R.K. Abichandani, J.
1. The assessee, a registered partnership firm, filed return of its income for the assessment year 1976-77 in respect of accounting period of Samvat year 2031 declaring a total income of Rs. 3,14,483. The Income-tax Officer Circle I.E. (Rev.), Surat, by his order dated March 25, 1977, framed the assessment under section 143(1) of the Income-tax Act, 1961, (hereinafter referred to as 'the said Act'). The business of the assessee-firm was of manufacturing art silk cloth and Shri Suresh Nagindas and Shri Mahesh Nagindas who were partners in the firm were paid Rs. 54,796 and Rs. 51,969 being 'majuri' payments for job work done by them for the assessee-firm. Thereafter, proceedings under section 263 of the said Act were initiated by the Commissioner of Income-tax Baroda, on the ground that the Income-tax Officer failed to disallow under section 40(b) of the said Act, the sums of Rs. 54,796 and Rs. 51,963 paid by way of 'majuri' to these two partners.
2. The Commissioner was of the view that, since the job work for which 'majuri' payments were made by the assessee-firm to these two partners was admittedly carried out on the machinery belonging to the assessee firm and that they had done the 'majuri' work for none else but he assessee-firm, it was obvious that the arrangement between the firm and these partners amounted to a device to reduce the taxable profits of the firm as such. Relying upon the ratio of the decision of the Madras High Court in R. A. Goodsir and Co., v. CEPT : [1948]16ITR367(Mad) and the Kerala High Court in CIT v. Veeriah Reddiar : [1969]73ITR162(Ker) , the Commissioner held that the 'majuri' payments of Rs. 54,796 and Rs. 51,963 were nothing but 'remuneration' for the labour work done for the assessee-firm by the two partners and such payments had to be disallowed by virtue of the provisions of section 40(b) of the aid Act. An alternative contention was raised before the Commissioner that only the net surplus received by these two partner which can be termed as remuneration could be added to the assessee-firm's income. The Commissioner held that what the assessee-firm had claimed as deduction was the gross amount of 'majuri' paid by it to the two partners and disbursements made by the them from those amounts to the labourers was a matter entirely of their concerned. The Commissioner observed that he alternative claim that he net surplus alone could be added to the assessee's income ran counter to its own claim that the business carried on by these two partners was distinct was, therefore, rejected by the Commissioner and it was held that these amounts paid to the partners on accounts of 'majuri' work done by the them for the assessee-firm have to be disallowed under section 40(b) of the said Act.
3. The assessee-firm carried the matter before the Income-tax Appellate Tribunal by I. T. A. No. 704/Ahd of 1979 and the Tribunal, for reasons stated in their order in an earlier appeal being I. T. A. No. 703/Ahd of 1979 which was filed by Messrs. Trimurti Fabrics and decided by the Tribunal only July 23, 1980, as per order at annexure 'C', allowed the appeal of the assessee-firm. The Tribunal held that it was unable to accept the finding of the Commissioner that the arrangement between the assessee-firm and its partners was a device to reduce the taxable profits of the assessee. The Tribunal was of the view that, simply because a partner carries on the job work on the machinery belonging to the assessee-firm alone, it does not follow that the arrangement between the firm and is partner was a device to reduce the taxable profits of the firm. The Tribunal was of the view that these payments were legitimate payments made by the assessee-firm in order to boring into existence the profits of the firm. The Tribunal, in that case, had referred to its earlier decision in I. T. A. Nos. 1705 and 1706/Ahd of 1976-77, decided on September 15, 1979, in the appeal filed by the assessee, Messrs. Dhamanwala Silk Mills, Surat, in which it was held that a legitimate payment made to the partner for bringing into existence the profits of the firm could not be said to have been made to manipulate the profits of the firm and that the labour charges which were paid in that case of Dhamanwala for executing the job work of calendering, processing, finishing and dyeing of grey cloth for the assessee-firm were not hit by the provisions of section 40(b) of the said Act. A copy of the judgment of the Tribunal in Dhamanwala's case has been placed on the record of this case. In Dhamanwala's case, the Tribunal held as above in the context of the contention that the provisions of section 40(b) of the said Act being absolute in their terms as long as the payments were found to be made to a partner in whatever capacity, they were liable to be disallowed under section 40(b). The Tribunal held that the labour charges which were paid of Dhamanwala were an allowable deduction before the profits came into existence and were expenditure which was incurred for bringing into existence of the profits and could not be treated as profits itself. It was held that the labour charges so paid cannot be equated with the profits of the firm and, therefore, there was no question of siphoning away the profits of the firm under the guise of salary or remuneration. We have referred to the findings of the Tribunal in Dhamanwala's case because the case seems to have been relied upon by the Tribunal in Trimurti Fabrics which in turn is relied upon for disposing of the assessee's appeal and since the reasons given in Messrs. Trimurti Fabrics have been incorporated by reference while disposing of the appeal of the assessee-firm.
