Rajasthan H.C : Whether the Tribunal is correct in holding that the payment of Rs. 7,200 to two of the four partners of the firm, in view of cl. 5 of the partnership deed of the firm, was the application of the profit of the firm after it had accrued or was earned ?

Counsel Appeared

P.K. Kasliwal, for the Assessee : R.N. Surolia, for the Revenue

BY THE COURT :

This reference under s. 256(1) of the IT Act, 1961 (‘the Act’) is at the instance of the assessee to answer the following question of law : “1. Whether the Tribunal is correct in holding that the payment of Rs. 7,200 to two of the four partners of the firm, in view of cl. 5 of the partnership deed of the firm, was the application of the profit of the firm after it had accrued or was earned ? Whether, on the facts and in the circumstances of the case, the payment of Rs. 7,200 to the two partners of the firm was an expenditure exclusively incurred for the business of the firm to fulfil the personal obligation of the firm under cl. 5 of the deed to the two partners ? Whether, on the facts and in the circumstances of the case, s. 40(b) of the IT Act, 1961 prohibits the allowances of the payment of Rs. 7,200 to two partners of the firm ?”

The relevant assessment year is 1971-72. The assessee is a firm carrying on business of public transport with its head office at Kekri in Rajasthan and branches at Kanpur, Ahmedabad, Agra, Rajkot, Jaipur, Beawar, Delhi and Kota. The firm was constituted by a deed of partnership dt. 8th Sept., 1969, which consisted of six partners including Sobhagmal and Hiralal. One of the clauses in the partnership deed mentioned that these two partners, Sobhagmal and Hiralal, who stay at Ahmedabad and Jaipur, respectively, and were carrying on the business of partnership, were to be paid Rs. 300 per moth to meet their additional expenses of living in these metropolitan cities by way of city allowance. It was also stated therein that this city allowance to be paid to these two partners was not their salary, commission or other remuneration, and that it will be treated as expenditure incurred for the business of the firm. In this manner the total amount of Rs. 7,200 paid to these two partners as city compensatory allowance during the relevant assessment year was claimed as a deduction treating the same as an expenditure incurred for the business of the firm.

The ITO while making the assessment disallowed the assessee’s claim for deduction of the above amount of Rs. 7,200 on the ground that it was nothing other than remuneration paid to these two partners, and therefore, it could not be allowed as a permissible deduction in view of the express prohibition contained in s. 40(b) of the Act. The assessee’s appeal to the AAC was, however, allowed accepting the assessee’s contention. The Tribunal thereafter set aside the appellate order and restored that of the ITO. The Tribunal held that this city compensatory allowance to two of the partners of the firm was not an expenditure incurred for the purpose of carrying on the business of the firm, but it was application of the firm’s income after it had been earned. It was also pointed out by the Tribunal that this payment made to the two partners was a payment to them in their capacity as a partner and not de hors their capacity as a partner. Treating these payments having been made to the two partners out of the earned income of the firm, the assessee’s contention was rejected. At the instance of the assessee, the Tribunal then referred the above question of law for decision by this Court.

The only point involved for our decision is the true character or characteristic of the so-called city compensatory allowance paid in the above manner to two of the partners of the assessee- firm who reside at Ahmedabad and Jaipur. Sec. 40(b) prohibits any deduction in the case of any firm of any payment of interest, salary, bonus commission or remuneration made by the firm to any partner of the firm. The question, therefore, is whether these payments fall within the ambit of this prohibition. It is beyond controversy that these amounts were payments made to the two partners by the firm. The only surviving question, therefore, is, whether the payment fall within the meaning of the expression “interest, salary, bonus, commission or remuneration.” We have no doubt that even if the payment does not fall within the ambit of the expression ‘Salary or commission’, it must fall within the meaning of the expression ‘remuneration’ occurring in s. 40(b). Even treating it to be a city compensatory allowance, it would be a part of the remuneration paid by the firm to these two partners. There is an obvious fallacy in the assessee’s contention that this payment forms a part of the firm’s expenditure incurred for earning income of the firm. If it were so, there was no reason to treat it differently instead of saying and treating it as a part of the firm’s expenditure incurred at its Ahmedabad and Jaipur branches. In that situation, it would not be a lump sum payment of these two partners, but precisely the extra expenditure incurred at these two branches of which the material particulars would be disclosed in the firm’s expense account of the two branches. This fact also repels the assessee’s contention.

We are, therefore, satisfied that the view taken by the Tribunal about the nature of these payments made by the firm to its two partners, and the conclusion that deduction of the same is prohibited by virtue of s. 40(b) is justified.

The reference is, therefore, answered against the assessee and in favour of the Revenue, as indicated above.

[Citation : 170 ITR 626]