Asst. Cit Vs. Patel Quarry

This appeal by the revenue is directed against the order dated 29-3-1996 of Commissioner (Appeals)-I, Baroda for the assessment year 1993-94. The only ground of appeal is as under: "1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in allowing remuneration of Rs. 24,276 to HUF partner Shri Prakash P, Patel ignoring the provisions of section 40(b) of the Act that remuneration is allowable only to an individual who is actively engaged in the business of the firm as a 'working partner' and not a representative of the assessee. " The brief facts are that during the course of assessment proceedings, the assessing officer found that assessee debited to the P&L a/c, inter alia remuneration paid to the partners as under: The assessing officer also found that assessee-firm had paid remuneration to Shri P.P. Patel, HUF (Sr. No. 1) and two lady partners (S. Nos. 2 & 3) which is not allowable in view of specific provisions contained in Explanation 4 to section 40(b) of the Income Tax Act, 1961. The assessing officer in the assessment order also noted that Explanation 4 says that for the purpose of section 40(b) "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. The assessee in reply has stated that remuneration has been given to the HUF and ladies partners and the remuneration so paid has been duly shown by these partners in their personal returns of income as their income. He has, therefore, stated that the remuneration paid may be allowed in the hands of the firm. The assessee's submission have been considered but the same were rejected. Shri Prakash P. Patel represents the firm in his capacity as karta of the HUF of Shri Prakash P. Patel. Shri Prakash P. Patel is found to be partner in his individual capacity in the following firms wherein he is treated as working partner.

The partners mentioned at Sr. Nos. 2 & 3 above are house-wives and no evidence as to any services rendered by these female partners of the firm has been produced so as to enable the firm to pay remuneration of Rs. 71,400 and Rs. 22,848 respectively to these two ladies partners (i.e. approximately Rs. 6,000 per month). In fact as per the deed of partnership remuneration has been paid entirely and exclusively on the basis of share of profit.

The assessee carried the matter in appeal and learned Commissioner (Appeals) upheld the disallowance of salary in respect of female partners. However, learned Commissioner (Appeals) allowed the remuneration paid to Shri Prakash P. Patel, karta of HUF partner, keeping in view the principles laid down in the judgments reported as CIT v. Kalu Babu Lal Chand (1959) 37 ITR 123 (SC), Mathura Prasad v.CIT (1966) 60 ITR 428 (SC), CIT v. K.S. Subbiah Pillai (HUF) (1984) 147 ITR 87 (Mad) and D.N. Bhandarkar & Ors. v. CIT (1986) 158 ITR 724 (Kar). Aggrieved by the order of learned Commissioner (Appeals), revenue is in appeal before us.

At the time of hearing before us on behalf of revenue Smt. Vibha Desai, learned Departmental Representative appeared and contended that it is unbelievable that karta of HUF was actually rendering any services to the firm because in his individual capacity, he is partner in three more firms. She also relied on Explanation 4 to section 40(b) and contended that action of assessing officer regarding disallowance of salary of Rs. 24,276 were in accordance with law and learned Commissioner (Appeals) is not justified in directing the assessing officer to allow the same.

On the other hand, learned counsel appearing for the assessee supported the orders of authorities below. The counsel of the assessee submitted that Shri Prakash P. Patel represented the firm in his capacity as HUF.He is actually working and salary has been paid in lieu of services rendered by him for the firm. The counsel of the assessee also submitted that it is well settled that only individual can become a partner and in case by mistake salary has been included in the income of HUF in that event revenue is at liberty to take appropriate steps to correct the mistake. The counsel of the assessee submitted that so far firm is concerned, salary paid to partner Shri Prakash P. Patel who represent the firm in his capacity as karta of HUF is fully allowable as per provisions contained in section 40(b) of the Income Tax Act, 1961.

After hearing both the sides, we have carefully gone through the orders of authorities below. The assessing officer disallowed the salary paid to ladies partners on the ground that there was no evidence of services rendered by them. The action of assessing officer so far it relates to disallowance of salary paid to ladies partners were upheld by learned Commissioner (Appeals) and same were accepted by assessee also. Shri P.P. Patel represents the firm in his capacity as karta of HUF. He has rendered services to the firm though he may also be rendering services/working for other firms as mentioned by assessing officer in the assessment order. A person can work for one or more firms in accordance with his capacity when the firms are operating in one premises. Keeping in view the totality of the facts and circumstances of the case, we are of the view that Shri P.P. Patel is a working partner and learned Commissioner (Appeals), is legally and factually correct in directing the assessing officer to allow the remuneration of Rs. 24,276 paid to him. The order of learned Commissioner (Appeals) is legally and factually correct. We decline to interfere.