4. In compliance with the directions issued by this court, the Tribunal has referred to this court, the following four questions for its opinion under section 256(2) of the said Act :
'(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the majuri payment of Rs. 54,796 and Rs. 51,963 paid by the assessee to its partners, Shri Suresh Nagindas and Shri Mahesh Nagindas, could not be disallowed under the provisions of section 40(b) of the Income-tax Act, 1961
(2) Whether the finding of the appellate Tribunal that the majuri payment of Rs. 54,796 and Rs. 51,963 made by the assessee to its partners, Shri Suresh Nagindas and Shri Mahesh Nagindas, was not hit by the provisions of section 40(b) of the Income-tax Act, 1961, is correct in law and sustainable from the material on record
(3) Whether the conclusion of the Income-tax Appellate Tribunal that the payment of Rs. 54,796 and Rs. 51,963 to partners, Shri Suresh Nagindas and Shri Mahesh Nagindas, could not be said to be a device to manipulate the profits of the firm, is based on any material on record and the same is reasonable and sustainable in law
(4) Whether the findings of the Appellate Tribunal that the majuri payment of Rs. 54,796 and Rs. 51,963 was the legitimate payment made to Shri Suresh Nagindas and Shri Mahesh Nagindas, by the assessee-firm and it could not be hit by the provisions of section 40(b) of the Act is correct in law and sustainable from the material on record ?'
5. It was contended on behalf of the Revenue by learned counsel, Mr. Thakore, that the provisions of section 40(b) of the said Act were clear and unambiguous in terms and there was no scope for interpreting the provision in a manner which would make certain types of remunerations paid to a partner allowable deductions. He submitted that the prohibition against the type of deductions enumerated in section 40(b) was absolute in nature. He submitted that, if any dual capacity of a partner is to be recognised for the purpose of applying the provisions of section 40(b), then the very object of the provision will be frustrated. Mr. Mehta, learned counsel appearing on behalf of the assessee, on the other hand, contended that the real question to be considered while deciding the aspect of applicability of section 40(b) of the Act was to determine whether the payment said to have been made to the partner to the partner was made for the purpose of earning profits of whether such payment amounted to appropriation of profits. He submitted that a distinction should be made between cases where labour work which is done by the partner is of the assessee-firm and cases where it is done for the assessee-firm. He submitted that if either under the contract or under the statutory provisions of the partnership law, it was incumbent upon the partner to do a particular work and, therefore, he is obliged to do that work, then and then alone the provisions of section 40(b) can be invoked in respect of salary or remuneration paid to such partner. However, when the partner renders service or does the service which he is not at all obliged or supposed to do under the terms of the contract or under the statutory provision, then payment made to him for any work done for the firm would stand on the same footing as any expenditure incurred while paying similar amounts to outsiders for similar work.
6. The controversy, therefore, mainly centers around the question whether payment made to a partner by way of remuneration in respect of work done or services rendered by him for the firm which he is not obliged to do under the contract or the statutory provisions should be kept out of the purview of the provisions of section 40(b) and that the provisions should be applied only when such payment is made to the person concerned in his capacity as a partner. Let us examine whether the provisions of section 40(b) permit such a construction. The provisions of section 40(b) read as under :
'Amounts not deductible. - Notwithstanding anything to the contrary in sections 30 to 38, 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.'
