Back
2010 Supreme(Kar) 904
High Court of Karnataka (Circuit Bench At Gulbarga)
THE HONOURABLE MR. JUSTICE N. KUMAR & THE HONOURABLE MR. JUSTICE SUBHASH B. ADI
M/s. Dr. Bidari Ashwini Hospital, Bijapur, Rep. by its Partner L.H. Bidri & Others
Versus
The Income Tax Officer, Bijapur
I.T.A. No.869 of 2008 C/W I.T.A. Nos.870, 871 & 872 of 2008
Decided on : 24-09-2010
For the Appellants:Ashok Kulkarni, G.B. Yadav for M/s. K.R. Prasad, Advocates.
For the Respondent:Ameet Kumar Deshpande, Advocate.
Headnote:HINDU LAW - Hindu Undivided Family & Partnership: [N. Kumar & Subhash B. Adi, JJ] Whether an HUF can become a partner of a firm? Held, a HUF is not a legal person for the purpose of the Partnership Act. A HUF directly or indirectly cannot become a partner of a firm. There is no way that a HUF can intrude into the relationship created by a contract between certain individuals. The HUF is not and cannot be a partner in a partnership firm. If a claim is made by a person who is a partnership firm as representing HUF or any other body of persons, in law it makes no difference. In the assessment of the firm, such a partner cannot be heard to say that he has not received the remuneration as a partner of the firm but in a different capacity. He may have to account for the remuneration received as a partner to third parties and in the case of a HUF to other members of the HUF. But, that agreement does not bind the firm nor does it alter the position of the partners under the Partnership Act or the Income Tax Act. He may have to hand over the money to some others. That may be his position qua a third party. The Partnership Firm has noting to do with it. Once it has paid the commission/remuneration to one of its partners it cannot get any deduction in its assessment for that payment because Section 40(b) of the Act expressly prohibits such deduction.
INCOME TAX ACT, 1961 -Section 37: [N. Kumar & Subhash B. Adi, JJ] Deduction under Section 40(b) of Income Tax Act - Held, It is clear from the non obstante clause contained under Section 40(b) of the Income Tax Act, that any remuneration paid to a partner in whatever capacity, in whatever manner, is not deductible as an expenditure under Section 37 of Income Tax Act.
INCOME TAX ACT, 1961 - Section 40(b), Explanation: [N. Kumar & Subhash B. Adi, JJ] Disallowing of deduction - Partnership firm running Hospitals - Two partners were doctors - Two other were Karta of HUF and qualified as Chemists - Question whether the commission received by Two Chemist partners are income of individuals or of firm and whether appellant hospital can claim deduction? Assessing Officer, Commissioner and Tribunal disallowed the claim - Appeal under Section 260A of Income Tax Act - Held, Partnership is an association of individuals. The said individuals may be a natural person or a legal person. A partnership firm is a compendious way of describing individuals constituting the firm. The Partnership Act, 1932 contains various provisions regarding the relationship among partners. All these provisions relating to the mutual rights and liabilities are only applicable to the firm. A parties 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. The application for registration of a firm has to be made under Section 184 of the Income Tax Act. The very fact that individual shares of the partners have to be specified and that such partners must personally sign the partnership deed and also the application for registration go to show his position is that of an individual, though he may be representing certain interest. The firm has nothing to do with such interest he represents. Although a partnership is not a legal entity, it has been treated as an independent Unit for assessment under the Income Tax Act. The law has to be taken as it is. Section 40(b) of the Income Tax Act applies to certain payments made by a firm to its partners. A HUF’ is not a legal person for the purpose of the Partnership Act. A HUF directly or indirectly cannot become a partner of a firm. These is no way that a HUF can intrude into the relationship created by a contract between certain individuals. The HUF is not and cannot be a partner in a partnership firm. If a claim is made by a person who is a partner in a partnership firm as representing HUF or any other body of persons, in law it makes no difference. In the assessment of the firm, such a partner cannot be heard to say that he has not received the remuneration as a partner of the firm but in a different capacity. He may have to account for the remuneration received as a partner to third parties and in the case of a HUF to other members of the HUF. But, that agreement does not bind the firm nor does it alter the position of the partners under the Partnership Act or the Income Tax Act. He may have to hand over the money to some others. That may be his position qua a third party. The Partnership Firm has nothing to do with it. Once it has paid commission/remuneration to one of its partners it cannot get any deduction in its assessment for that payment because Section 40(b) of the Act expressly prohibits such deduction - A partner is not entitled to receive remuneration for taking part in the conduct of the business under Section 13 of the Partnership Act. This rule is subject to the contract to the contrary. In other words, if there is a contract between partners to receive remuneration for taking part in the conduct of the business, this rule is not applicable. Section 40(b) of the Income Tax Act recognizes this rule. It provides for making payment to a partner subject to the condition mentioned therein being fulfilled. The said conditions are - (i) Is the partnership deed i.e., contract between the parties should provide for such payment. (ii) The person to whom it is paid should be a working partner and such payment should be within the limits prescribed in Section 40(b)(v).
