M/s. Vijay Saw Mill, Baroda v. The Income tax Officer,Ward-5(1),, Baroda

ITA 3233/AHD/2009 | 2003-2004
Pronouncement Date: 29-01-2010 | Result: Partly Allowed

Appeal Details

RSA Number 323320514 RSA 2009
Bench Ahmedabad
Appeal Number ITA 3233/AHD/2009
Duration Of Justice 1 month(s) 26 day(s)
Appellant M/s. Vijay Saw Mill, Baroda
Respondent The Income tax Officer,Ward-5(1),, Baroda
Appeal Type Income Tax Appeal
Pronouncement Date 29-01-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted SMC
Tribunal Order Date 29-01-2010
Assessment Year 2003-2004
Appeal Filed On 03-12-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'SMC' (BEFORE SHRI N S SAINI ACCOUNTANT MEMBER) ITA NOS.3233 AND 3234/AHD/2009 (ASSESSMENT YEARS:- 2003-04 AND 2004-05) M/S VIJAY SAW MILLS YAMUNA MILL ROAD PRATAPNAGAR DABHOI ROAD BARODA V/S THE INCOME-TAX OFFICER WARD-5(1) BARODA [APPELLANT] [RESPONDENT] APPELLANT BY :- SHRI BANDISH SOPARKAR RESPONDENT BY:- SHRI C K MISHRA SR. LEARNED DEPARTMENTAL REPRESENTATIVE O R D E R THESE TWO APPEALS HAVE BEEN FILED BY THE ASSESSEE AGAINST TWO SEPARATE ORDERS BOTH DATED 22-09-2009 PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) IN APPEAL NOS.CAB/(A)V/157/08-09 AND CAB/(A)V/158/08-09 FOR T HE ASSESSMENT YEARS 2003-04 AND 2004-05 RESPECTIVELY. 2 THE COMMON GROUNDS NO.1 AND 2 TAKEN IN BOTH THE A PPEALS READ AS UNDER: 1 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE REOPENING OF THE CASE U/S 147 OF THE ACT. UNDER THE FACTS AND THE CIRCUMSTANCES OF THE CASE NO INCOME HAS ESCAPED ASS ESSMENT AND THEREFORE THE ACTION OF AO IN REOPENING OF THE CASE ON THE SOLE BASIS OF REVENUE AUDIT OBJECTION IS BAD IN LAW AND WITHOU T JURISDICTION AND REQUIRES TO BE QUASHED. 2 THE LEARNED CIT(A) HAS FURTHER ERRED IN LAW AND ON FACTS IN CONFIRMING THE ORDER PASSED BY AO U/S 144 R.W.S. 14 7 OF THE ACT THOUGH ALL DETAILS CALLED FOR IN RESPONSE TO NOTICE U/S 148 WERE SUBMITTED AND ARE ON RECORD. THE OBSERVATION OF LD . CIT(A) WHILE DEALING WITH THE OBJECTION RAISED BY THE APPELLANT AS MERELY 2 ACADEMIC IN NATURE AND THE APPELLANT HAVING NOT SU FFERED ANY DAMAGE IS COMPLETELY UNCALLED FOR AND AGAINST THE P RINCIPLES OF NATURAL JUSTICE DESERVES TO BE QUASHED . 3 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE SUBMITTED THAT HE IS NOT PRESSING THE ABOVE QUOTED GROUNDS OF APPEAL IN BOTH THE YEARS UNDER APPEAL AND THEREFORE THEY A RE DISMISSED AS NOT PRESSED. 4 THE COMMON GROUND NO.3 TAKEN IN APPEAL IN BOTH T HE YEARS UNDER CONSIDERATION READS AS UNDER: THE LEARNED CIT(A) HAS GROSSLY ERRED IN CONFIRMING THE ACTION OF AO IN MAKING APPLICABLE PROVISIONS OF SECT6ION 40(B)(1) O N THE BASIS OF AUDIT OBJECTION RAISED BY REVENUE PARTY AND RESTRICTING T HE PAYMENT OF REMUNERATION AS PER CEILING LAID DOWN BY THE PROVIS IONS OF SECTION 40(B)(V)(II) WITHOUT PROPERLY APPRECIATING THE FACT S OF THE CASE AND HAS FURTHER ERRED IN IGNORING VARIOUS SUBMISSIONS EXPL ANATIONS AND DOCUMENTS SUBMITTED BY THE APPELLANT DEMONSTRATING THAT THE R EMUNERATION IS PAID TO THE PARTNERS IN THEIR INDIVIDUAL CAPACITY FOR RENDE RING SERVICES AND OFFERED TO TAX IN INDIVIDUAL RETURNS OF INCOME AND NOT IN R EPRESENTATIVE CAPACITY AS KARTA OF HUF PARTNER THAT OUGHT TO HAVE BEEN CONSID ERED BEFORE PASSING THE IMPUGNED ORDER. 