7. Section 10(4) (b) of the Indian Income-tax Act, 1922, which corresponds to the provisions of section 40(b) of the said Act introduced by the Amendment Act of 1939. Until then, it appears that the state of the law on the subject was far from satisfactory because the decision in each particular case in respect of payments made by way of interest, salary, commission or remuneration by a firm to a partner turned upon determining as a fact whether the payment was to a partner as a partner or in a different character and whether the payment was real and bona fide or only intended to serve as a device to escape taxation. It appears that, with the object of obviating such uncertainty in the determination of the nature of such payments, section 10(4) (b) was introduced by the Amendment Act of 1939. From the wordings of the provisions of section 40(b), it appears to us that any payment of the nature described made by the firm to any of the partners of the firm would not be deductible. The word 'any' is a work of wide import and should be given its full meaning in the context of the provision. It will be seen that there is no indication whatsoever to differentiate between the nature of remuneration or between the purposes for which remuneration was given to any partner. As the provisions reads, it seems to us that it imposes an absolute embargo against deductions in respect of any of the payments made by the firm, of the nature enumerated, to any partner of the firm. Explanation 2 which has been added clarifies that interest paid by the firm to an individual who is a partner in a firm in a representative capacity shall not be taken into account for the purposes of the said clause. The wording of the provisions of section 40(b) clearly indicates that they are intended to cover all the payments of the nature described to a partner of the firm by the firm and do not indicate that only such payments as are made to a partner in his capacity as a partner and not other payments made to such partner are covered by the said provision. There is nothing in the said provisions to indicate that any category of salary, remuneration, etc., though paid by a firm to a person who is a partner were to fall outside the scope of the above provision.
8. The provisions of section 12 and 13 of the Indian Partnership Act which deal with relations of partners to one another, inter alia, provide that subject to contract between the partners, each partner is bound to attend diligently to has duties in the conduct of the business and a partner is not entitled to receive remuneration for taking part in the conduct of the business. A partner cannot be an employee of the firm. Any monies obtained by a partner as salary are in the nature of profits accrued to him (S. Magnus v. CIT : [1958]33ITR538(Bom) ; : AIR1958Bom467 ). Even a managing partner would stand on the same footing as any other partner and cannot charge the co-partners with any sum in shape of salary or commission. (see Indian Partnership Act by Pollock and Mulla, Fifth edition, at page 47). It appears to us that section 40(b), on its plain reading, does not envisage splitting of capacities of a partner in which he can work and does not warrant a distinction between a partner obliged to work and the one not obliged to work under the terms of a contract or the provision of law. Such a distinction or trend does not follow from the decisions rendered in cases in which persons were partners not in their individual capacity but in their representatives capacity as in the case of 'karta' or a 'trustee'. Just as a sole proprietor doing business in a shop who could possibly get the work of fixing gadgets or electrical fittings done through someone else and may be able to claim deductible expenditure for such work which he may get done, cannot claim such deduction when the himself does such work, even a partner who does the work of his firm in fact does his own work and would stand on the same footing as an individual doing his own work. If deductions were to be allowed for remuneration given to a partner for doing firm's own work, by creating an artificial distinction of his having worked in a different capacity, the very purpose underlying the provisions of section 40(b) will, in our opinion, be frustrated and the provision will stand demolished. In our view, the only pertinent question which requires to be asked while invoking the provisions of section 40(b) is as to whether any of the payments enumerated in clause (b) is made by the firm to any partner. If the answer is in the affirmative, the provision ought to be applied and the amount would not be deductible in computing the income chargeable under the head 'Profits and gains of business or profession'.
9. In R. A. Goodsir and Co., v. CEPT : [1948]16ITR367(Mad) , the Madras High Court, while considering the scope of the provisions of section 10(4) (b) of the Act of 1922, in the context of payments made by the assessee-firm to its partners in their capacity as proprietors of two independent concerns for agency business, held that the said provisions made no distinction between payments by way of interest, commission, salary or remuneration made to partner as a partner and made to him in a different character and, therefore, the sums paid by way of commission to them were not permissible deductions. We find ourselves in respectful agreement with the said ratio. In CIT v. Veeriah Reddiar : [1969]73ITR162(Ker) , the Kerala High Court expressed its complete agreement with the interpretation of the provisions of section 10(4) (b) given by the Madras High Court in Goodsir's case : [1948]16ITR367(Mad) . In Harihar Cotton Pressing Factory v. CIT : [1960]39ITR594(Bom) , a Division Bench of the Bombay High Court, while considering the question whether rebates allowed to the partner could be treated as commission or not, construed the provisions of section 10(4) (b) of the Act of 1922, holding that (at page 608) : 'the prohibition is absolute and makes no distinction between payments made to a partner as such and payments made to him in a different character, as for example, as the owner of an independent business.' We find ourselves in complete agreement with the said proposition. The Karnataka High Court in Mysore Bangle Works v. CIT : [1986]157ITR411(KAR) , while construing the provisions of section 40(b) of the said Act, opined that the said provisions was absolute in its terms and made no distinction between payments by way of bonus, commission, remuneration, etc., made to a partner as a partner and such payments made to him although in a different capacity as proprietor of an independent concern. The High Court negatived the contention that the commission payable to the partner could not be treated just as a trade discount allowable to any trader. In R. J. Trivedi and Sons v. CIT : [1991]188ITR299(MP) , where the term of agreement between two firms indicated that it was the assessee-firm which was the agent of the other mine firm, it was held that the necessary inference that could be made was that whatever amount was paid by the assessee-firm to its partner was paid to him only as the partner of the assessee-firm and not in his capacity as the agent of the mine owing firm. The High Court upheld the decision of the Tribunal holding that the salary paid by the assessee-firm to the partner had to be disallowed under section 40(b) of the Act as it was paid to him as partner of the assessee-firm and not as the agent of the other firm which owned the mine. The above decisions lend support to our view that there is no scope for introducing in section 40(b) any distinction where a person who is a partner does the work of the firm as a partner which he may be obliged to do and where the work is done in his individual capacity or to recognise such dual capacity or to recognise such dual capacity for splitting the nature of remuneration paid for the work done by a partner of the firm.
