Kabadi Chicknagusa & Sons, Bangalore V. JCIT, Bangalore

ITA 736/BANG/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0580 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 23-07-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JASON P BOAZ
• Assessee Lawyers: A S VISHNU BHARATH
• Section: 40(b)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE A BENCH, BANGALORE BEFORE SHRI K.K.GUPTA, AM AND SHRI SHAILENDRA KUMAR YADAV, JM ITA NO.736(BANG.)/2009 (ASSESSMENT YEAR : 2005-06) M/S KABADI CHICNAGUSA & SONS, NO.36, TELUGUPET, BANGALORE APPELLANT VS THE JOINT COMMISSIONER OF INCOME-TAX, RANGE-5, BANGALORE RESPONDENT APPELLANT BY : SHRI A.S.VISHNU BHARATH REVENUE BY : SHRI JASON P.BOAZ O R D E R PER SHRI SHAILENDRA KUMAR YADAV, JM ; THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A)-II, BANGALORE DATED 29-12-2008 WHEREIN DISAL LOWANCE OF REMUNERATION TO PARTNERS U/S 40(B) OF IT ACT HAS BE EN OPPOSED. THE ASSESSEE IS A FIRM ENGAGED IN EXPORT OF SILK FABRIC GOODS TO EUROPEAN AND AMERICAN CONTINENTAL COUNTRIES. 2. THE FACTS, AS ASCERTAINED IN THE ASSESSMENT ORDE R ARE THAT THERE WAS A CHANGE IN THE CONSTITUTION OF PARTNERSH IP WITH EFFECT FROM 01-04-2004 ONLY IN SO FAR AS IT RELATES TO PAYMENT OF INTEREST ON THE CREDIT BALANCES OF THE PARTNERS AND SALARY TO WORKI NG PARTNERS. OUT ITA NO.736(B)/2009 2 OF EIGHT PARTNERS WHO HAVE BEEN IN THE FIRM, THREE PARTNERS VIZ. SHRI K.V.JAGANNATHSA, K.V.NAGARAJA AND K.N.ASHOK KUMAR R EPRESENT THEIR RESPECTIVE HINDU UNDIVIDED FAMILIES AS KARTHAS. AL L THE PARTNERS ARE WORKING PARTNERS AS PER THE PARTNERSHIP DEED AND AR E PAID REMUNERATION ON THE BASIS OF THEIR SHARING RATIO. T HE ABOVE THREE PARTNERS REPRESENTED THEIR HUF AS KARTHA WERE PAID SALARY WHICH IS CREDITED TO THE ACCOUNTS OF HUF. THE AO CAME TO TH E CONCLUSION THAT SINCE THE SALARY PAYABLE HAVE BEEN CREDITED TO THEI R HUFS ACCOUNTS. SUCH PAYMENT SUFFERS DISALLOWANCE IN TERMS OF SEC.4 0(B) OF THE IT ACT ON THE GROUND THAT HUFS CANNOT BE WORKING PARTNERS , THOUGH THEY CAN ENTER INTO PARTNERSHIP ON THE BASIS OF CERTAIN DECISIONS. IN APPEAL, THE CIT(A) CONFIRMED THE ORDER OF AO ON THE ISSUE. SAME HAS BEEN AGITATED BEFORE US. 3. BEFORE US, LEARNED AR SUBMITTED THAT THE CIT(A) HAS MISCONSTRUED THE DECISION OF RASHIKLAL & CO., VS CIT (229 ITR 458)(SC) BY DISALLOWING REMUNERATION. ON THE OTHER HAND, LEARNED DR SUPPORTED THE ORDER OF CIT(A), WHO HAS DISALLOWE D THE REMUNERATION PAID TO THREE PARTNERS, WHO HAPPENED T O BE KARTHA OF HUF. 4. AFTER GOING THROUGH THE RIVAL SUBMISSION AND MA TERIAL OF RECORD, WE ARE NOT INCLINED TO INTERFERE WITH THE F INDINGS OF THE CIT(A). ITA NO.736(B)/2009 3 THE PARTNERSHIP WAS RE-CONSTITUTED ON 01-04-2004 CO NSISTING OF THE FOLLOWING PARTNERS WITH THEIR RESPECTIVE PROFIT AND LOSS SHARING RATIO. NO. NAME OF THE PARTNER PROFIT/LOSS SHARING RATIO I. SHRI K.NAGENDRASA 10% II. JAGANNATHASA 15% III. K.V.NAGARAJ 15% IV. K,N.ASHOK