The assessee has filed this appeal against the order of Dy.
Commissioner (Appeals), Patiala, dated 30-3-1998, for the assessment year 1996-97, on as many as four grounds upholding the order of the assessing officer relating to the issue whether the assessing officer was justified in carrying out the rectification under section 154 by disallowing salary paid to partner as claimed by the assessee on the reasoning that the partner was Karta of HUF and so it was not entitled to salary as per provisions of section 40(b) of the Income Tax Act.
The relevant and material facts for the disposal of the issue involved in the grounds of. instant appeal filed by the assessee are that the assessee-firm consisted of six partners including Shri Sat Pal, HUF. It filed. its return of income for the assessment year 1996-97 declaring nil income. Subsequently it came to the notice of the assessing officer that deduction of Rs. 5,294 has been wrongly claimed by the assessee under section 40(b) on account of salary paid to Shri Sat Pal, HUF. The assessing officer issued notice under section 154 to the assessee and in response thereto, the assessee filed a reply dated 9-9-1997. The assessing officer rejected the explanation filed by the assessee on the reasoning that only an individual who is actively engaged in conducting the business of the firm can be a working partner as per Explanation 4 to section 40(b) of the Income Tax Act and as Shri Sat Pal was not actively engaged in conducting the business of the firm, so the assessee was not entitled to deduction of Rs. 5,294 under section 40(b) of the Income Tax Act and accordingly, the assessing officer withdrew the same by passing an order under section 154.
Aggrieved, the assessee filed an appeal before the first appellate authority and contended before him that the disallowance of salary paid to partner who was Karta of HUF under section 40(b) was since not a mistake apparent from record because Shri Sat Pal was a partner in his HUF capacity and had invested HUF funds in the firm and so, the order under section 154 passed by the assessing officer was bad in law and against the facts of the case of the assessee. The assessee also contended before Dy. Commissioner (Appeals) that salary paid to the partner of the firm should be taxed as business income because emphasis in Explanation 4 to section 40(b) was not on the word 'individual' but upon the term working partner and as Sh. Sat Pal as Karta of HUF was actively engaged in the business of the firm, so the assessee has rightly claimed deduction under section 40(b) of Income Tax Act. He also contended that Explanation 4 to section 40(b) wherein term 'individual' included both individual and Karta of HUF and since it had not been indicated in the Explanation that the remuneration can be paid to a person in his individual capacity, so law does not prohibit payment of remuneration to Karta of HUF.After considering these submissions of the assessee the Dy.
Commissioner (Appeals) was of the opinion that the assessing officer was fully justified in rejecting the assessee's explanation and adding back a sum of Rs. 5,294 wrongly claimed under section 40(b) by carrying out rectification under section 154 of the Income Tax Act, by observing that the assessing officer had given a finding that the main issue as to whether HUF can be a working partner, was clarified by Explanation 4 to section 40(b) of Income Tax Act, and so these submissions of the assessee were completely irrelevant and further observing that,the assessee's counsel has argued in its written submission that the word 'individual' includes both HUF and individual and nowhere does the Act clearly prohibit payment of remuneration to the Karta of HUF In this connection, it is worth mentioning that the reverse logic can be applied and Explanation 4 interpreted in such a manner that an individual meant only an individual and if it was meant to include the Karta of HUF, the language of Explanation 4 could have been easily modified by the statute to include the term Karta of HUF in its definition of working partner. The fact that there is specific omission of the word Karta of HUF in Explanation 4 clearly means that the same cannot constitute a working partner for the purpose of claiming deduction under section 40(b) read with Explanation 4. Lastly, while upholding the order of the assessing officer, the Dy. Commissioner (Appeals) was of the opinion that this constitutes a mistake apparent from record and the assessing officer has rightly added back a sum of Rs. 5,294 which was wrongly claimed under section 40(b) of the Income Tax Act.
Notice for hearing was issued against the assessee by registered A.D.post for 6-2-2003, i.e., the date of hearing but despite issuance of notice by registered A.D. post against the assessee, none appeared on behalf of the assessee. Hence, the assessee is proceeded ex parte and we proceed to decide this appeal on merits after hearing the learned departmental Representative for the revenue, perusing the records and carefully going through the orders of the tax authorities below.
learned departmental Representative for the revenue placed strong reliance on the reasoning given in the orders of the tax authorities below and submitted that the assessing officer has rightly carried out rectification by withdrawing the claim of the assessee made under section 40(b) of the Income Tax Act, because even in the case of Income Tax Officer v. Sain Dass & Co. decided by the Tribunal, Chandigarh Bench, in ITA No. 1472/Chd/1995; Asst. yr. 1993-94, vide its order dated 12-12-2001, it was held that remuneration paid to a person in HUF capacity cannot be allowed and so the claim of payment of salary by the assessee to Shri Sat Pal in his HUF capacity has been rightly withdrawn by the assessing officer under the provisions of section 40(b) of the Income Tax Act by carrying out rectification under section 154 of the Income Tax Act as it was a mistake apparent from record.
We have considered the submissions of learned departmental Representative for the revenue, perused the records and carefully gone through the orders of the tax authorities below. In this case, we are required to decide the issue as to whether the term 'individual' used in Expln. 4 to section 40(b) of the Income Tax Act also includes individual and Karta of HUF, is a debatable issue. In this regard, on going through Expln. 4 to section 40(b) of the Income Tax Act, wherein working partner means an individual who is actively engaged in conducting the business of the firm in which he is a partner, reads as under "Working partner means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner." In this case, the assessee has claimed deduction on account of salary paid to Shri Sat Pal, HUF under section 40(b) of the Income Tax Act. On going through the provisions of section 154 and taking into consideration the judicial pronouncements, we are of the opinion that in order to invoke provisions of section 154, it is essential that apparentness of a mistake from the record is to be considered and established objectively. If there is a mistake apparent from the record, it ought to be capable of being demonstrated objectively. The determination of the apparentness subjectively by the authority concerned is not sufficient. We are further of the opinion that in order to consider the mistake apDarent from record, it is not permissible to the assessing officer in rectification proceedings to reconsider or to go into true scope of provisions of law. This is so because when a mistake has to be discovered by interpretation or construction of provisions of the Act, it can never be a mistake apparent from record. We are further of the opinion that in a particular case, a different interpretation may not furnish a good ground for rectification. In the instant case of the assessee, tax authorities below were of the opinion that as per Fpxpln. 4 to section 40(b), the word 'individual' does not include HUF and whereas according to the assessee, this word 'individual' also includes HUF and so we are of the clear view that in the instant case, the mistake was to be iscovered on the interpretation of the construction of provisions of the Act and so it cannot be termed as a mistake apparent from record and as such, the same was beyond the purview of section 154 of the Income Tax Act, even if in the decision of the Tribunal, Chandigarh Bench, relied upon by the learned departmental Representative for the revenue in the case of Sain Dass & Co. (supra), it has been held that remuneration paid to the partner HUF is not an allowable deduction under section 40(b) of the Income Tax Act.
For the reasons stated above, the order of Dy. Commissioner (Appeals) upholding the order of the assessing officer in which he withdrew the deduction of Rs. 5,294 on account of salary paid to Shri Sat Pal, HUF, claimed by the assessee, by passing a rectification order under section 154 of the Income Tax Act, is set aside and the respective grounds of appeal taken by the assessee are allowed.