10. In Chhotalal and Co., v. CIT : [1984]150ITR276(Guj) , a Full Bench of this Court, while construing the provisions of section 40(b) in the context of a partnership firm which included karta of a Hindu undivided family as one of its partner in a firm representing the Hindu undivided family, in computing the business profits of the assessee-firm, the interest paid to him on monies advanced by him from his individual funds could not be disallowed as the interest paid to him was not paid to him as a partner but as a stranger. The ratio of the decision of this court cannot, in any manner, assist the assessee-firm because in the present case, there is no question of any person having become partner in the assessee-firm in any representative capacity. The decision was based on the premises that it was well-settled that there was no impediment in a Hindu undivided family becoming a partner of a firm through its representative and the income derived by such representative person as a partner would really be the income of the Hindu undivided family and really derived by the Hindu undivided family. It was, in this context, that the court held that, if he advances amounts from his individual account when he is a partner as representative only of the Hindu undivided family, the interest is not paid to him qua partner but as a stranger. The principles laid down by the decision of this Court in Chhotalal's case : [1984]150ITR276(Guj) , has received statutory recognition by the addition of the Explanation to clause (b) of section 40 of the said Act. Thus a representative partner would not be a partner in his individual capacity and, therefore, obviously, in his individual capacity, he would not be governed by the expression 'partner' in section 40(b). The Full Bench, while referring to the question of payment of salary to a partner, observed that (at page 288) : 'We are not proposing to go into the decisions concerning payment of salary to a partner, for such payment stands on a footing different from the payment of interest. Payment of interest on amounts lent to the firm can be traced either to the individual or to the representative body by tracing the nature of the funds advanced, but not so labour by a partner. Whether he works in the firm and receives salary as an individual or as a representatives of the family cannot be known from the way he functions and, therefore, payment of salary must stand on a different footing'. It will, thus, be seen that this court was not, in Chhotalal's case : [1984]150ITR276(Guj) , concerned with the question of remuneration paid to a person who is a partner in his individual capacity and the decision cannot possibly support the view canvassed on behalf of the assessee that a dual capacity should be devised even where an individual is a partner depending upon his obligation to do work or render service to the firm.
11. Reliance was placed on behalf of the assessee on the decision of the Allahabad High Court in CIT v. Ram Laxman Sugar Mills : [1973]90ITR73(All) , in which the majority held that the payments made to the members of the managing board who were partners of the assessee-firm after the Government of India took action under the Essential Supplies (Temporary Powers) Act and took over the sugar factory of the firm and appointed two authorised controllers, were not inadmissible under section 10(4) (b) of the Act of 1922. It appears that the board of management in that case was appointed by the Central Government not with the consent of the partners but under the provisions of the Essential Supplies (Temporary Powers) Act, 1946. Justice Mishra, delivering a separate majority Judgment, held that a person may be a partner in a firm and yet be appointed as an authorised controller under the Essential Supplies (Temporary Powers) Act and his acts of commission of omission, while acting as an authorised controller or a member of the board of management, would not bind the other persons because he does not Act as their agent in that capacity and the remuneration paid by the firm to him would not be a remuneration paid to a partner and, therefore, the bar imposed by section 10(4) (b) would not be applicable. It will, thus, be seen that the majority decision turned upon a very different set of facts as the payment having been made by virtue of the statutory appointments by the Central Government to the board of management were not treated as remuneration paid by the firm to a partner. In any event, for the reasons which we have already given, in our view, it is not possible to accept the proposition that, when an individual is a partner, his capacity can be split up for ascertaining whether a particular remuneration is admissible or not for the purpose of section 40(b) of the Act. The Acting C.J. Mathur, who gave a dissenting judgment, in our respectful opinion, was right when he held that, after the incorporation of section 10(4) (b) in the Act of 1922, it was immaterial in which capacity the payment was made to the partner.
