KATARIA TRANSPORT CO. v. COMMISSIONER OF INCOME -TAX
[Citation -1987-LL-0803]

Citation 1987-LL-0803
Appellant Name KATARIA TRANSPORT CO.
Respondent Name COMMISSIONER OF INCOME -TAX
Court ITAT
Relevant Act Income-tax
Date of Order 03/08/1987
Assessment Year 1971-72
Judgment View Judgment
Keyword Tags city compensatory allowance • payment of interest • lump sum payment • head office
Bot Summary: Whether the Tribunal is correct in holding that the payment of Rs. 7,200, to two of the four partners of the firm, in view of clause 5 of the partnership deed of the firm, was the application of the profit of the firm after it had accrued or was earned 2. Whether, on the facts and in the circumstances of the case, the payment of Rs. 7,200 to the two partners of the firm was an expenditure exclusively incurred for the business of the firm to fulfil the personal obligation of the firm under clause 5 of the deed to the two partners 3. Whether, on the facts and in the circumstances of the case, section 40(b) of the Income-tax Act, 1961, prohibits the allowance of the payment of Rs. 7,200 to two partners of the firm The relevant assessment year is 1971-72. The Tribunal held that this city compensatory allowance to two of the partners of the firm was not an expenditure incurred for the purpose of carrying on the business of the firm, but it was application of the firm's income after it had been earned. Treating these payments as having been made to the two partners out of the earned income of the firm, the assessee's contention was rejected. Section 40(b) of the Income-tax Act, 1961, prohibits any deduction in the case of any firm of any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm. There is an obvious fallacy in the assessee's contention that this payment forms part of the firm's expenditure incurred for earning income of the firm.


JUDGMENT JUDGMENT This reference under section 256(1) of Income-tax Act, 1961, is at instance of assessee to answer following question of law: " 1. Whether Tribunal is correct in holding that payment of Rs. 7,200, to two of four partners of firm, in view of clause 5 of partnership deed of firm, was application of profit of firm after it had accrued or was earned? 2. Whether, on facts and in circumstances of case, payment of Rs. 7,200 to two partners of firm was expenditure exclusively incurred for business of firm to fulfil personal obligation of firm under clause 5 of deed to two partners? 3. Whether, on facts and in circumstances of case, section 40(b) of Income-tax Act, 1961, prohibits allowance of payment of Rs. 7,200 to two partners of firm? " relevant assessment year is 1971-72. assessee is firm carrying on business of public transport with its head office at Kekri in Rajasthan and branches at Kanpur, Ahmedabad, Agra, Rajkot, Jaipur, Beawar, Delhi and Kota. firm was constituted by deed of partnership dated September 8, 1969, which consisted of six partners including Sobhagmal and Hiralal. One of clauses in partnership deed mentioned that these two partners, Sobhagmal and Hiralal, who stay at Ahmedabad and Jaipur, respectively, and were carrying on business of partnership were to be paid Rs. 300 p.m. to meet their additional expenses of living in these metropolitan cities by way of city allowance. It was also stated therein that this city allowance to be paid to these two partners was not their salary, commission or other remuneration and that it will be treated as expenditure incurred for business of firm. In this manner, total amount of Rs. 7,200 paid to these two partners as city compensatory allowance during relevant assessment year was claimed as deduction treating same as expenditure incurred for business of firm. Income-tax Officer while making assessment disallowed assessee's claim for deduction of above amount of Rs. 7,200 on ground that it was nothing other than remuneration paid to these two partners, and, therefore, it could not be allowed as permissible deduction in view of express prohibition contained in section 40(b) of Income-tax Act, 1961. assessee's appeal to Appellate Assistant Commissioner was, however, allowed accepting assessee's contention. Tribunal thereafter set aside appellate order and restored that of Income-tax Officer. Tribunal held that this city compensatory allowance to two of partners of firm was not expenditure incurred for purpose of carrying on business of firm, but it was application of firm's income after it had been earned. It was also pointed out by Tribunal that this payment made to two partners was payment to them in their capacity as partner and not de hors their capacity as partner. Treating these payments as having been made to two partners out of earned income of firm, assessee's contention was rejected. At instance of assessee, Tribunal then referred above questions of law for decision by this court. only point involved for our decision is true character or characterstic of so-called city compensatory allowance paid in above manner to two of partners of assessee-firm, who reside at Ahmedabad and Jaipur. Section 40(b) of Income-tax Act, 1961, prohibits any deduction in case of any firm of any payment of interest, salary, bonus, commission or remuneration made by firm to any partner of firm. question, therefore, is whether these payments fall within ambit of this prohibition. It is beyond controversy that these amounts were payments made to two partners by firm.The only surviving question, therefore, is whether payments fall within meaning of expression " interest, salary, bonus, commission or remuneration ". We have no doubt that even if payment does not fall within ambit of expression " salary or commission ", it must fall within meaning of expression " remuneration " occuring in section 40(b) of Act. Even treating it to be city compensatory allowance, it would be part of remuneration paid by firm to these two partners. There is obvious fallacy in assessee's contention that this payment forms part of firm's expenditure incurred for earning income of firm. If it were so, there was no reason to treat it differently instead of saying and treating it as part of firm's expenditure incurred at its Ahmedabad and Jaipur branches. In that situation, it would not be lump sum payment to these two partners, but precisely extra expenditure incurred at these two branches of which material particulars would be disclosed in firm's expense account of two branches. This fact also repels assessee's contention. We are, therefore, satisfied that view taken by Tribunal about nature of these payments made by firm to its two partners and conclusion that deduction of same is prohibited by virtue of section 40(b) of Income- tax Act, 1961, is justified. reference is, therefore, answered against assessee and in favour of Revenue, as indicated above. No costs. *** KATARIA TRANSPORT CO. v. COMMISSIONER OF INCOME -TAX
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