5 THE ASSESSEE IS A PARTNERSHIP FIRM DEALING IN T IMBER AND CORRUGATED SHEETS IN THE NAME AND STYLE OF M/S VIJA Y SAW MILLS AT BARODA. THE ASSESSEE FILED RETURN OF INCOME FOR ASS ESSMENT YEAR 2003-04 ON 21-10-2003 DECLARING LOSS OF RS.3 06 570 /- AND THE SAME WAS PROCESSED U/S 143(1) OF THE ACT. SUBSEQUENT TO THIS THE LEARNED ASSESSING OFFICER NOTICED THAT THERE WAS ESCAPEMENT OF INCOME AS THE ASSESSEE CLAIMED DEDUCTION OF EXCESS REMUNERATI ON / SALARY PAID TO THE PARTNERS. THEREFORE THE LEARNED ASSESSING O FFICER REOPENED THE ASSESSMENT U/S 147 OF THE ACT. THERE WAS NO COM PLIANCE TO THE NOTICE ISSUED U/S 142(2) AND OTHER STATUTORY NOTICE S BY THE ASSESSEE. THEREFORE THE ASSESSMENT CAME TO BE MADE U/S 144 O F THE ACT IN WHICH THE LEARNED ASSESSING OFFICER RESTRICTED THE TOTAL CLAIM OF PAYMENT OF SALARY TO PARTNERS AT RS.50 000/- U/S 40 (B) OF THE ACT AND THE BALANCE AMOUNT OF RS.2 50 000/- WAS BROUGHT TO TAX HOLDING THAT AS EXCESS SALARY PAID TO PARTNERS AS PER SECTION 40 (B)(V) OF THE ACT. 3 SIMILARLY IN ASSESSMENT YEAR 2004-05 ALSO RS.2 50 000/- LACS BROUGHT TO TAX AS EXCESS SALARY PAID TO THE PARTNER S IN VIEW OF SECTION 40(B)(V) OF THE ACT AS IN THAT YEAR ALSO THE ASSESS EE HAD SHOWN LOSS OF RS.3 25 160/- IN THE RETURN OF INCOME FILED. THE SAID ORDER OF THE LEARNED ASSESSING OFFICER WAS CONFIRMED IN APPEAL B Y THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS). 6 BEING AGGRIEVED AGAINST THE ABOVE ORDERS OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) THE ASSESSEE IS IN APPEAL BEFORE US BY TAKING THE ABOVE GROUND OF APPEAL IN B OTH THE YEARS UNDER CONSIDERATION. 7 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE SUBMITTED THAT SECTION 40(B) OF THE ACT IS NOT APPL ICABLE TO THE ASSESSEE FOR THE FOLLOWING REASONS: (I) ALL THE PARTNERS ARE REPRESENTING THE CAPACITY OF H UF. (II) THE FIRM HAD PAID NO INTEREST/SALARY TO HUF. (III) THE SALARY HAS BEEN PAID TO HUF IN AN INDIVIDUAL CAPACITY AND NOT AS A PARTNER OF THE FIRM. (IV) SALARY HAS BEEN SHOWN IN THE INDIVIDUAL RETUR N OF INCOME. 8 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE ALSO RELIED ON THE DECISION OF HON'BLE PUNJAB AND H ARYANA HIGH COURT IN THE CASE OF CIT VS. UNIMAX LABORATORIES (2 009) 311 ITR 191 (P&H) IN SUPPORT OF HIS CONTENTIONS. 9 THE LEARNED DEPARTMENTAL REPRESENTATIVE VEHEMENT LY ARGUED AND SUPPORTED THE ORDER OF THE LEARNED COMMI SSIONER OF INCOME-TAX (APPEALS). 4 10 I HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABL E ON RECORD. THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM CONSISTING OF SIX PARTNERS. ALL THE PARTNERS A RE PARTNERS AS KARTA OF THEIR RESPECTIVE HUF. THE LEARNED ASSESSING OFFI CER OBSERVED THAT THE ASSESSEE FIRM HAS PAID SALARY OF RS.2 50 0 00/- IN ASSESSMENT YEAR 2003-04 AND RS.3 00 000/- IN THE ASSESSMENT YE AR 2004-05 TO THE PERSONS WHO ARE PARTNERS IN THE ASSESSEE FIRM. AS THE BOOK PROFIT OF THE ASSESSEE FIRM UNDER SECTION 40(B) WAS LOSS