Decided on January 10,1992



- (1.) THIS appeal raises the question whether salary paid to a person in his individual capacity by a firm in which he represented his joint family could be disallowed under Section 40(b) in computing the income of the firm.
(2.) The admitted facts are that the assessee is a firm consisting of four partners, namely, V. Krishnamurthy, R. V. Subramanian, R. V. Ramanathan and V. Brahanayaki. The three men represented their respective Hindu undivided families in the firm. They were paid salary of Rs. 1,000 each in their individual capacity. That amount was assessed in their hands in the status of "individual". In computing the income of the previous year ended March 31, 1982, corresponding to the assessment year 1982-83, the Income-tax Officer was of the opinion that the provisions of Section 40(b) of the Income-tax Act, 1961, applied to the salaries paid to these three partners and he, accordingly, added back the sum of Rs. 36,000. On appeal, the Commissioner of Income-tax (Appeals) noted that the salary being assessed in the hands of the partners in their individual capacity and they being partners as karta of their respective joint families, the provisions of Section 40(b) could not be applied as the payment of salary could not be regarded as salary paid to the partners. The Revenue is in appeal contending that though the partners represented their Hindu undivided families, the salary paid to them must be regarded as payment to the partner within the scope of Section 67 and it was pointed out that, for the earlier assessmnet year 1978-79, by order dated May 6, 1983, in I. T. A. No. 1433/Mds of 1982, the Tribunal had upheld the disallowance and the assessee had accepted similar disallowances for the intervening assessment years 1979-80 to 1981-82. On the other hand, the assessee relied on the decision of the Appellate Tribunal dated February 6, 1990, in I. T. A. No. 1909/Mds of 1987 in the case of Shammugha Talkies where, following the decisions of the Andhra Pradesh High Court in the case of CIT v. Chitra Kalpana [1988] 169 ITR 678 and N. T. R. Estate v. ClT [1986] 157 ITR 285, it was held that, on the same principles enunciated in the Explanation to Section 40(b), salary paid to the individual while he represented the joint family in the firm cannot be disallowed.
(3.) SINCE there appeared to be a direct conflict between the two decisions of the Tribunal referred to, this case was placed before the President for constituting a Special Bench under Section 255(3) and thus the matter is before this Special Bench.;

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