1992-VIL-161-ITAT-

Equivalent Citation: ITD 041, 008, [1992] 198 ITR (A. T.) 25

Income Tax Appellate Tribunal MADRAS

I. T. A. No. 4023/Mds/87

Date: 10.01.1992

INCOME-TAX OFFICER.

Vs

VRV. & COMPANY.

For the Appellant: A. Banerjee and S. Sanharalingam
For the Respondent: K. R. Ramamani and N. Devanathan

BENCH

Member(s)  : CH. G. KRISHNAMURTHY., T. N. C. RANGARAJAN., A. SATYANARAYANA.

JUDGMENT

1. This appeal raises the question whether salary paid to a person in his individual capacity by a firm in which he represented his joint family could be disallowed under section 40(b) in computing the income of the firm.

2. The admitted facts are that the assessee is a firm consisting of four partners, namely, V. Krishnamurthy, R.V. Subramanian, R.V. Ramanathan and V. Brahanayaki. The three men represented their respective Hindu undivided families in the firm. They were paid salary of Rs. 1,000 each in their individual capacity. That amount was assessed in their hands in the status of 'Individual'. In computing the income of the previous year ended 31-3-1982, corresponding to the assessment year 1982-83, the Income-tax Officer was of the opinion that the provisions of section 40(b) of the Income-tax Act applied to the salaries paid to these three partners and be accordingly added back the sum of Rs. 36,000. On appeal, the Commissioner of Income-tax (Appeals) noted that the salary being assessed in the bands of the partners in their individual capacity and they being partners as karta of their respective joint families, the provisions of section 40(b) could not be applied as the payment of salary could not be regarded as salary paid to partners.

3. The Revenue is in appeal to contend that though the partners represented their Hindu undivided families, the salary paid to them must be regarded as payment to the partner within the scope of section 67 and it was pointed out that for the earlier assessment year 1978-79 by order dated 6-5-1983 in I.T.A. No. 1433/Mad./82, the Tribunal had upheld the disallowance and the assessee had accepted similar disallowance for the intervening assessment years 1979-80 to 1981-82. On the other hand, the assessee relied on the decision of the Appellate Tribunal in the case of Shanmugha Talkies [IT Appeal No. 1909 (Mad) of 1987 dated 6-2-1990] where following the decisions of the Andhra Pradesh High Court in the case of CIT v. Chitra Kalpana [1988] 169 ITR 678 and N. T.R. Estate v. CIT [1986] 157 ITR 285 it was held that on the same principles enunciated in the Explanation to section 40(b), salary paid to the individual while he represented the joint family in the firm cannot be disallowed.

4. Since there appeared to be a direct conflict between the two decisions of the Tribunal referred to, this case was placed before the President for constituting a Special Bench under section 255(3) and thus the matter is before this Special Bench.

5. Before us it was contended on behalf of the assessee that the Explanation introduced to section 40(b) recognised the representative capacity of the person who was a partner in a firm and on that basis the payment made to him in a different capacity could not be disallowed under section 40(b). It was also argued that even though different views bad been taken earlier, subsequent legislation must be taken into account in deciding whether those decisions could still be applied. It was pointed out that there are already two decisions of the High Court holding that the provisions of section 40(b) were not applicable in similar situation and, therefore, the claim of the assessee should be upheld.

6. On the other hand, it was pointed out on behalf of the Revenue that the Explanation to section 40(b) referred only to the payment of interest and could not, therefore, by itself be applied to payment of salary. It was argued that the law as it stood prior to the Explanation, therefore, continued to apply and since the Explanation itself was not retrospective, even the principles incorporated in that Explanation cannot be of any assistance in deciding the issue. It was submitted that in the circumstances the disallowance made by the Income-tax Officer under section 40(b) should be upheld.

7. We have considered the submissions of both sides and have perused the decisions cited. The admitted fact is that the three individuals were paid salaries in their individual capacity while they became partners only as kartas of their respective joint families. In other words, while the share income was derived to the detriment of the joint family funds, the salary was derived by them as a recompense for personal services rendered. Therefore, it was not treated as the income of the joint family but was assessed as their own personal income in the status of an individual. The Supreme Court has observed in a recent decision in the case of Chandrakant Manilal Shah v. CIT [C.A. No. 1187 of 1976] that before the commencement of the Hindu Gains of Learning Act, 1930, if a coparcener of a joint family were to enter into a partnership with the karta of the family to carry on business, the fruits even of his skill and labour would have been the property of the joint family and the very purpose of entering in a partnership, namely, having a share of his own in the profits of the business, would have been defeated. However, an almost complete transformation in the legal position was brought about by the Hindu Gains

of Learning Act with the result that the skill and labour of the coparcener would be his own property and the income derived would not belong to the H.U.F. Thus the assessment of the salary income derived by the three individuals in their individual capacity is in conformity with the principles laid down by the Supreme Court.