T HE REMUNERATION PAID TO THE PARTNERS WAS ALLOWABLE TO THE EXTENT OF RS.50 000/- ONLY AND THEREFORE THE LEARNED ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE FIRM CLAIMED EXCESS DEDUCTION ON ACCOUNT O F REMUNERATION TO PARTNERS OF RS.2 00 000/- IN ASSESSMENT YEAR 200 3-04 AND RS.2 50 000/- IN ASSESSMENT YEAR 2004-05. THE LEARN ED COMMISSIONER OF INCOME-TAX (APPEALS) CONFIRMED THE ACTION OF THE LEARNED ASSESSING OFFICER. BEFORE US THE LEARNED A UTHORISED REPRESENTATIVE OF THE ASSESSEE CONTENDED THAT THE S ALARY WERE PAID TO THE INDIVIDUALS WHO WERE PARTNERS IN THE ASSESSE E FIRM IN THE CAPACITY OF KARTA OF HUF AND THEREFORE THE PROVISIO NS OF SECTION 40(B) WERE NOT ATTRACTED AND THEREFORE THE LOWER AU THORITIES WERE NOT JUSTIFIED IN DISALLOWING SALARY PAID TO THE INDIVID UALS BY INVOKING PROVISIONS OF SECTION 40(B) OF THE ACT. ACCORDING T O THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SALARY P AID TO THE INDIVIDUALS ARE GOVERNED BY THE PROVISIONS OF SECTI ON 37 ONLY AND SECTION 40(B) IS NOT ATTRACTED AS THE SALARY WAS NO T PAID TO THE HUF. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPRESE NTATIVE SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. I FI ND THAT THE HON'BLE SUPREME COURT IN THE CASE OF RASHIK LAL & CO. VS. COMMISSIONER OF INCOME TAX SUPREME COURT OF INDIA (1998) 144 CTR (SC) 161 : (1998) 229 ITR 458 (SC) : (1998) 96 TAXMAN 16 HELD AS UNDER: THE FIRM HAS PAID A COMMISSION TO R AND HAS CLAIMED THAT AMOUNT AS DEDUCTION. SUCH DEDUCTION IS NOT PERMISSIBLE IN CLE AR TERMS OF S. 40(B). BUT TO COMPLICATE THE MATTER AN ARGUMENT WAS SOUGHT TO BE MADE THAT R HAD 5 NOT JOINED THE FIRM AS AN INDIVIDUAL BUT WAS REALLY REPRESENTING AN HUF. THE REAL PARTNER OF THE FIRM WAS THE HUF. THIS CONT ENTION CANNOT BE UPHELD FOR A NUMBER OF REASONS. A FIRM IS A COMPEND IOUS WAY OF DESCRIBING THE INDIVIDUALS CONSTITUTING THE FIRM. AN HUF DIREC TLY OR INDIRECTLY CANNOT BECOME A PARTNER OF A FIRM BECAUSE THE FIRM IS AN A SSOCIATION OF INDIVIDUALS. IN LAW AN HUF CAN NEVER BE A PARTNER OF A PARTNERSHIP FIRM. EVEN IF A PERSON NOMINATED BY THE HUF JOINS A PARTN ERSHIP THE PARTNERSHIP WILL BE BETWEEN THE NOMINATED PERSON AN D THE OTHER PARTNERS OF THE FIRM. HAVING REGARD TO THE DEFINITION OF 'PARTN ERSHIP' AND 'PARTNERS' IT IS NOT POSSIBLE TO HOLD THAT AN HUF BEING A FLUCTUA TING BODY OF INDIVIDUALS CAN ENTER INTO A PARTNERSHIP WITH OTHER INDIVIDUAL PARTNERS. IT CANNOT DO INDIRECTLY WHAT IT CANNOT DO DIRECTLY. IF A KARTA O R ANY OTHER MEMBER OF THE HUF JOINS A PARTNERSHIP HE CAN DO SO ONLY AS AN IN DIVIDUAL. HIS RIGHTS AND OBLIGATIONS VIS-A-VIS OTHER PARTNERS ARE DETERMINED BY THE PARTNERSHIP ACT AND NOT BY HINDU LAW. WHATEVER MAY BE THE RELATIONS HIP BETWEEN AN HUF AND ITS NOMINEE PARTNER IN A PARTNERSHIP NEITHER THE HUF NOR ANY MEMBER OF THE HUF CAN CLAIM TO BE A PARTNER OR CONN ECTED WITH THE PARTNERSHIP THROUGH A NOMINEE. WHERE THE KARTA OF A N HUF ENTERS INTO A PARTNERSHIP AGREEMENT WITH A STRANGER THE KARTA AL ONE IN THE EYE OF LAW IS THE PARTNER. IF ANY PAYMENT BY THE FIRM TO A PARTNE R IS PROHIBITED BY LAW THE KARTA