KUMAR 10% V. K.N.SRINIVAS 15% VI. K.V.NAGUSA 15% VII. K.V.BANUDAS 10% VII. K.N.LAKSHMI DEVI 05% 5. OUT OF THE ABOVE SHRI K. NAGENDRASA, HRI K.V.JA GANNATHASA, SHRI K.V.NAGARAJ AND SHRI K.N.ASHOK KUMAR PRESENT T HEIR RESPECTIVE HUFS. IN PARA -5 OF THE SAID PARTNERSHIP DEED IN QUESTION, IT HAS BEEN PROVIDED THAT PARTNERS HAVE MUTUALLY DECIDED T HAT ALL THE PARTNERS WILL BE WORKING PARTNERS, WHO SHALL BE PAI D REMUNERATION HENCEFORTH IN THE SAID PROFIT SHARING RATIO. ON TH E BASIS OF PROFIT AND LOSS ACCOUNT, PARTNERS HAVE BEEN PAID SALARY AS FOL LOWS: NO. NAME OF THE PARTNER SALARY PAID I. SHRI K.NAGENDRASA RS.10,83,912/- II. K.V.JAGANNATHASA RS.16,25,869/- III. K.V.NAGARAJ RS.16,25,869 IV. K.N.ASHOK KUMAR RS.16,25,869/- V. K.N.SRINIVAS RS.16,25,869/- VI. K.V.NAGUSA RS.16,25,869/- VII. K.V.BANUDAS RS.10,83,912/- VIII. K.N.LAKSHMI DEVI RS.05,41,946/- ITA NO.736(B)/2009 4 6. WHILE COMPLETING THE ASSESSMENT THE AO DISALLOWE D A SUM OF RS.48,77,607/- BEING SALARY PAID TO PARTNERS MENTIO NED AT (II)(III)AND (IV)ABOVE) ON THE GROUND THAT THAT ANY PAYMENT OF S ALARY, BONUS, COMMISSION OR REMUNERATION BY WHATEVER NAME CALLED TO ANY PARTNER, WHO IS NOT A WORKING PARTNER SHALL BE DISALLOWED. ACCORDING TO AO, THE REMUNERATION PAID AND CREDITED TO THE HUFS ACC OUNT CANNOT BE FOR THE WORKING PARTNERS, SINCE THE HUF AS SUCH CAN NOT BE A WORKING PARTNER AS IT IS IN FIDUCIARY CAPACITY THAT IT HAS ENTERED INTO THE PARTNERSHIP. THE INDIAN PARTNERSHIP ACT AS SUCH PE RMITS ONLY INDIVIDUALS TO BECOME PARTNERS IN A PARTNERSHIP FIR M. WE FIND THAT THE HONBLE SUPREME COURT IN THE CASE OF RASHIKLAL & CO ., VS CIT(1998) 229 ITR 458 OBSERVED THAT THE INTEREST PAID TO PART NERS REPRESENT HUF ON THE CREDIT BALANCE OF HUF IS TO BE DISALLOWE D. A SIMILAR VIEW HAS BEEN TAKEN IN CASE OF SHRI VUPPALA NAGALINGAM & SONS VS CIT (1999) 237 ITR 16(AP)WHEREIN IT HAS BEEN THAT SALAR Y PAID TO PARTNERS FOR RENDERING THE SERVICES IN INDIVIDUAL CAPACITY A ND NOT AS A PARTNER REPRESENTING THE HUF IS DEDUCTIBLE. IN VIEW OF THE AMENDMENT OF SEC.40(B) IN 1992, REMUNERATION TO THE PARTNER FOR HIS EXPERTISE IS NOT DEDUCTIBLE IN THE ASSESSMENT YEAR 1982-83. A PART NER IN THE FIRM IS VERY MUCH A PARTNER AND IT IS THAT STATUS WHICH DEF INES HIS RIGHT AND ALSO IMPOSES ON HIM THE OBLIGATION TO RENDER ALL TH E SERVICES THAT HE IS CAPABLE OF, FOR ADVANCEMENT OF THE OBJECT OF THE FI RM. SUCH A PARTNER ITA NO.736(B)/2009 5 CANNOT SEEK TO AVOID THE EFFECT OF PROHIBITION MADE IN THE STATUTE IN SEC.40(B) OF THE IT ACT, BY DESCRIBING HIMSELF AS A N EXPERT. IN VIEW OF OUR ABOVE DISCUSSION, THE ORDER OF CIT(A) IS JUSTIF IED. WE UPHOLD THE SAME. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE (K.K.GUPTA) (SHAILENDRA KUMAR YADAV) ACCOUNTANTMEMBER JUDICIAL MEMBER PLACE: BANGALORE DATED: 2009 AM* COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. CIT(A) 4. CIT 5. DR 6. GF(BLORE) 7. GF(DELHI) BY ORDER AR, ITAT, BANGALORE