If all these conditions are fulfilled, a partner is entitled to remuneration by way of salary, commission, bonus etc., apart from share in the profit. Therefore, any payment made to a partner if it is to be eligible for deduction as explained under Section 37 of the Act, should satisfy the aforesaid requirements. Otherwise, the amount paid to such partner cannot be deducted as expenditure under Section 37 of the Act - Though the said persons named is shown in the partnership deed as partners, as is clear from the description, it is the HUF which is the partner and therefore, that individual is not a partner. The individual is paid remuneration by way of commission for the services rendered for which he is duly qualified. In other words, the said remuneration is paid to him not in his capacity as a partner, but in his capacity as an employee who rendered services. This is precisely what is prohibited deed provides for remuneration paid to any partner, is not deductible under Section 37 of the Act. Even if he possess a specialized qualification, he is rendering services and without that service the partnership business cannot be carried on, still for the services rendered by him as a partner of the firm, if he wants remuneration to be paid by way of salary, commission, bonus, etc., then the requirements of Section 40(b) of the Act has to be complied with. Otherwise, as is clear from the non obstante clause contained under Section 40(b) of the Act, any remuneration paid to a partners in whatever capacity, in whatever manner, is not deductible as an expenditure under Section 37- It is settled law, while interpreting the statutory provisions, not only the Court has to keep in mind the express words used in the Section, it ought to keep in mind what is not expressed expressly. If the legislature in its wisdom do not expressly extend the said benefit to the salary, remuneration, bonus, etc., the Courts by interpreting the same cannot extend the said benefit, when the same is deliberately omitted by the legislature. Otherwise, it amounts to re-writing the Section by the Court, which is impermissible. In fact, this is precisely what the tribunal has held after referring to all these judgments and the statutory provisions. There is no merit in the said contention also - In that view of the matter, we do not see any error committed by the tribunal in disallowing remuneration paid to these qualified partners as a permissible deduction under Section 37 of the Act. Accordingly, we answer the aforesaid question of law in favour of the revenue and against the assessee.
INDIAN PARTNERSHIP ACT, 1932 - Status of Partners: [N. Kumar & Subhash B. Adi, JJ] Held, Partnership is an association of individuals. The said individuals may be a natural person or a legal person. A partnership firm is a compendious way of describing individuals constituting the firm. The Partnership Act, 1932 contains various provisions regarding the relationship among partners. All these provisions relating to the mutual rights and liabilities are only applicable to the individual partners who are members of the firm. A partner does not act in a representative capacity like any other 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. The application for registration of a firm has to be made under Section 184 of the Income Tax Act. The very fact that individual shares of the partners have to be specified and that such partners must personally sign the partnership deed and also the application for registration go to show his position is that of an individual, though he may be representing certain interest. The firm has nothing to do with such interest he represents. Although a partnership is not a legal entity, it has been treated as an independent Unit for assessment under the Income Tax Act. The law has to be taken as it is, Section 40(b) of the Income Tax Act applies to certain payments made by a firm to its partners.