CANNOT BE HEARD TO SAY THAT THE PAYMENT W AS RECEIVED BY HIM NOT AS A PARTNER BUT IN SOME OTHER CAPACITY. WITHIN THE PARTNERSHIP THE KARTA IS A PARTNER LIKE ANY OTHER PARTNER WITH WHOM HE HA S ENTERED INTO A PARTNERSHIP AGREEMENT INDIVIDUALLY. IT IS ESSENTIAL TO HAVE AN AGREEMENT BETWEEN THE PARTNERS TO FORM A PARTNERSHIP. AN HUF NOT BEING A 'PERSON' CANNOT ENTER INTO AN AGREEMENT OF PARTNERSHIP. SO F AR AS THE PARTNERSHIP FIRM IS CONCERNED THE KARTA IS A PARTNER LIKE ANY OTHER PARTNER. IF A COMMISSION IS PAID TO A PARTNER WHO HAPPENS TO BE A NOMINEE OF AN HUF THE COMMISSION IS NOT PAID TO THE HUF. IT IS PAID B Y THE FIRM TO ONE OF ITS INDIVIDUAL PARTNERS. THE PARTNER MAY HAVE TO ACCOUN T FOR THE MONIES RECEIVED FROM THE FIRM TO ANOTHER PERSON OR ANOTHER FIRM OR AN AOP OR AN HUF. BUT THAT WILL NOT ALTER THE FACT THAT COMMISSI ON WAS PAID BY THE FIRM TO ONE OF ITS PARTNERS. THERE IS NO WAY THAT AN HUF CAN INTRUDE INTO THE RELATIONSHIP CREATED BY A CONTRACT BETWEEN CERTAIN INDIVIDUALS. THE ONLY RIGHT OF THE HUF IS POSSIBLY TO CALL UPON ITS NOMIN EE PARTNER TO RENDER ACCOUNTS FOR THE PROFITS THAT HE HAS MADE FROM THE PARTNERSHIP BUSINESS. BUT THAT IS SOMETHING BETWEEN THE NOMINEE AND THE H UF WITH WHICH THE PARTNERSHIP IS NOT CONCERNED. SEC. 40(B) WILL APPLY EVEN WHEN THERE IS A SPECIAL CONTRACT. ANY COMMISSION PAID BY A FIRM TO ITS PARTNER WILL NOT BE PERMITTED AS DEDUCTION FROM THE BUSINESS INCOME OF THE FIRM. IF A CLAIM IS MADE BY A PARTNER THAT HE IS REPRESENTING AN HUF OR ANY OTHER BODY OF PERSONS THEN THE POSITION IN LAW WILL NOT BE ANY DI FFERENT. THE HUF IS NOT AND CANNOT BE A PARTNER IN A PARTNERSHIP FIRM. THE REMUNERATION OR THE COMMISSION THAT IS PAID TO THE PARTNER CANNOT BE CL AIMED TO BE A REMUNERATION OR COMMISSION PAID TO THE HUF. THE PAR TNER MAY BE ACCOUNTABLE TO THE FAMILY FOR THE MONIES RECEIVED B Y HIM FROM THE PARTNERSHIP. BUT IN THE ASSESSMENT OF THE FIRM THE PARTNER CANNOT BE HEARD TO SAY THAT HE HAS NOT RECEIVED THE COMMISSION AS A PARTNER OF THE FIRM BUT IN A DIFFERENCE CAPACITY. THEREFORE THERE IS NO SC OPE FOR ANY ARGUMENT THAT 6 EVEN THOUGH UNDER THE INDIAN PARTNERSHIP ACT AN HU F NOT BEING A PERSON CANNOT BE A PARTNER BUT THE PAYMENT OF CO MMISSION TO THE NOMINEE PARTNER WILL TANTAMOUNT TO PAYMENT TO THE H UF AND THEREFORE SUCH PAYMENT WILL NOT COME WITHIN THE MISCHIEF OF S . 13 OF THE PARTNERSHIP ACT OR S. 40(B) OF THE IT ACT. THE VERY FACT THAT I NDIVIDUAL SHARES OF THE PARTNERS HAVE TO BE SPECIFIED AND THAT SUCH PARTNER S MUST PERSONALLY SIGN THE PARTNERSHIP DEED AND ALSO THE APPLICATION FOR R EGISTRATION GO TO SHOW THAT EVEN IF A PERSON JOINS A FIRM AS A REPRESENTAT IVE OF AN HUF OR ANY OTHER BODY OR ASSOCIATION WITHIN THE FIRM HIS POSI TION IS THAT OF AN INDIVIDUAL. HE MAY HAVE AN AGREEMENT WITH A THIRD P ARTY TO DIVIDE THE PROFITS RECEIVED FROM THE FIRM BUT THAT AGREEMENT DOES NOT BIND THE FIRM NOR DOES IT ALTER THE POSITION OF THE PARTNERS UNDE R THE PARTNERSHIP ACT OR THE IT ACT. THE PROVISIONS RELATING TO ASSESSMENT O F THE FIRM SHOULD NOT BE CONSTRUED IN A WAY TO DEFEAT ITS OBJECT. SEC. 40(B) FORBIDS