12. Reliance was then placed on behalf of the assessee on the decision of the Madras High Court in CIT v. Gemini Productions : [1977]110ITR847(Mad) , wherein, under an agreement entered into between the assessee-firm and one of its partners, a limited company, the company, the company had to advance to the firm a sum of Rs. 20 lakhs without interest and was entitled to the sole and permanent distribution and exploitation rights of pictures involved in the agreement at their sole discretion. As provided in the agreement, out of the realisations of the exhibition and distribution of the pictures, the said company was to pay itself the distribution commission and thereafter to pay itself the available balance until the entire advance was discharged or satisfied. The assessment of the firm was reopened on the ground that payments of commission by the assessee to one of its partners came within the scope of section 10(4) (b) of the Act of 1922, and, therefore, that amount ought not have been deducted while computing the income of the firm. It was held that the appropriation of commission due to the company by it from and out of the realisations from the exhibition and distribution of the films could not be said to constitute payment of commission to a partner attracting section 10(4) (b). The basic of the decision appears to be that there was no payment made by the firm to the partner and that the income which was derived by the company received in the course of carrying on their business was the income of the company and not that of the person whose pictures they were exhibiting, that is the firm. Thus, it is not as if the firm had made payment of commission to a partner. The amounts which were realised by the company were not the monies of the assessee-firm and the company had not received those amounts on behalf of or as the agent of the assessee-firm but had received then only in their own right in the course of carrying on their independent business and, therefore, there was no question of any payment of commission by the firm to the partner within the meaning of section 10(4) (b) of the Act. That decision, therefore, cannot assist the assessee. Even in CIT v. Dharti Films : [1991]191ITR261(Bom) , it was held that the assessee-firm had not made nay payment to the sole proprietor concern which was of the partner and, therefore, the question of any disallowance under section 40(b) did not arise.
13. Reliance was also placed on behalf of the assessee on the decision of the Andhra Pradesh High Court in CIT v. Chitra Kalpana [1988] 169 ITR 678, in which, it was held that there was no contract among the partners that the managing partner should furnish the story for producing films or that the other partner should direct the films and, in such circumstances, the payments which were made to them for such work could not be disallowed and that they permissible deductions in computing the income of the firm. The High Court, after referring to the relevant provision of the Partnership Act, held that every partner is bound to attend diligently to his duties in the conduct of the business and is not entitled to receive remuneration for taking part in the conduct of the business of the firm, and observed that inasmuch as a partner is bound to attend to his partnership business without anticipating any commission or other remuneration, any contract providing for the payment of commission or other remuneration may have as its object the diverting of the firm's income into the hands of the partners. It has then held that, whether or not these arrangements are bona fide, section 40(b) of the Act steps in and makes all such payments not deductible in computing the income of the firm so that attempts in any case to siphon off the firm's profits by diversion into the partner's hands may be prevented. Proceedings further, the High Court held (at page 683) :' One principle flows from out of this. That is, wherever a partner, being under a legal obligation, or duty-bound to conduct the partnership business without anticipating payment of salary, bonus, commission of remuneration as quid pro quo for his services and wherever a partner is under a legal obligation to provide capital for the business without anticipating any interest on the capital, except the return in respect of capital by way of his share in the firm's profits, the amounts paid to him by way of salary, bonus, commission or other remuneration and interest are made impermissible as deductions in computing the firm's income'. Having thus held, the high court posed a question as to whether the same principle could be applied if payments are made by a firm to its partners in respect of services which the partners are not bound or under a duty to render and proceeded to answer the question by holding that, where a partner is under no legal obligation to provide any particular service or involve himself in any particular activity, the payment made to him as a quid pro quo for such services and activities, does not fall under section 40(b) of the Act and such a payment is a permissible deduction while computing the income of the firm. We are of the view that there is no warrant for the gloss which is sought to be put on the provisions of clause (b) of section 40 which does not, as observed by us above, envisage splitting up of capacities of an individual who is a partner and distinguishing such individual's work as a partner and otherwise than as a partner. In our view, it is not permissible to introduce such a gloss on the provisions of clause (b) of the section 40 of the said Act and with great respect, we are unable to subscribe to the view taken in Chitra Kalpana's case [1988] 169 ITR 678.
