Hemtej Imprint, Ahmedabad V. The Dy.CIT.,Circle-10, Ahmedabad

ITA 1520/AHD/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5522 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 16-07-2010
• Assessment Year: 2007-2008
• Appeal Filed On: 07-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K M MAHESH
• Assessee Lawyers: S N DIVETIA
• Section: 40(b)

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI MUKUL KUMAR SHRAWAT, JM AND D.C.AGRAW AL, AM HEMTEJ IMPRINT, 4, NARAYAN CHAMBERS, NEHRUBRIDGE CORNER, ASHRAM ROAD, AHMEDABAD. VS. DY. C.I.T., CIRCLE-10, AHMEDABAD. (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI S. N. DIVETIA, AR REVENUE BY:- SHRI K. M. MAHESH, SR.DR O R D E R PER D. C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF LD. CIT(A) DATED 18.03.2010 RAISING FOLLOWING GROUND:- (1) THAT BOTH THE LOWER AUTHORITIES HAVE ERRED IN DISAL LOWING REMUNERATION OF RS.3,50,000/- PAID TO ASHIT H. SHAH IN THE CAPACITY OF KARTA OF HIS HUF ON LAW AND FACTS. 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS THAT L D. AO HAS NOT ALLOWED AND LD. CIT(A) CONFIRMED THE ADDITION IN RE SPECT OF REMUNERATION OF RS.3,50,000/- PAID TO A PARTNER WHO WAS WORKING IN THE FIRM IN HUF CAPACITY. 3. THE FACTS OF THE CASE ARE THAT SHRI ASIT H. SHAH IS WORKING IN THE PARTNERSHIP FIRM ON BEHALF OF HIS HUF. REMUNERATION WAS PAID TO SHRI ITA NO.1520/AHD/2010 ASST. YEAR :2007-08 2 ASIT H. SHAH WHICH WAS DISALLOWED UNDER SECTION 40( B) OF THE ACT. ACCORDING TO THE AO SALARY/REMUNERATION CAN BE PAID TO AN INDIVIDUAL ONLY AND SINCE ASSESSEE IS A PARTNER IN THE FIRM IN HUF CAPACITY HE IS NOT AN INDIVIDUAL AND, THEREFORE, NO SALARY/REMUNERATIO N CAN BE ALLOWED TO HIM. THE AO HAS REFERRED TO SECTION 40(B) AND EXPLA NATION-4 THERETO TO EMPHASISE THE POINT THAT SALARY CAN ONLY BE ALLOWED IF INDIVIDUAL IS PARTNER IN THE FIRM IN INDIVIDUAL CAPACITY ONLY. AC CORDINGLY BE DISALLOWED SALARY PAYMENT OF RS.3,50,000/- TO SHRI ASIT H. SHA H. THE LD. CIT(A) CONFIRMED THE ADDITION FOLLOWING THE SAME REASONING . 4. AGAINST THIS, LD. AR FOR THE ASSESSEE SUBMITTED THAT SO FAR AS PARTNERSHIP FIRM IS CONCERNED, IT IS ONLY AN INDIVI DUAL WHO CAN BE A PARTNER BUT THEREAFTER IT IS NONE OF THE CONCERN OF THE FIRM AS TO WHERE THE PROFITS RECEIVED FROM THE FIRM OR ANY OTHER PAYMENT MADE TO PARTNER ARE ASSESSED. IF A PERSON IS A PARTNER IN INDIVIDUAL CA PACITY, THEN ENTIRE PROFIT/REMUNERATION/INTEREST WOULD GO TO THE INDIVI DUAL AND ASSESSABLE IN HIS HANDS WHEREAS IF AN INDIVIDUAL IS REPRESENTING HIS HUF THEN ENTIRE SALARY/PROFITS ETC. WOULD GO TO THE HUF AND WOULD B E ACCORDINGLY TAXABLE IN THE HANDS OF HUF. HE REFERRED TO THE DECISION OF ITAT, AHMEDABAD A BENCH IN THE CASE