DEDUCTION OF ANY AMOUNT PAID BY WAY OF COMMISSION TO A PARTNER. IN T HE INSTANT CASE R IS A PARTNER OF THE FIRM R. THE COMMISSION RECEIVED BY H IM FROM THE PARTNERSHIP FIRM CANNOT BE ALLOWED AS A DEDUCTION F ROM THE BUSINESS INCOME OF THE PARTNERSHIP. RASHIKLAL & CO. VS. CIT (1991) 100 CTR (ORI) 242 : (1992) 196 ITR 106 (ORI) : TC 33R.391 A FFIRMED; DULICHAND LAXMINARAYAN VS. CIT (1956) 29 ITR 535 (SC) : TC 33 R.1114 AND CIT VS. BAGYALAKSHMI & CO. (1985) 55 ITR 660 (SC) : TC 33R. 1334 APPLIED; BRIJ MOHAN DAS LAXMAN DAS VS. CIT (1997) 138 CTR (SC) 21 4 : (1997) 223 ITR 825 (SC) AND SUWALAL ANANDILAL JAIN VS. CIT (19 97) 140 CTR (SC) 278 : (1997) 224 ITR 753 (SC) DISTINGUISHED. SEC. 40(B) PROHIBITS DEDUCTION ON ACCOUNT OF PAYMEN T OF INTEREST SALARY BONUS OR REMUNERATION BY A FIRM TO ANY PARTNER OF T HE FIRM. EXPLN. II WAS ADDED TO S. 40(B) SPECIFICALLY PROVIDING THAT WHERE AN INDIVIDUAL WAS A PARTNER IN A FIRM IN A REPRESENTATIVE CAPACITY FOR AND ON BEHALF OF ANY OTHER PERSON THE INTEREST PAID BY THE FIRM TO SUCH INDIV IDUAL SHALL NOT BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF CL. (B) OF S. 40. I N BRIJ MOHAN DAS LAXMAN DAS VS. CIT (1997) 138 CTR (SC) 214 : (1997) 223 IT R 825 (SC) AND SUWALAL ANANDILAL JAIN VS. CIT (1997) 140 CTR (SC) 278 : (1997) 224 ITR 753 (SC) THIS COURT HELD THAT IN VIEW OF THIS EXPLA NATION WHEN A KARTA OF AN HUF HAD JOINED A FIRM REPRESENTING HIS HUF AND H AD MADE DEPOSITS IN THE FIRM IN HIS INDIVIDUAL CAPACITY THE INTEREST P AID TO HIM COULD NOT BE DISALLOWED BY REASON OF THE EXPLN. II ADDED TO S. 4 0(B) OF IT ACT 1961. IT WAS FURTHER HELD THAT THE EXPLANATION WAS ONLY CLAR IFICATORY. IT IS DIFFICULT TO AGREE WITH THAT PROPOSITION BECAUSE THE EXPLANAT ION WAS ADDED BY THE TAXATION LAWS (AMENDMENT) ACT 1984 W.E.F. 1ST APRI L 1985 I.E. FROM THE ASST. YR. 1985-86. BY ADDING THE EXPLANATION THE L EGISLATURE ALTERED THE LAW PROSPECTIVELY ON AND FROM 1ST APRIL 1985. IF W HAT WAS CONTAINED IN THE EXPLANATION WAS ALREADY THE LAW IN FORCE THEN GIVI NG EFFECT TO THE EXPLANATION FROM 1ST APRIL 1985 DOES NOT MAKE ANY SENSE. HOWEVER IN THE PRESENT CASE NO QUESTION OF PAYMENT OF ANY INTERES T IS INVOLVED. A COMMISSION WAS PAID BY THE FIRM FOR THE SERVICES RE NDERED BY THE PARTNER. SUCH COMMISSION CANNOT BE PAID BECAUSE OF THE PROVI SIONS OF S. 13 OF THE PARTNERSHIP ACT IN THE ABSENCE OF A SPECIAL CONTRAC T. EVEN IF A SPECIAL 7 CONTRACT EXISTS S. 40(B) OF THE IT ACT PROHIBITS AL LOWANCE OF SUCH COMMISSION AS DEDUCTION FROM THE BUSINESS INCOME OF THE FIRM . FURTHER THE PROVISIONS OF SECTION 40(B) WHICH ARE CONSIDERED RELEVANT FOR DECIDING THE ISSUE UNDER CONSIDERATION IS EXTRACTED HEREINBELOW. EXPLANATION 1 : WHERE AN INDIVIDUAL IS A PARTNER I N A FIRM ON BEHALF OR FOR THE BENEFIT OF ANY OTHER PERSON (SUCH PARTNER AND THE OTHER PERSON BEING HEREINAFTER REFERRED TO AS 'PARTNER IN A REPR ESENTATIVE CAPACITY' AND 'PERSON SO REPRESENTED' RESPECTIVELY) (I) INTEREST PAID BY THE FIRM TO SUCH INDIVIDUAL OTHERW ISE THAN AS PARTNER IN A REPRESENTATIVE CAPACITY SHALL NOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS CLAUSE; (II) (II) INTEREST PAID BY THE FIRM TO SUCH INDIVIDUAL A S PARTNER IN A REPRESENTATIVE CAPACITY AND INTEREST PAID BY THE FI RM TO THE PERSON SO REPRESENTED SHALL BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS CLAUSE. EXPLANATION 4: FOR THE PURPOSES OF THIS CLAUSE 'WO RKING 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 .] A READING OF CLAUSE (I) OF EXPLANATION 1 TO SECTION 40(B) SHOWS THAT WHEN AN INDIVIDUAL IS A PARTNER IN A FIRM IN A REPR ESENTATIVE CAPACITY THEN INTEREST PAID TO SUCH AN INDIVIDUAL IN HIS IND IVIDUAL CAPACITY IS NOT TAKEN INTO CONSIDERATION FOR THE PURPOSE OF SEC TION 40(B) OF THE ACT. THUS IT IS TO BE NOTED THAT THE ABOVE PROVISI ON IS APPLICABLE ONLY IN RESPECT OF INTEREST AND NOT IN RESPECT OF R EMUNERATION. NO SIMILAR PROVISION FOR REMUNERATION WAS ENACTED BY T HE LEGISLATURE. FURTHER THE LEARNED COMMISSIONER OF INCOME-TAX (AP PEALS) HAS QUOTED THE DECISION IN THE CASE OF MUNJAL SALES COR PORATION VS. CI T 298 ITR 298 (SC) WHEREIN IT WAS HELD THAT FOR CLA IMING DEDUCTION U/S 30 TO 38 BY A PARTNERSHIP FIRM IT HAS TO FURTH ER ESTABLISH THAT IT IS NOT DISENTITLED TO DEDUCTION U/S 40 OF THE ACT. IN VIEW OF THE ABOVE IN MY CONSIDERED OPINION THE PARTIES TO WHOM SALAR Y WAS PAID OF 8 RS.2 50 000/- IN ASSESSMENT YEAR 2003-04 AND RS.3 0 0 000/- IN THE ASSESSMENT YEAR 2004-05 WERE PARTNERS IN THE PARTN ERSHIP FIRM THOUGH IN A REPRESENTATIVE CAPACITY AND THEREFORE R EMUNERATION PAID TO THEM WERE TO BE ALLOWED AFTER CONSIDERING THE PR OVISIONS OF SECTION 40(B) OF THE ACT. AS IN THE INSTANT CASE I T IS NOT IN DISPUTE THAT THE BOOK PROFIT WITHIN THE MEANING OF EXPLANAT ION 3 TO SEC. 40(B) OF THE ACT WAS LOSS THEREFORE IN MY CONSIDE RED VIEW THE LEARNED ASSESSING OFFICER WAS JUSTIFIED IN RESTRICT ING THE DEDUCTION ALLOWABLE ON ACCOUNT OF REMUNERATION TO PARTNERS AT RS.50 000/-. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE RELIED UPON THE DECISION OF THE HON'BLE PUNBJAB AND HARYANA HIG H COURT IN THE CASE OF CIT VS. UNIMAX LABORATORIES (2009) 311 ITR 191 (P&H) IN SUPPORT OF THE CLAIM OF THE ASSESSEE THAT THE SALAR Y PAID TO THE AFORESAID PARTNERS WERE NOT COVERED BY THE PROVISIO NS OF SECTION 40(B) OF THE ACT. IN THE ABOVE CASE THE ASSESSMENT YEAR INVOLVED WAS ASSESSMENT YEAR 1983-84 AND THE SALARY WAS PAID TO A PERSON WHO HAD TECHNICAL QUALIFICATION AND EXPERTISE AND W AS PARTNER IN THE ASSESSEE FIRM IN THE REPRESENTATIVE CAPACITY AS KAR TA OF HIS HUF. ON THE ABOVE FACTS THE HON'BLE HIGH COURT HELD AS UND ER: ONCE THE CHARACTER OF AN INDIVIDUAL HAS BEEN TREAT ED DIFFERENT THAN HUF FOR THE PURPOSES OF INTEREST THEN THERE IS NO REASO N AS TO WHY THIS WOULD NOT EXTEND TO THE SALARY AND BONUS PAID TO SUCH PARTNER S ON ACCOUNT OF THEIR PERSONAL SERVICES RENDERED TO THE FIRM IN CONTRADIS TINCTION TO THEIR CAPACITY AS A REPRESENTATIVE OF HUF. THE AFOREMENTIONED CONC LUSION WOULD NECESSARILY FLOW FROM THE CONCEPT OF PARTNER REPRES ENTING HUF IN CONTRADISTINCTION TO HIS INDIVIDUAL CAPACITY. THERE FORE THE SAME REASONING WOULD APPLY TO THE CASES WHERE PAYMENT IN THE FORM OF SALARY AND BONUS HAS BEEN