8. Now section 40(b) provides that 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 shall not be deducted in computing the income of the firm. Obviously, the rationale of this section was that such payment of interest, salary, bonus, commission or remuneration to a partner was in the nature of a payment to oneself to be treated as a share income of the firm and could not, therefore, be deducted in computing the income of the firm. [See CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292 (SC)]. On the basis of this rationale itself, keeping in mind the observations of the Supreme Court cited above, it would be clear that the salary derived by a partner in his individual capacity not being at the disposal of the joint family which be represented as a partner, could not be regarded as a share of income derived from the firm so as to be disallowed under that section.

9. Several High Courts had taken the view that since only an individual can be a partner and not a joint family as such, any payment to him should be considered as payment to a partner notwithstanding that he represented the joint family in the partnership. One of those cases is A.S.K Rathnaswamy Nadar Firm v. CIT [1965] 58 ITR 312 (Mad.). That was the case which was followed by the Tribunal in the assessee's own case for the assessment year 1977-78 in I.T.A. No. 1874/80 by order dated 18-9-1981.

10. However, the Taxation Laws (Amendment) Act, 1984 introduced the following Explanation to section 40(b) with effect from 1-4-1985 :

"Explanation 2: Where an individual is a member of an association or body on behalf, or for the benefit of any other person (such member and the other person being hereinafter referred to as 'member in a representative capacity' and 'person so represented', respectively),---

(i) interest paid by the association or body to such individual or by such individual to the association or body otherwise than as member in a representative capacity, shall not be taken into account for the purposes of this clause;

(ii) interest paid by the association or body to such individual or by such individual to the association or body as member in a representative capacity and interest paid by the association or body to the person so represented or by the person so represented to the association or body, shall be taken into account for the purposes of this clause."

Thus Parliament has recognised the representative capacity of a partner and has provided that where interest is received in a capacity other than the capacity in which he was a partner, such interest should not be disallowed under section 40(b).

11. It appears to us that this distinction was particularly required in the case of interest because unlike the case of salary or remuneration which would be a personal gain, interest would be attributable only to the funds advanced and they require the recognition of the representative status. This is in the background of the decision of the Allahabad High Court in the case of CIT v. Govind Prasad Purshotam Dass [1991] 191 ITR 470 where it was held that the karta of the Hindu undivided family does not have a distinct and separate personality from that of the Hindu undivided family and, therefore, monies invested by him from his individual account cannot be treated as distinct and separate for the purposes of section 40(b). That was perhaps the reason why the Explanation did not refer to the other items in section 40(b), namely, salary, bonus, commission or remuneration which would all be governed by the provisions of the Hindu Gains of Learning Act, 1930 as explained by the Supreme Court. In the case of interest, however, the ownership of the funds in separate status has to be recognised.

12. This leads to the question whether the Explanation which was introduced with effect from 1-4-1985 has any retrospective effect. The Andhra Pradesh has taken the view in the case of N.T.R. Estate and the Punjab and Haryana High Court in the case of Hindustan Steel Forgings v. CIT [1989] 179 ITR 280 that the Explanation is clarificatory and applies to assessments even prior to the introduction. Other High Courts such as the Allahabad High Court in CIT v. U.P. Iron Stores [1989] 180 ITR 296 have taken the view that it is prospective. The Supreme Court has observed with reference to the Explanation inserted in section 64 of the Income-tax Act that even a provision which is not retrospective in its operation serves as a legislative exposition of the import of that Explanation [see CIT v. P. Doraiswamy Chetty [1990] 183 ITR 559 (SC)]. The Himachal Pradesh High Court has observed in the case of CIT v. Mohan Meakin Breweries Ltd. [1991] 192 ITR 134 that an Explanation merely clarifies certain ambiguities which may have crept in the statutory provision. It is well recognised that such declaratory legislation is retrospective in the sense that it serves to clarify the meaning from the inception of the statute. In the present case, the Explanation 2 indicates that the Legislature has now recognised the representative capacity of a partner and the legislative intent to add back under section 40(b) only such amount as is paid to him in the same capacity in which he became a member of the firm.

13. We find that this principle has been applied by the Orissa High Court in the case of Rasiklal & Co. v. CIT [1991] 99 CTR (Ori.) 85 where the commission paid to a person in his individual capacity while he was a partner as the karta of his H.U.F. was not added back under section 40(b). The Court particularly noted the legislative intention of making a distinction between an individual and a karta of a joint family. Similarly, the Andhra Pradesh High Court has in the case of Chitra Kalpana allowed the deduction of remuneration to a partner where such remuneration was paid as a quid pro quo for services rendered and was not attributable to the membership of the firm. In the circumstances, we see no reason to take a different view in the present case. The disallowance has been made in the assessee's own case for the earlier years because the Tribunal did not have the benefit of the subsequent legislation and the decisions which we have referred to above. We also find that for the earlier years the appeals of the assessee were dismissed for non-prosecution. That, however, does not preclude the assessee from making a just claim for the current year and as we have noted above the provisions under section 40(b) cannot be applied to the facts of the case and it is not possible to uphold the disallowance only because such disallowance was made in the assessments for the earlier years. We, therefore, confirm the order of the CIT (Appeals).

The appeal is dismissed.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.