OF M/S AJIT ADS, AHMEDABAD VI DE ITA NO.2064/AHD/2005 FOR ASST. YEAR 2002-03 PRONOUNCED ON 20.1.2006 AND ON THE DECISION IN THE CASE OF ACIT VS. GIRIRAJ MI NES IN ITA NO.72/AHD/1997 ASST. YEAR 1993-94 DECIDED ON 16 TH APRIL, 2004 WHERE ALSO SIMILAR VIEW WAS TAKEN. HE REFERRED TO THE DEC ISION IN GIRIRAJ MINES WHERE REFERENCE HAS BEEN MADE TO THE DECISION IN TH E CASE OF KRISHNA CERAMICS VS. ITO IN ITA NO.2072/AHD/1989 WHEREIN AL SO REMUNERATION PAID TO HUF HAS BEEN ALLOWED. 3 5. THE LD. DR ON THE OTHER HAND, SUPPORTED THE ORDE R OF LD. CIT(A) AND SUBMITTED THAT REMUNERATION CAN ONLY BE ALLOWED IF INDIVIDUAL IS A PARTNER IN THE FIRM. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THE AUTHORITIES B ELOW WERE NOT JUSTIFIED IN NOT ALLOWING REMUNERATION TO THE HUF. IT IS UNDI SPUTED FACT THAT SHRI ASIT H. SHAH WAS A PARTNER IN HUF CAPACITY BUT IN L AW ONLY AN INDIVIDUAL CAN BE A PARTNER IN THE PARTNERSHIP FIRM. IT HAS BE EN HELD BY THE COURTS THAT AN INDIVIDUAL CAN REPRESENT ANY OTHER ENTITY WHILE HE IS ACTING AS A PARTNER. IN THAT CASE THE PROFITS GIVEN TO THE INDI VIDUAL WOULD BE IN FACT THE PROFITS OF THE ENTITY TO WHOM SUCH INDIVIDUAL I S REPRESENTING. WHETHER SUCH REMUNERATION OR SALARY PAID TO THE INDIVIDUAL IS ASSESSABLE IN THE HANDS OF INDIVIDUAL OR IN THE HANDS OF THE CONCERN TO WHICH SUCH INDIVIDUAL IS REPRESENTING IN THE FIRM, IS NOT A DE CIDING FACTOR ABOUT THE ALLOWABILITY OF DEDUCTION FROM THE COMPUTATION OF I NCOME OF THE FIRM. AS PER EXISTING POSITION OF LAW, IT IS ONLY THE INDIVI DUAL WHO CAN BE A PARTNER OF THE FIRM AND, THEREFORE, WHEN REMUNERATION IS PA ID TO SUCH INDIVIDUAL THEN THERE IS NO VIOLATION OF SECTION 40(B). THE IS SUE OF ALLOWABILITY OR OTHERWISE OF REMUNERATION STOPS AT THAT POINT. IN T HIS REGARD FOR THE BENEFIT WE MAY REFER TO THE DECISION OF THE TRIBUNAL IN THE CASE OF KRISHNA CERAMICS VS. ITO (SUPRA) AS REFERRED TO IN ACIT VS. GIRIRAJ MINES 001 SOT 0279 (AHD) (SUPRA) AS UNDER: 'ON A READING OF THIS CLAUSE IT IS CLEAR THAT THE R EMUNERATION WAS PAID TO THE PARTNERS FOR ATTENDING TO THE AFFAIRS OF BUSINESS OF THE PAR TNERSHIP FIRM AS WORKING PARTNERS. THEREFORE, THE CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT THERE WAS NO EVIDENCE THAT THEY WERE WORKING PARTNERS. IN VIEW OF THE SUPREME COURT DECISION IN THE CASE OF RASHIKLAL AND CO. 229 ITR 458 IT IS THE INDIVIDUAL WHO IS PAR TNER IN THE FIRM AND IT IS IMMATERIAL AS TO IN WHAT CAPACITY HE IS THE PARTNER. HIS OBLIG ATION MAY BE TOWARDS OTHERS, BUT VIS A VIS THE FIRM HE IS THE PARTNER IN HIS INDIVIDUAL CAPACITY. EVEN OTHERWISE, AS HELD IN THE CASE OF KSHETRA MOHAN SANNYASI CHARAN SADHUKHAN VS. CEPT 4A HINDU UNDIVIDED FAMILY IS INCLUDED IN THE EXPRESSION