Delhi High Court
K.C. Raj & Co. vs Commissioner Of Income-Tax on 7 November, 1979
Equivalent citations: ILR 1979 Delhi 761
Author: Khanna
Bench: S Ranganathan, D Khanna
JUDGMENT
Khanna, J.
1. M/s. K.C. Raj & Co. is a partnership concern having four partners. In the partnership deed it was recited that three of the partners, namely, Prem Nath, Bal Kishan and Kishan Lal, had entered into partnership in representative capacities of their respective Hindu undivided families. They held the status of kartas in those families. The firm allowed various amounts as salaries to these partners for the services rendered by them to the partnership as working partners. They claimed that they were being paid the salaries in their individual capacities, and not as kartas of their Hindu undivided families.
2. The income-tax authorities, however, disallowed the deductions of these salary amounts in the hands of the firm for the assessment years 1957-58 to 1961-62. Reference in this regard was made to Section 10(4)(b) of the I.T. Act, 1922, which prohibited allowance of any expenditure by way of interest, salary, commission or remuneration paid by a firm to any partner of the firm. The decisions were upheld in second appeals by the Delhi Bench "B" of the Appellate Tribunal.
3. Now, at the instance of the assessed-firm, the following question has
been referred under Section 66(1) of the Act for each of the said five years
for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the salaries paid to Shri Prem Nath,
Shri Bal Kishan and Shri Kishan Lal were not allowable as a revenue expenditure of the assessed in the assessment years 1957-58, 1958-59, 1959-60, 1960-61 and 1961-62?"
4. It is now well-settled that HUF cannot, as such, enter into a contract of partnership with another person or persons. The karta of the HUF, however, may and frequently does enter into partnership with others on behalf of and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the' firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of
the rights of the firm. So far as the firm and its other partners are concerned it is the karta who alone is and is, in law, recognised as a partner. Whatever arrangements a partner might be having with his family with regard to the share income from the partnership, the same is essentially an arrangement inter se that partner and the family. The (sic)m as such does not come into the picture. Our view finds support from (sic) observations of the Supreme Court in the case of CIT v. Kalu Babu (sic) Chand [1959] 37 ITR 123.
5. A perusal next of the provisions of Section 10(4)(b) of the I.T. Act, 1922, shows that it placed an absolute prohibition against allowance of expenditure in the nature of interest, salary or commission paid by a firm to any partner. The same is not a permissible deduction in the hands of the firm. It does not make the slightest difference whether the person joining the firm as a partner enters it as an individual or in a representative capacity as karta of his HUF. In fact, as noted above, so far as the firm is concerned, it recognises him only as a partner. It has nothing to do with the arrangement that he might be having with his family Our view again finds support from a number of decisions of different High Courts reported as A. S. K. Rathnaswamy Nadar Firm v. CIT [1965] 58 ITR 312 (Mad), Girdharilal Ghasiram v. CIT [1968] 69 ITR 890 (Cal), Pannalal Girdharilal v. CIT [1971] 81 ITR 624 (Delhi), N. M. Anniah & Co. v. CIT [1975] 101 ITR 348 (Kar) and CIT v. London Machinery Co. .
6. The Full Bench decision of the Allahabad High Court in CIT v. Ram Laxman Sugar Mills [1973] 90 ITR 73 is entirely distinguishable inasmuch as the salary allowed there was not to the partner in his capacity as such. Rather the Central Government had set up a management board of partners under the Essential Supplies (Temporary Powers) Act. Whatever salary was allowed was in his status as authorised controller which was treated as distinct from his status as partner, and involved no element of agency qua the other partners, which is the normal feature of a partnership.
7. In view of the discussion above, we answer the question referred in the affirmative. The salary amounts paid to the partners were rightly disallowed as revenue expenditure in the hands of the firm by the Tribunal. The respondent will be entitled to costs.