INDIAN PARTNERSHIP ACT, 1932 - Section 13: [N. Kumar & Subhash B. Adi, JJ] Remuneration to partners - Held, a partner is not entitled to receive remuneration for taking part in the conduct of the business under Section 13 of the Partnership Act. This rule is subject to the contract to the contrary. In other words, if there is a contract between partners to receive remuneration for taking part in the conduct of the business, this rule is not applicable.
INTERPRETATION OF STATUTE - Statutory provision: [N. Kumar & Subhash B. Adi, JJ] Held, It is settled law, while interpreting the statutory provisions, not only the Court has to keep in mind the express words used in the Section, it ought to keep in mind what is not expressed expressly. If the legislature in its wisdom do not expressly extend the said benefit to the salary, remuneration, bonus, etc., the Courts by interpreting the same cannot extend the said benefit, when the same is deliberately omitted by the legislature. Otherwise, it amounts to re-writing the Section by the Court, which is impermissible. In fact, this is precisely what the tribunal has held after referring to all these judgments and the statutory provisions. There is no merit in the said contention also.
1. A common question of law is involved in all these four appeals. Therefore, they are taken up for consideration together and disposed of by this common order.
2. For proper appreciation of the legal position, facts in one of the cases is set out. M/s. Srinath Drugs Distributors, is a partnership firm. It consisted of five partners. Two of the partners D.C.Darbar and R.C.Darbar represented their Hindu Undivided Family in the partnership firm (hereinafter for short, referred to as ‘HUF’) being the karta of their family. In the partnership deed, there is no provision for payment of commission to them. These two persons possess Certificate of Diploma in Pharmacy. To carry on the business of drugs atleast one person has to be qualified for selling the drugs. The firm paid commission to the aforesaid two partners, in their individual capacities amounting to Rs.2,54,470/-each for the services rendered by them by virtue of the specialized qualification they possessed. The assessing officer held that, the said amount cannot be allowed as deduction at the hands of the firm in view of Section 40(b) of the Income Tax Act, 1961 (hereinafter for short, referred to as the ‘Act’). In coming to the said conclusion, he relied on the judgment of the Apex Court in the case of Rashik Lal & Co. vs. CIT reported in 229 ITR 458 and that a HUF cannot be a partner, in a partnership firm. The individual in a representative capacity, on behalf of the HUF, is the partner. Commission paid to him is to be treated as commission paid to the partner. A partner cannot be heard to say that he has not received commission as a partner in the firm, but in a different capacity. If he was a working partner, he could have been treated as such and remuneration or commission paid to such working partner was allowable for deduction. Explanation (4) to Section 40(b) of the Act does not specify payment of commission to an individual where he is a partner in HUF capacity. Hence, explanation given by the assessee was not accepted. Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The appellate authority, after considering the submissions of the assessee and pursuing the various case laws, upheld the disallowance of commission paid to two partners placing reliance on the decision of the Apex Court in Rashik Lal & Co’s case. Aggrieved by the same, the assessee preferred an appeal before the tribunal.
3. The tribunal held, commission paid to a partner who is not a working partner is not allowable in the case of assessment of the firm. The work ‘commission’ as mentioned in Section 40(b)(i) of the Act has been subsequently referred to as ‘remuneration’ in Section 40(b)(iii). Hence, commission which could be considered as part of remuneration is allowable in case the same is authorized by the partnership deed. If the partnership deed has not authorized, then the same cannot be considered for deduction in the assessment of the firm. The legislature was fully aware of the fact that, sometimes the partner is a partner on behalf of and for the benefit of any other person. An exception has been provided in respect of interest and not in respect of commission or remuneration. If the legislature wanted to allow such deduction in respect of commission or remuneration, then either an exception would have been provided or the word ‘remuneration’ should have also been added to interest in Explanation (1). Section 40 contains a non-obstante clause. The commission, if any, payable for specific services is allowable under Section 37 of the Act. However Section 40 says that, notwithstanding anything to the contrary in Sections 32 to 38, the amounts mentioned in Section 40 will not be allowed. As per the amended provisions, commission can be allowed to the working partner provided it is authorized in the partnership deed. The partnership deed in question does not provide for payment of any commission to the partners. Hence, commi