14. It was contended by learned Counsel, Mr. Mehta, on behalf of the assessee, that, under section 28(1) of the Act, all expenses must necessarily be taken into account for arriving at true profits of the year, the basis for such computation being commercial principles as are understood in trading circles. He submitted that the amounts which were paid as labour charge to two partners were expenses which were necessary to be incurred for earning profits for the firm and, unless such expenses are taken into account, the commercial person cannot ascertain the profits of the year. He submitted that the provisions of section 40(b) would apply after the income has accrued and it is the net profit which is required to be stopped from being siphoned off. He submitted that the non obstante clause of section 40(b) indicates that section 28 was kept out of its sweep since the opening words referred to sections 30 to 38 of the Act. He also submitted that, having regard to the other provisions of the Act, namely, section 40A(2) and section 67, it will appear that only at the stage when profits are accrued and are sought to be siphoned away in the manner enumerated in section 40(b) that the deductions would become impermissible. In our view, there appears to be no warrant for the proposition that, since the opening words of section 40(b) of the Act refer in the non obstante clause only to sections 30 to 38, section 28 is to be kept out of the purview of section 40 and, therefore, the deductions should be allowable under the general principles under section 28 on the ratio of the Supreme Court in Badridas Daga v. CIT : [1958]34ITR10(SC) . In Badridas Daga's case : [1958]34ITR10(SC) , the Supreme Court held that, when a claim is made for a deduction for which there is no specific provision in section 10(2) of the Act of 1922, whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The Supreme Court, in terms, held that, if that is established, then the deduction must be allowed, provided, of course, there is no prohibition against it, express or implied in the Act. It, therefore, follows that, if there is prohibition under the Act, express or implied, there would be no question of allowing any deduction. The opening words of section 40 indicate that the amounts enumerated therein shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession'. Notwithstanding anything to the contrary in sections 30 to 38, when it speaks of computation of the income chargeable under the head 'Profits and gains of business or profession', it obviously refers to the amount chargeable under section 28 of the Act and as provided in section 28, the income referred to in section 28 is required to be computed in accordance with the provisions contained in sections 30 to 43 of the Act. Therefore, there is no scope for contending that, despite the embargo under clause (b) of section 40, the amount of the nature referred to therein would be deductible under the provisions of section 28 of the Act. The prohibition against the deduction of the amounts of the nature covered under clause (b) of section 40 is not made dependent on the fact whether such payment is made for the purpose of earning profit or not or whether it is made out of the profit and, if any such distinction is to be read in clause (b) of section 40, it would, in our opinion, be unreal and would frustrate the very object of the provision. As held by the Supreme Court in CIT v. Moon Mills Ltd. : [1966]59ITR574(SC) , the concept of assessable income under the Act is different from profit and loss in a commercial sense. Though profit and loss ascertained under the system adopted by an assessee is the basis, the assessable income is arrived at by adopting rules incorporated in the provisions of the Act. Prima facie, the allowances, deductions and deemed profits shall be ascertained in terms of the statutory provisions unless the statute itself accepts the principles of commercial accountancy in a particular case. It is, therefore, clear that a statutory prohibition against deductions such as contained in clause (b) of section 40 cannot be bypassed by reference to the fact that profit and loss of a business are to be ascertained on commercial principles.
15. It was contended on behalf of the assessee by Mr. Mehta that ample safeguards are provided for in sub-section (2) (a) of section 40A in the event of excessive payments made by the firm. It will be seen that the provisions of section 40A have effect notwithstanding anything contained to the contrary in any of the provisions of the Act relating to the computation of income under the head 'Profits and gains of business or profession'. Sub-section 2(a) and (b), inter alia, provide that, where the assessee incurs an expenses in respect of which payment was made or is to be made to any person including a partner of the firm and the Assessing Officer is of the opinion that such expenses is excessive or unreasonable having regard to the fair market value of the goods, services, etc., for which the payment is made, so much of the expenditure as is considered excessive or unreasonable shall not be allowed as a deduction. The provisions of sub-section (2) (a) of section 40A cannot be construed so as to read that the deductions which are made impermissible under section 40(b) should be read as permissible under section 40A. It is clear that the payments made to a partner which are covered by section 40A(2)(a) are of the nature other than those which are prohibited by clause (b) of section 40. In other words, it is in cases where payments other than those which are covered by clause (b) of section 40 are made to the partner that the question of excessiveness or unreasonableness of payments may arise which would be governed by the provisions of section 40A(2)(a) of the Act. Therefore, the argument, though attractive, cannot hold the filed in favour of the assessee.