PER SON AS DEFINED IN THE INDIAN 4 INCOME-TAX ACT AS WELL AS IN THE EXCESS PROFITS TAX ACT, BUT IT IS NOT JURISTIC PERSON FOR ALL PURPOSES. WHEN TWO KARTAS OF TWO HINDU UNDIVIDE D FAMILIES ENTER INTO A PARTNERSHIP AGREEMENT THE PARTNERSHIP IS POPULARLY DESCRIBED AS ONE BETWEEN THE TWO HINDU UNDIVIDED FAMILIES BUT IN THE EYE OF LAW IT I S PARTNERSHIP BETWEEN THE TWO KARTAS AND THE OTHER MEMBERS OF THE FAMILIES DO NOT IPSO F ACTO BECOME PARTNERS. THERE IS, HOWEVER, NOTHING TO PREVENT THE INDIVIDUAL MEMBERS OR ONE HINDU UNDIVIDED FAMILY FROM ENTERING INTO A PARTNERSHIP WITH THE INDIVIDUA L MEMBERS OF ANOTHER HINDU UNDIVIDED FAMILY AND IN SUCH A CASE IT IS A PARTNER SHIP BETWEEN THE INDIVIDUAL MEMBERS AND IT IS WHOLLY INAPPROPRIATE TO DESCRIBE SUCH A PARTNERSHIP AS ONE BETWEEN TWO HINDU UNDIVIDED FAMILIES. THIS DECISION HAS BEE N NOTED IN THE CASE OF VANSON KIDS SUFF 83 ITD 268 WHEREIN ALSO THE PARTNER REPRE SENTING IN HUF CAPACITY WAS HELD TO BE A WORKING PARTNER IN HIS INDIVIDUAL CAPA CITY AND THE REMUNERATION WAS ALLOWED WITHIN THE MEANING OF SECTION 40(B) READ WI TH EXPLANATION THERETO. WE ALSO FIND THAT THE AHMEDABAD BENCH OF THE TRIBUNAL IN TH E CASE OF GANDHI BABULA BHOGILAL AND CO. IN ITA NO.2380/AHD/1995 ORDER DATED 7-9-199 9 HAS ALLOWED A SIMILAR CLAIM BY REFERRING TO THE SECTION OF THE SUPREME COURT IN THE CASE OF RASHIK LAL AND CO. (SUPRA). THERE IS YET ANOTHER DECISION OF THE AHMED ABAD BENCH IN THE CASE OF SUJAT ENTERPRISES IN ITA NO. 1083/AHD./1996 REPORTED IN A HMEDABAD CHARTERED ACCOUNTANTS JOURNAL MARCH, 2003 AT PAGE 637 WHEREIN FOLLOWING THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SMRUTI TRADING CO. 70 TTJ (MUM.) 114, IT WAS HELD THAT SALARY PAID TO THE PARTNER WHO WAS PARTNER IN HIS REPRESENTATIVE CAPACITY AS KARTA OF HUF CANNOT BE CONSIDERED TO BE PAYMENT TO HUF BUT TO KARTA AS AN INDIVIDUAL. THE KARTA OF HUF IS A WORKING PARTNE R AND, THEREFORE, THE REMUNERATION PAID TO HIM IS ALLOWABLE. RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS, WE ARE OF THE OPINION THAT THE REVENUE AUTHORITIES WERE NOT JUSTIFIED IN DISAVOWING THE CLAIM OF THE ASSESSEE. THE TWO PARTNERS THOUGH THEY WERE REPRESENTATIVES OF THEIR RESPECTIVE HUFS WERE PARTNERS IN THEIR INDIVIDUAL C APACITY AND, THEREFORE, THE REMUNERATION PAID TO THEM WOULD BE AN ALLOWABLE DED UCTION. WE DIRECT ACCORDINGLY.' RESPECTFULLY FOLLOWING THE ABOVE ORDERS, WE ALLOW T HE CLAIM OF THE ASSESSEE. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER WAS PRONOUNCED IN OPEN COURT ON 30/7/2010 SD/- SD/- (MUKUL KR.SHRAWAT) (D.C .AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD, DATED : 30/7/2010 MAHATA/- 5 COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD