IMPORTANT POINT
Section 40(b) of the Income Tax Act, 1961 forbids deduction of any amount paid by way of commission to a partner by the firm.

Headnote:TAXATION-Income Tax Act, 1961-Section 40(b)-Business income-Claim of deduction u/s 40(b) -Partnership firm-Commission paid to one of its partners-The firm cannot get any deduction in its assessment for that payment u/s 40(b)-Claim made by the partner that he is representing an HUF-Commission paid to the partner cannot be claimed to be commission paid to HUF-HUF cannot be a partner in a partnership firm-Only the members who have entered into partnership are to be regarded as partners-Definitions of partnership, partner , firm and firm name .
       Held : Section 40(b) of the Income Tax Act will apply even when there is such a special contract. Any commission paid by a firm to its partner will not be permitted as deduction from the business income of the firm. If a claim is made by a partner that he is representing an HUF or any other body of persons then the position in law will not be any different. The HUF is not and cannot be a partner in a partnership firm. The remuneration or the commission that is paid to the partner cannot be claimed to be a remuneration or commission paid to the HUF. The partner may be accountable to the family for the monies received by him from the partnership. But in the assessment of the firm, the partner cannot be heard to say that he has not received the commission as a partner of the firm but in a different capacity. (Para 13)
       A partner does not act in a representative capacity in the partnership. He functions in his personal capacity like any other partner. The provisions of the Partnership Act and the Income Tax Act relating to partners and partnership firms will apply in full force in respect of such a partner. If any remuneration is paid or a commission is given to a partner by a partnership firm, Section 40(b) will apply even if the partner has joined the firm as a nominee of an HUF. The Hindu Undivided family or its representative does not have any special status in the Partnership Act. Although the partnership firm is not an legal entity, it has been treated as an independent unit of assessment under the Income Tax Act. The assessment of a firm will have to be made strictly in accordance with the provisions of the Income Tax Act. The law has to be taken as it is. Section 40(b) applies to certain payments made by a firm to its partners. Neither the firm nor its partners can evade the tax law on the pretext that although in law he is a partner but it reality he is not so. He may have to hand over the money to somebody else. That may be his position qua a third party. But the firm has nothing to do with it. It has paid the commission to one of its partners. It cannot get any deduction in its assessment for that payment because of Section 40(b) of the Act expressly prohibits such deduction. (Para 21)
       The provisions relating to assessment of the firm should not be construed in a way to defeat its object. Section 40(b) forbids deduction of any amount paid by way of commission to a partner. In the instant case, Rashiklal is a partner of the firm Rashiklal and Company. The commission received by him from the partnership firm cannot be allowed as a deduction from the business income of the partnership. (Para 23)

JUDGMENT

Sen, J.- The following question of law was referred by the Tribunal to the Orissa High Court under Section 256 (1) of the Income Tax Act, 1961 :

"Whether on the facts and in the circumstances of the case, the commission paid by the assessee-firm to Sri Rashiklal P. Rathor (individual) is allowable under Section 40 (b) of the Income Tax Act, 1961 as a deduction while computing the business income of the assessee.

2. The assessee is a partnership firm carrying on a number of businesses including sale and purchase of various commodities as well as mining. The partners of the firm were :

(1) Popatlal Devram

(2) Jayantilal Jagmal

(3) Pragji Devram

(4) Ratilal Odhavji

(5) Rashiklal P Rathor

3. Popatlal is Rashiklal s father. On 1.4.1967, there was an oral partition of the share of Popatlal in the firm amongst Popatlal, his wife and his two sons including Rashiklal. The assets of Rashiklal continued to be invested in the partnership firm. Rashiklal was Karta of a smaller HUF. On 17.10.1978, there was an agreement between Rashiklal and the firm Rashiklal and Company that Rashiklal will receive 37 paise per tonne of mineral sold by the firm. In the assessment year 1980-81 Rashiklal received a sum of Rs. 28579/- as commission. The firm claimed deduction of this amount from its income. The claim was negatived by the Income Tax officer. The Appellant Assistant Commissioner allowed the appeal holding that the commission was paid to Rashiklal in his individual capacity and not as Karta of the smaller HUF which is the partners of the firm. Since the payment was not made to the partner, Section 40(b) of the Income Tax Act was not attracted. The amount of commission paid to Rashiklal could not be included in the income of the firm. On further appeal by the Revenue, the Tribunal held that Section 40(b) of the Income Tax Act clearly applied in this case. Payment to Rashiklal will be payment to a partner. The partnership firm could not claim any deduction for this payment from its income. The High Court on reference held that there was clear material that Rashiklal had invested his joint family funds to enter into the partnership. Payment was made to Rashiklal who was a partner. Accordingly, the Tribunal was correct in coming to the conclusion that Section 40(b) will be applicable in this case. The firm was not entitled to claim any deduction on account of payment of commission to one of its partners.

4. The firm has come up in appeal against the judgment of the High Court. Section 40(b) of the Income Tax Act, at the material time, stood as under :

"40. Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession".

(a) x x x x x

(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."

5. In our view the answer to the question raised in this case is self-evident. There is no dispute that Rashiklal was a partner of the assessee-firm. For assessment of the firm under the head profits and gains of business and profession any payment of commission by the firm to any partner of the firm will not be allowed as deduction. The firm has paid a commission of Rs. 28579/- to Rashiklal and has claimed that amount as deduction. Such deduction is not permissible in clear terms of Section 40(b).

6. The language of the Section is simple and clear. But to complicate the matter an argument was sought to be made that Rashiklal had not joined the firm as an individual but was really representing an HUF. The real partner of the firm was the HUF. The payment to Rashiklal did not amount to payment of commission to the HUF which was the real partner. Therefore, the amount of commission paid by the firm to

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1997 Supreme(SC) 1615

IMPORTANT POINTSection 40(b) of the Income Tax Act, 1961 forbids deduction of any amount paid by way of commission to a partner by the firm.

IMPORTANT POINT
Section 40(b) of the Income Tax Act, 1961 forbids deduction of any amount paid by way of commission to a partner by the firm.