MADE TO A PARTNER IN HIS INDIVIDUAL CAPACI TY IN CONTRADISTINCTION TO HIS REPRESENTATIVE CHARACTER OF THE HUF. THE TRI BUNAL WAS THEREFORE RIGHT IN LAW IN ALLOWING THE AMOUNT OF SALARY AND B ONUS PAID BY THE FIRM TO PARTNERS FOR SERVICES RENDERED BY THEM ON THE GROUN D OF HAVING TECHNICAL QUALIFICATION AND EXPERTISE THOUGH THEY REPRESENTE D THEIR HUF AND S. 40(B) WAS NOT ATTRACTED.BRIJ MOHAN DAS LAXMAN DAS VS. CIT (1997) 138 CTR (SC) 214 : (1997) 1 SCC 352 APPLIED. WE FIND THAT THE FACTS OF THE ABOVE CASE ARE DISTIN GUISHABLE FROM THE FACTS OF THE INSTANT CASE. IN THE ABOVE CASE THE P ERSONS TO WHOM 9 SALARY WAS PAID HAD TECHNICAL QUALIFICATIONS AND EX PERTISE IN THEIR RESPECTIVE FIELDS AND THE SERVICES WERE RENDERED IN THEIR INDIVIDUAL CAPACITY IN CONTRADISTINCTION TO THEIR CAPACITY AS REPRESENTATIVES OF THEIR HUF WHEREAS IN THE INSTANT CASE IT IS OBSERVE D FROM THE DEED OF PARTNERSHIP THAT THE PARTNERS ARE WORKING PARTNERS AND THEREFORE ENTITLED TO SALARY. THE RELEVANT CLAUSE OF DEED OF PARTNERSHIP IS EXTRACTED AS UNDER: (7A) SINCE ALL THE PARTNERS OF THIS FIRM ARE ACTIV E IN THE RUNNING OF THE BUSINESS OF THE FIRM THEY SHALL BE CONSIDERED AS W ORKING PARTNERS . NAME OF WORKING PARTNER SALARY 1 SHRI CHANDRAKANT R SHAH RS.60 000/- 2 SHRI GOVINDLAL R SHAH RS.60 000/- 3 SHRI JAGDISHCHANDRA R SHAH RS.60 000/- 4 SHRI JOGENDRABHAI R SHAH RS.60 000/- 5 SHRI HARSHADBHAI R SHAH RS.60 000/- 6 SHRI KRUSHNALAL R SHAH AND SHRI ANILBHAI K SHAH (BOTH) RS.60 000/- IN CASE OF ANY FUTURE AMENDMENT IN PROVISIONS OF SE CTION 40(B) OF THE INCOME TAX ACT THE SAME WILL BE TREATED TO BE EFFE CTIVE TO THIS PROVISION FROM THE DATE OF AMENDMENT . THUS IT IS OBSERVED THAT IN THE INSTANT CASE THE PERSONS WHO WERE PARTNERS IN THEIR REPRESENTATIVE CAPACITY WERE REQU IRED TO RENDER SERVICES IN THE COURSE OF BUSINESS OF THE ASSESSEE FIRM AND WERE AS SUCH ENTITLED FOR SALARY. IN OTHER WORDS PARTNER R ENDERING SERVICES IN THE CAPACITY OF PARTNER AND THEREFORE ENTITLED FOR SALARY. IN VIEW OF THE ABOVE FACTS OF THE INSTANT CASE IN MY CONSIDER ED OPINION THE AFORESAID DECISION IS DISTINGUISHABLE ON FACTS AND IS NOT APPLICABLE TO THE PRESENT CASE. THUS THIS GROUND OF APPEAL OF TH E ASSESSEE IS DISMISSED IN BOTH THE YEARS UNDER APPEAL. 11 GROUND NO.4 IN BOTH THE APPEALS READS AS UNDER: 10 BOTH THE LOWER AUTHORITIES HAVE GROSSLY ERRED IN C OMPUTING THE INCOME OF THE APPELLANT AT A POSITIVE FIGURE AS PER DISALLOWA NCE MADE U/S 40(B)(V)(II) OF THE ACT BY COMPLETELY IGNORING THE FACT THAT THE RETURN FOR ASSESSMENT YEAR 2003-04 WAS FILED AT A LOSS OF RS.3 06 570/- A ND FOR THE ASSESSMENT YEAR 2004-05 WAS FILED AT A LOSS OF RS.3 25 160/- A ND DISPUTED DISALLOWANCE OF SALARY PAID TO PARTNERS WOULD HAVE REDUCED THE LOSS OF THE APPELLANT FIRM TO RS.1 06 570/- IN ASSESSMENT YEAR 2003-04 AND TO RS.75 160/-= IN ASSESSMENT YEAR 2004-05 AND WOULD N OT CONVERT TO POSITIVE INCOME OF RS.200 000/- IN ASSESSMENT YEAR 2003-04 AND RS.2 50 000/- IN ASSESSMENT YEAR 2004-05. THE IMPUG NED ORDER PASSED BEING ATROCIOUS ARBITRARY AND TOTALLY FALLACIOUS D ESERVES TO BE QUASHED AND SET ASIDE . 