Sen, J. - (1.) The following question of law was referred by the Tribunal to the Orissa High Court under S. 256(1) of the Income-tax Act, 1961:"Whether on the facts and in the circumstances of the case, the commission paid by the assessee-firm to Sri Rashiklal P. Rathor (individual) is allowable under S. 40(b) of the Income-tax Act, 1961 as a deduction while computing the business income of the assessee.
(2.) The assessee is a partnership firm carrying on a number of businesses including sale and purchase of various commodities as well as mining. The partners of the firm were: (1) Popatlal Devram (2) Jayantilal Jagmal (3) Pragji Devram (4) Ratilal Odhavji (5) Rashiklal P. Rathor
(3.) Popatlal is Rashiklal's father. On 1-4-1967, there was an oral partition of the share of Popatlal in the firm amongst Popatlal, his wife and his two sons including Rashiklal. The assets of Rashiklal continued to be invested in the partnership firm. Rashiklal was Karta of a smaller HUF. On 17-10-1978, there was an agreement between Rashiklal and the firm Rashiklal and Company that Rashiklal will receive 37 paise per tonne of mineral sold by the firm. In the assessment year 1980-81 Rashiklal received a sum of Rs. 28579/- as commission. The firm claimed deduction of this amount from its income. The claim was negatived by the Income-tax Officer. The Appellate Assistant Commissioner allowed the appeal holding that the commission was paid to Rashiklal in his individual capacity and not as Karta of the smaller HUF which is the partner of the firm. Since the payment was not made to the partner, Section 40(b) of the Income-tax Act was not attracted. The amount of commission paid to Rashiklal could not be included in the income of the firm. On further appeal by the Revenue, the Tribunal held that Section 40(b) of the Income-tax Act clearly applied in this case. Payment to Rashiklal will be payment to a partner. The partnership firm could not claim any deduction for this payment from its income. The High Court on reference held that there was clear material that Rashiklal had invested his joint family funds to enter into the partnership. Payment was made to Rashiklal who was a partner. Accordingly, the Tribunal was correct in coming to the conclusion that S. 40(b) will be applicable in this case. The firm was not entitled to claim any deduction on account of payment of commission to one of its partners.;