upheld by the Income-tax Appellate Tribunal which referred the aforesaid question for the opinion of this court at the request of the assessee. In the additional statement submitted by the Tribunal, it is observed that "the Tribunal considered the facts and the law on the subject and endorsed the order of the Commissioner of Income-tax (Appeals), vide paragraph 7 of the order."
3. Section 40(b) of the Income-tax Act, 1961, is as under :
"40. Amounts not deductible.--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',...
(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."
4. A Full Bench of this court, in CIT v. Narbharam Popatbhai and Sons [1987] 166 ITR 534, approving a Division Bench decision in Balchand Hashmatrai and Co. v. CIT [1986] 161 ITR 121 (MP), held that, if a person is a partner in a firm in a representative capacity and if such partner lends to the firm monies belonging to him individually, then the interest paid by the firm to such partner on the monies lent by him is not liable to be added back under Section 40(b) of the Act. In fact, when this court desired the Tribunal to submit a supplementary statement in the case, the decision in Narbharam's case [1987] 166 ITR 534 (MP) [FB] was referred to and relied on and it is for this reason that the Tribunal was required to state whether the amount paid to Shri R. J. Trivedi was paid as a partner of the assessee-firm or in his capacity as an agent of the owners of mines. Learned counsel for the assessee attempted to demonstrate that the circumstances of the case do not warrant a conclusion that the amount was paid to Shri R. J. Trivedi qua partner of the assessee-firm but was paid to him as an agent of the mine owners. To lend support to this contention, learned counsel referred to the terms of the agreement. Clause 2 of this agreement states that, in addition to the obligation undertaken by party No. 2 (the assessee-firm), as stated in Clause 1 of the agreement, party No. 2 shall also act as an agent of party No. 1 (the owner of the collieries/mines) as the said collieries were owned by party No. 1. This term clearly indicates that it was the assessee-firm which was the agent of the other firm, viz., mine owner, and not that Shri R. J. Trivedi was the agent. The necessary inference, therefore, is that whatever amount was paid to Shri R. J. Trivedi was paid only as the partner of the assessee-firm and not in his capacity as the agent of the mine owners. The Commissioner of Income-tax (Appeals), and with whom the Appellate Tribunal has concurred, has also placed reliance upon this clause in the agreement for the conclusion that the salary was paid to Shri R. J. Trivedi not as an agent of the mine owners but as a partner of the assessee-firm, It, therefore, cannot be said that there is no basis for the conclusion the Commissioner of Income-tax (Appeals) has reached and which conclusion the Appellate Tribunal has affirmed.
5. Shri Purohit, learned counsel for the assessee-firm, whose submission ex facie appears to be convincing, very ably submitted with reference to the other clauses of the agreement that it is Shri R, J. Trivedi who was to act as an agent of the mine owners and the only inference from the other terms of the agreement is that, the mine owners who, under the mining statute, were obliged to appoint an agent to look after the mining operations, had appointed only Shri R. J. Trivedi as their agent. It was also submitted that Shri R. J, Trivedi had already been acting as such even prior to the agreement and that the agreement only envisages continuance of that status. Reference was made particularly to Clauses 4, 7 and 14 of the agreement. It is true that an attempt through these terms in the agreement is made to create an impression as if Shri Trivedi was the agent of the mine owners. A close scrutiny, however, would show that it is not so. The status of Shri R. J. Trivedi is only that of a partner of the assessee-firm. That status cannot be changed even if the assessee-firm has become the agent of the mine owners. Even, according to Clause 4, the emoluments of all the employees of the mine owners have to be paid by the assessee-firm. It is also stated therein that the mine owners shall retain all their previous employees. An inference, therefore, was sought to be drawn that Shri R. J. Trivedi was being retained by the mine owners as their agent as before although the emoluments were to oe paid by the assessee-firm. In our opinion, this inference is not warranted because, in terms of the agreement, it is the assessee-firm which has agreed to act as an agent and, consequently, Shri R. J. Trivedi ceased to have any direct nexus with the mine owners and could not, therefore, be termed as the agent of the mine owners. We, therefore, do not agree with the submission so made by Shri Purohit.
6. For the aforesaid reasons, we are of the opinion that Shri R. J. Trivedi was paid the amount in question by the assessee-firm as a partner and not as the agent of the mine owners. The question, therefore, has to be answered against the assessee and in favour of the Department. We answer the question as follows :
"In the facts and circumstances of the case, the salary paid by the assessee-firm to Shri R. J. Trivedi has to be disallowed under Section 40(b) of the Act as it was paid to him as partner of the assessee-firm and not as the agent of the mine owners."
7. There shall be no order as to costs.