12 I HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABL E ON RECORD. THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE FIRM DECLARED LOSS OF RS.3 12 212/- AFTER CLAIMING DEDUCTION OF RS.2 5 0 000/- ON ACCOUNT OF REMUNERATION PAID TO PARTNERS IN ASSESSM ENT YEAR 2003- 04 AND DECLARED LOSS OF RS.3 36 665/- AFTER CLAIMIN G DEDUCTION OF RS.3 00 000/- ON ACCOUNT OF REMUNERATION TO PARTNER S IN ASSESSMENT YEAR 2004-05 WHO WERE PARTNERS IN THE ASSESSEE FIRM . THE LEARNED ASSESSING OFFICER OBSERVED THAT THE REMUNERATION PA ID TO THE PARTNERS OF RS.2 50 000/- IN THE ASSESSMENT YEAR 20 03-04 AND RS.3 00 000/- IN THE ASSESSMENT YEAR 2004-05 WAS AL LOWABLE TO THE EXTENT OF RS.50 000/- ONLY IN VIEW OF SECTION 40(B) OF THE ACT. I FIND THAT DEDUCTION CLAIMED OF RS.2 50 000/- WAS IN EXCE SS BY RS.2 00 000/- IN THE ASSESSMENT YEAR 2003-04 AND WA S IN EXCESS BY RS.2 50 000/- IN THE ASSESSMENT YEAR 2004-05. THE L EARNED ASSESSING OFFICER THEREFORE COMPUTED THE TOTAL IN COME OF THE ASSESSEE AT RS.2 00 000/- IN ASSESSMENT YEAR 2003-0 4 AND AT RS.2 50 000/- IN THE ASSESSMENT YEAR 2004-05. IN MY CONSIDERED VIEW THE ABOVE ACTION OF THE LEARNED ASSESSING OFF ICER IS CLEARLY INDEFENSIBLE AND BAD IN LAW. THE LEARNED ASSESSING OFFICER WAS REQUIRED TO COMPUTE THE TOTAL INCOME AFTER ALLOWING DEDUCTION AS PERMISSIBLE UNDER THE INCOME-TAX ACT AND NOWHERE TH E INCOME-TAX ACT AUTHORIZES THE LEARNED ASSESSING OFFICER TO ASS UME THE TOTAL INCOME OF THE ASSESSEE AT AN AMOUNT WHICH IS FOUND BY HIM TO HAVE 11 BEEN CLAIMED AS EXCESS DEDUCTION CLAIMED BY THE ASS ESSEE. I THEREFORE SET ASIDE THE ORDERS OF THE LOWER AUTHOR ITIES AND DIRECT THE LEARNED ASSESSING OFFICER TO RE-COMPUTE THE TOTAL I NCOME (LOSS) OF THE ASSESSEE AFTER ALLOWING DEDUCTION FOR REMUNERAT ION PAID TO PARTNERS AT RS.50 000/- IN PLACE OF RS.2 50 000/- C LAIMED IN ASSESSMENT YEAR 2003-04 AND AT RS.50 000/- IN PLACE OF RS.3 00 000/- CLAIMED IN ASSESSMENT YEAR 2004-05. T HUS IN OTHER WORDS THE TOTAL LOSS CLAIMED BY THE ASSESSEE WILL BE REDUCED BY RS.2 00 000/- IN THE ASSESSMENT YEAR 2003-04 AND BY RS.2 50 000/- IN THE ASSESSMENT YEAR 2004-05. THUS THIS GROUND O F APPEAL OF THE ASSESSEE IS ALLOWED. 13 GROUND NO.5 OF THE APPEAL IN BOTH THE YEARS REL ATES TO THE INITIATION OF PENALTY U/S 271(1)(C) OF THE ACT. WE HOLD THAT THIS GROUND OF APPEAL IS PREMATURE AND HENCE THE SAME IS DISMISSED. 14 GROUND NO.6 OF THE APPEAL IN BOTH THE YEARS REL ATES TO THE CHARGING OF INTEREST U/S 234A 2324B AND 234C O F THE ACT. AT THE TIME OF HEARING NO ARGUMENTS WERE ADVANCED BY THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE. WE HOLD THAT CHARGING OF INTEREST IS CONSEQUENTIAL AND ACCORDINGLY DISPOSE O F THIS GROUND OF APPEAL OF THE ASSESSEE. 15 IN THE RESULT THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT TODAY ON 29-01- 2010 SD/- (N S SAINI) ACCOUNTANT MEMBER DATE : 29-01-2010 COPY OF THE ORDER FORWARDED TO : 12 1. M/S VIJAY SAW MILLS YAMUNA MILL ROAD PRATAPNAG AR DABHOI ROAD BARODA 2. THE ITO WARD-5(1) BARODA 3. CIT CONCERNED 4. CIT(A)-V BARODA 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT AHMEDABA