Salary and interest paid to partners of a firm are not deductible in computing the income of the firm under Sec. 40(b) of the Income-tax Act, 1961.

Uday Sinha, J.

1. In these references under Sec.256(1) of the Income-tax Act (to be called " the Act "), we are concerned with the assessment years 1965-66 to 1969-70. The questions referred for our opinion are :

" 1. Whether, on the facts and in the circumstances of the case, the salary and interest paid to Ram Ratanlal Rajgarhia and Maniklal Raj-garhia have been correctly added while computing the income of the assessee-firm by applying the provisions of Sec. 40(b) of the Income-tax Act in the assessments of the firm for the assessment years 1965-66 to 1969-70 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 45,781 received on devaluation of rupee was a taxable receipt in the hands of the assessee in the assessment year 1967-68 ?"

2. The assessee is a partnership firm. The firm came into existence in 1953. Prior to it, Chandmul Rajgarhia, father of Ram Ratanlal Rajgarhia and Maniklal Rajgarhia, alone was managing the business. The partnership firm set up in 1953 consisted of Ram Ratanlal Rajgarhia and Maniklal Rajgarhia, as partners. Five others who were their minor children were admitted to the benefits of the partnership. While assessing the firm during the relevant assessment years, the firm claimed deduction of salary and interest paid to Ram Ratanlal Rajgarhia and Maniklal Rajgarhia. These salary and interest payments were paid to them by the firm besides their share of profits of the firm. The Income-tax Officer rejected the claim of deduction of salary and interest payable to them. According to the Income-tax Officer, Sec. 40(h) was a bar to deduction of salary and interest paid to the partners.

3. The stand of the assessee-firm was that the Hindu undivided families of Ram Ratanlal Rajgarhia and Maniklal Rajgarhia were partners of the firm and representatives of the Hindu undivided family being their respective kartas. Their claim was that just as salary or interest could have been paid to any stranger and the firm would be entitled to deduct those sums as business expenditure, the payment of salary and interest to them too was deductible expenditure. The claim of the assessee found favour neither with the Department nor with the Tribunal. The salary and interest payments were added to the taxable income of the firm. Hence, the present references to this court for our opinion.

4. The difficulty in the way of the assessee is created by Sec. 40(b) of the Act which reads 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,-- ...

(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. The language of the Act is absolutely explicit and admits of no doubt. It places an embargo upon deduction of salary or interest paid to a partner by the firm. Ram Ratanlal Rajgarhia and Maniklal Rajgarhia were partners of the firm. They were paid salary by the firm. In terms of Sec. 40, the salary paid to them cannot be claimed as expenditure, but must be added to the total income of the firm.

6. Learned counsel for the assessee has agitated before us the same questions as raised before the Tribunal. The first question is about the deduction of salary paid to Ram Ratanlal Rajgarhia and Maniklal Rajgarhia. Ram Ratanlal Rajgarhia and Maniklal Rajgarhia were admittedly partners of the firm. The salary was paid to them for their labour and exertion. Although, for the sake of argument, it may be conceded that they had a dual personality, namely, an individual and, secondly, as representatives of the Hindu undivided family, yet it admits of no doubt that salary was paid to them for their exertions. In the matter of assessment of the firm, the existence of the Hindu undivided family was irrelevant. It is well settled