16. We may now come to the alternative contention canvassed on behalf of the assessee that, should this court come to the conclusion that payments of the nature covered by clause (b) of the section 40 which are made to the partner in respect of work done by him which he is not obliged to do are also hit by clause (b) of section 40, then in that event, the work which is done by the partner for the firm should be treated as work done by the firm and accordingly all the expenditure which is incurred for such work would be allowable as deductible expenditure. We find considerable force in this contention because, once dual capacity, as is contended, is denied to a person who is a person in his individual capacity and it is held that a person cannot be his own employee and, therefore, a partner of the firm cannot be an employee of the firm itself and in view of the fact that a partner is bound to do the work of the firm diligently without being entitled to any remuneration, it should follow that the work which is done by the partner even if he is not obliged to do under the terms of the contract of the statutory provisions, is the work which is in effect done by the partnership firm itself, the partner acting as its agent. Therefore, whatever expenditure is incurred by the partner in respect of such work done for the firm, cannot be considered as remuneration or salary given by the firm to the partner and would be deductible expenditure as in case of any expenditure incurred by the firm for doing its work through persons other than partners. The partnership acts through its partners and, therefore, when partners get work done of the partnership firm or for the partnership firm, the expenditure which is deductible ought to be deducted and it is only the real or net remuneration which may fall to the share of the partner that would be hit by the provisions of section 40(b) and to the entire payment which may include the expenditure for the work done for the firm. We are, therefore, of the view that the amount of payment which can be arrived at after deducting the expenses incurred for the work done which remains as net remuneration in the hands of the partner, would alone be impermissible as deduction under section 40(b) and not the entire amount paid to the partner. Therefore, where payments are made as in the present case and a contention is raised that the payment is not in its entirety for remuneration but includes the expenditure required to be incurred for the work of the firm, it would be necessary for the authorities to examine the extent of such expenditure incurred and to find out what is the real amount of remuneration or salary which remains in the hands of the partner so as to attract the provisions of section 40(b) of the Act. In the instant case, it appears that, though an alternative contention was raised before the Commissioner that only the net surplus derived by the two partners could, at worst, be added to the assessee-firm's income, no attempts has been made by the Commissioner or the Tribunal to examine the genuineness of the expenditure said to have been incurred by the partners and it appears that the taxing authorities have not applied their mind to this aspect with a view to find out as to what was the real payment of the nature covered by clause (b) of section 40 that was made by the firm to the partners. It would, therefore, be necessary for the Tribunal to go into this question and examine in the light of the observations made in this judgment as to what portion of the amounts of Rs. 54,796 and Rs. 51,969 paid to the said tow partners, Suresh Nagindas and Mahesh Nagindas, respectively, is a real payment which can be termed as 'remuneration' in their hands after taking into account all the genuine deductible expenditure incurred for the work of the firm from these amounts as having been incurred by the firm itself through its partners.
17. We are not called upon to decided that, unless the partners assessment made under section 67 of the Act is reopened and the payment is treated as remuneration or salary and not as business income of the firm, it is not permissible to disallow the payment in the case of the assessee-firm on the ground that it was remuneration, since no such contention was raised before the Tribunal nor is any such question referred to us for our opinion.
18. For the aforesaid reasons, we answer questions Nos. 1, 2 and 4 in the negative and against the assessee. The question, whether the payment made to the partners by the firm was a device to manipulate the profits of the firm or not, is directly linked with the question of the genuineness of the expenses which may have been incurred by the partners for the work of the firm. Since we do not have sufficient material on record to come to the conclusion as to whether payment of any of these two amounts was a device to manipulate profits or not, we refuse to answer question No. 3. It will be open to the Tribunal to decide this aspect in the light of the observations of this Court and on the basis of the material on record including additional evidence that may be led before it.
19. The reference is answered accordingly with no order as to costs.