Andhra HC (Pre-Telangana)
A. Ramakrishnaiah, B. Narayana And Co. vs Commissioner Of Income-Tax on 9 March, 1994
Equivalent citations: 1994(2)ALT37, [1994]209ITR156(AP)
Author: T.N.C. Rangarajan
Bench: T.N.C. Rangarajan
ORDER T.N.C. Rangarajan, J.
1. The basic facts relating to this reference application are that the assessee is a firm of four partners engaged in the business of "dealer in pulses and grains". For the previous year ended October 10, 1978, corresponding to the assessment year 1979-80, the firm had paid a salary of Rs. 18,500 to two partners in their individual capacity. Those two partners represent their respective Hindu undivided families in the firm. The Income-tax Officer was of the view that the salary so paid must be treated as salary paid to the partners and added back under section 40(b) of the Income-tax Act. On appeal, both the Commissioner of Income-tax and the Income-tax Appellate Tribunal affirmed that view. At the instance of the assessee, the following question has been referred :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the remuneration paid to A. Ramakrishnaiah and B. Narayana for their services under section 40(b) of the Income-tax Act in the hands of the firm?"
2. It may be mentioned that this question has been concluded by the decision of this court in N. T. R. Estate v. CIT . But learned counsel for the Revenue pleaded for reconsideration of that decision on the ground that the Supreme Court has held in CIT v. R. M. Chidambaram Pillai that salary paid to the partner is nothing but a share of profit and that the Explanation added to section 40(b) recognising the representative capacity of a partner referred only to payment of interest and that could not, therefore, be applied to the payment of salary. However, after dealing with the Explanation, this court in N. T. R. Estate's case applied the same principle to salary also. Though the underlying basis was not elaborated in that case, the following appears to be the reasons : Earlier, the Supreme Court had held in CIT v. Bhagyalakshmi and Co. that a Hindu undivided family cannot be a partner in a firm since only individuals can form a partnership and that the representative capacity of the individuals who form the partnership will be of no relevance to the other partners. This has led to certain hardships in cases where an individual is a partner of the firm and the joint family advances money to the firm and such interest paid to the joint family was being added back to the profit of the firm. Recognising the hardship arising from such situation, Parliament has come out with the Explanation to section 40(b) recognising the representative capacity of a partner in the case of payment of interest. We do not think that there can be a partial recognition of such representative capacity. Once it is recognised that the real partner is the joint family, it would follow that payment of salary could be regarded as a share of the profit only if the salary is paid to the joint family itself and assessed in its hands in the status of a joint family. In the present case, admittedly, the salary paid to the individual is assessed only in his hands in the status of an individual. If this salary is added back under section 40(b), it will increase the total income of the firm and thereby the share of the Hindu undivided family, on which the family has to bear a higher burden of tax even though the salaries paid to the individual do not really represent the share of profit. This also follows from the provisions of the Hindu Gains of Learning Act, Act 30 of 1930, under which the gains of learning must be held to be separate property of the individual and cannot be treated as part of the income of the joint family. Once the joint family is recognised as the real partner of the firm, the law has departed from the original position of recognising only the individual as a partner and, consequently, it must also be recognised that the salary paid to the individual not being part of the income of the firm, cannot be taken as part of the share of profit of a partner. In the circumstances, when section 40(b) refers to the salary paid to a partner, it cannot take into account the salary paid to the individual as a representative of the joint family as he is not a partner in his individual capacity. In view of this position we are not inclined to agree with the submission of learned counsel for the Revenue that the decision of this court in N. T. R. Estate's case requires reconsideration. Moreover, it is stated that in the assessee's own case, a similar view has been taken by this court and there being no difference in the facts or law, were cannot depart from that view. The question referred is, therefore, answered in the negative, in favour of the assessee and against the Revenue.