BANERJEE, J. - (1.) THIS reference, under s. 66(1) of the Indian IT Act, 1922, has been made in circumstances here-in- after related.
(2.) THE assessee, M/s Giridharilal Ghasiram, is a registered firm. The firm was constituted under an instrument of partnership, dt. January 21, 1954. In terms of the partnership, one Prahladrai Mahwar became a partner in the firm in his representative capacity, as Karta of a HUF known as M/s Prahladrai Mahwar. The share of Prahldrai Mahwar in the partnership admittedly was Re. 0-2-1 1/2 pies. Before Prahladrai became a partner of the assessee-firm, he had been rendering services to the Delhi branch of the partnership and was earning a remuneration. After he became a partner in the assessee firm, he continued to render services to the firm and earn remuneration therefor. For the asst. yr. 1957-58, the remuneration paid to Prahladrai amounted to Rs. 8,500 and for the asst. yr. 1958-59 the remuneration amounted to Rs. 9,000 per annum. The assessee claimed the remuneration paid to Prahladrai as business expenditure. The ITO found in favour of the claim and allowed the claim for deduction on the theory that the services were being rendered by Prahladrai not in his capacity as a partner of the firm but in his individual capacity. The remuneration thus constituted the personal income of Prahladrai and not the income of the joint family which he represented.
(3.) SOME other reliefs, which the assessee had claimed, but which were not granted by the ITO aggrieved the assessee and the assessee preferred an appeal before the AAC. The AAC differed from the ITO on the relief granted to the assessee regarding the amount of remuneration paid to Prahladrai. The reasons which weighed with the AAC were : "A HUF cannot enter into a contract of partnership with another person and accordingly the ITO's observation that the HUF styled as Prahladrai Mahwar is a partner in the firm, is entirely incorrect. The contract of partnership is between the individual Prahladrai Mahwar and certain other persons. It may be that Prahladrai Mahwar has entered into the partnership on behalf and for the benefit of his joint family. But from the point of view of the firm he alone is the partner, and not the HUF of which he is the Karta." ;