Commissioner of Income Tax Vs. A.P. Matpadi and Bros. - Court Judgment

Excerpt:

- karnataka panchayat raj act (14 of 1993) sections 58, 145, 184, 234, 235, 236 & 312: [p.d.dinakaran, c.j. & v.g.sabhahit,j] public interest litigation issuance of direction to state government and authorities under the act, to initiate action for development of waterways and providing ferry services - though act has been amended to enable authorities to take up such works, no action has been taken so far during last six years directions given to authorities concerned to invoke powers conferred on them and to set law in motion in this regard within prescribed time. - 367, wherein it has been held as under :it is well settled that an huf, as such, cannot enter into a partnership with another person or persons, that a karta of an huf may, and frequently does, enter into partnership on behalf of the family with outsiders and that when he does so, the other members of the family do not, vis-a-vis the outsiders, become the partners of the firm and that so far as outsiders are concerned, it is the karta who alone is, and is in law, recognised as the partner......judgment of this court in cit vs . mangalore ganesh beedi works : [1992]193itr77(kar) : tc 33r.306 affirmed the claim of the assessee. on the said facts, the following question of law has been referred for our opinion in these two cases : 'whether, on the facts and in the circumstances of the case, the tribunal was right in law in holding that salary paid by the firm to a person who was a partner in a representative capacity was not disallowable under s. 40(b) of the it act, 1961 ?' 2. we have heard sri sarangan, learned senior counsel for the assessee and sri m. v. seshachala, learned standing counsel for the it department. 3. in the case of cit vs. mangalore ganesh beedi works (supra), this court on a consideration of the explanation appended to s. 40(b) of the act, has held that the interest payment to hufs, of which the partners of the firm were karthas, were not disallowable under s. 40(b) of the act. in the said judgment this court was not concerned with the payment of salary to any of the partners of the firm, may be in a representative capacity being a member of huf. on the other hand, we find that the question has been specifically dealt with by an earlier bench of.....

Judgment:

ORDER

G.C. Bharuka, J.

1. The present references pertain to asst. yrs. 1984-85 and 1985-86 respectively. The assessee is a partnership firm. It had paid salary to one of the partners for the services rendered by him. The said partner had entered into the partnership as representing his HUF. The payment of salary was disallowed under s. 40(b) of the IT Act, 1961 (for short 'the Act'). On appeal, the decision of the AO was reversed. The Revenue appealed to the Tribunal. The Tribunal, relying on the judgment of this Court in CIT vs . Mangalore Ganesh Beedi Works : [1992]193ITR77(KAR) : TC 33R.306 affirmed the claim of the assessee. On the said facts, the following question of law has been referred for our opinion in these two cases :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that salary paid by the firm to a person who was a partner in a representative capacity was not disallowable under s. 40(b) of the IT Act, 1961 ?'

2. We have heard Sri Sarangan, learned senior counsel for the assessee and Sri M. V. Seshachala, learned standing counsel for the IT Department.

3. In the case of CIT vs. Mangalore Ganesh Beedi Works (supra), this Court on a consideration of the Explanation appended to s. 40(b) of the Act, has held that the interest payment to HUFs, of which the partners of the firm were karthas, were not disallowable under s. 40(b) of the Act. In the said judgment this Court was not concerned with the payment of salary to any of the partners of the firm, may be in a representative capacity being a member of HUF. On the other hand, we find that the question has been specifically dealt with by an earlier Bench of this Court in the case of N. M. Anniah & Co. vs. CIT : [1975]101ITR348(KAR) : TC 33R.367, wherein it has been held as under :

'It is well settled that an HUF, as such, cannot enter into a partnership with another person or persons, that a Karta of an HUF may, and frequently does, enter into partnership on behalf of the family with outsiders and that when he does so, the other members of the family do not, vis-a-vis the outsiders, become the partners of the firm and that so far as outsiders are concerned, it is the Karta who alone is, and is in law, recognised as the partner.'

When this decision was brought to the notice of the Bench in the case of Mangalore Ganesh Beedi Works (supra), the same was rightly distinguished since in the latter case the question was related to payment of interest to a partner in a representative capacity, and was governed by the proviso to s. 40(b) of the Act.

4. Mr. Sarangan, learned senior counsel appearing for the assessee has brought to our notice an unreported order of this Court passed in CIT vs. Kalburgi Wine Distributors (ITRC Nos. 69 to 74/94) wherein a question similar to one referred in these references, has been answered in favour of the assessee with the following reasoning :

'2. Having heard the learned counsel for parties, we find that answer to this question is squarely covered by the Division Bench judgment in CIT vs. Mangalore Ganesh Beedi Works : [1992]193ITR77(KAR) : TC 33R.306 dt. 27th September, 1991. In the said decision the referred question is answered in favour of the assessee and against the Revenue.'

5. As noticed above, in our considered opinion, the decision in Mangalore Ganesh Beedi Works (supra), has absolutely no bearing in relation to payment of salary to a partner of a firm. Moreover, in the case of Kalburgi Wine (supra) this Court has not noticed the earlier binding precedent of this Court in the case of N. M. Anniah & Co. cited supra. Accordingly, in our opinion, the order passed in ITRC Nos. 69 to 74/94 referred to above is per incurium and cannot be held as a binding precedent.

6. For the above said reasons, we hold that the salary paid by the assesses-firm to its partner, may be in a representative capacity, was liable to be disallowed in view of the clear intendment contained in s. 40(b) of the Act. The question is accordingly answered against the assessee and in favour of the Revenue. No costs.