A. PASAYAT J., - In both the cases at the instance of the assessee, the following question has been referred under section 256(1) of the Income-tax Act, 1961 (in short "the Act"), for adjudication by this court :
"Whether, on the facts and in the circumstances of the case, the commission paid by the assessee-firm to Sri Rasiklal P. Rathor (individual) was rightly disallowed under section 40(b) of the Income-tax Act, 1961 ?"
The cases are disposed of by this common judgement.
According to the Revenue, in terms of section 40 (b) of the Act, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm in case the assessee is a firm is not a permissible deduction while computing the income chargeable under the head "Profits and gains" of business or profession.
The undisputed factual position is that one Sri Rasiklal P. Rathor is a partner in the firm, M/s Rasiklal and Co. (hereinafter referred to as "firm") representing his Hindu Undivided family. For the assessment years 1979-80 and 1981-82, the sums of Rs. 2,038 and Rs. 30,658 were paid to the said Rasiklal P. Rathor in his individual capacity as commission. The Assessing Officer added the amounts to the taxable income of the firm, purportedly under section 40(b) of the Act. The firm is described as the assessee in this judgement.
The assessee questioned the legality of the addition. The assessees stand was that payment was made to Sri Rasiklal P. Rathor in his individual capacity, while his Hindu undivided family was the partner and, therefore, section 40(b) had no application. A distinction was made that Rasiklal P. Rathor was a different person while representing his Hindu undivided family firm and while receiving commission as an individual.
There is no unanimity in the views of several High Court on the question. In the following cases, it has been held that the prohibition contained in the clause is absolute and makes no distinction between payments by way of interest, commission, salary, etc., made to a partner as a partner and such payments made to him in a different character, e.g., in his personal capacity when he is a partner in his capacity as a karta of a joint family or vice versa. (see A. S. K. Rathnaswamy Nadar Firm v. CIT  58 ITR 312 (Mad), Giridharilal Ghasiram v. CIT  69 ITR 890 (Cal) Pannalal Girdharilal v. CIT  81 ITR 624 (Delhi), N. M. Anniah and Co. v. CIT  101 ITR 348 (Kar), CIT v. London Machinery Co.  117 ITR 111 (All), Raj (K. C.) and Co. v. CIT  121 ITR 911 (Delhi), Dwarkadas Rameshwar Goenka v. CIT  127 ITR 397 (Mad), Sanghi Motors v. CIT  135 ITR 359 (Delhi), Chandumal Rajgarhia v. CIT  164 ITR 486 (Patna), CIT v. Hari Nath and Co.  168 ITR 440 (All) and CIT v. Nitro Phosphetic Fertilizer  174 ITR 269 (All) [FB]. A contrary view has been expressed in the following cases :
CIT v. Pannalal Hiralal and Co.  146 ITR 549 ((BOM)), Chhotalal and Co.  150 ITR 276 (Guj) [FB], N. T. R. Estate v. CIT  157 ITR 285 (AP), CIT v. Narbharam Popatbhai and Sons  166 ITR 534 (MP) [FB], Gajanand Poonam Chand and Bros. v. CIT  174 ITR 346 (Raj) and CIT v. Kishanlal and Bros.  174 ITR 728 (Raj).
Explanations 2 and 3 to clause (b) of section 40 have been added to the clause by the Taxation Laws (Amendment) Act, 1984, which now provide that the disallowance under the clause will not apply in certain cases when an individual is a partner in his representative capacity or receives payment from the firm on behalf or for the benefit of any other person.
The determinative question is whether payments were made to a partner, and who was the partner.
In this context, it may be necessary to refer to section 64(1) of the Act which permits clubbing of share income of the wife or minor child, as the case may be, with that of a male partner, if they are co-partners in the same partnership firm. Clubbing cannot be done if the said male partner is a partner in his capacity as karta of a Hindu Undivided family. As defined in section 2(31) of the Act, person includes (i) an individual, and (ii) a Hindu undivided family. In a partnership, a Hindu undivided family acts through and is represented by its karta. That does not make the karta a partner. He shares the profits and losses of the firm for and on behalf of the Hindu undivided family. As an individual, the karta can be separately assessed. The legislative intention of making a distinction between an individual does not encompass in its meaning karta of a joint family who acts in representative capacity.
In view of our above conclusion, we answer the question in favour of the assessee and against the Revenue holding that the disallowance of the payment of commission was not in order. There shall be no order as to costs.
S. K MOHANTY J., - I agree.