RASHIK LAL AND CO. vs. COMMISSIONER OF INCOME TAX, ORISSA

CIVIL APPEAL No. 4589/1992Supreme Court1997 INSC 80109 December 1997Bench: 2 JudgesAuthor: S.C. SEN, S. SAGHIR AHMAD LAL AND CO. A14 pages
AI SummaryDismissed

What were the facts?

The assessee, Rashik Lal and Co., a partnership firm, claimed a deduction for commission paid to one of its partners, Rashiklal P. Rathor, in assessment year 1980-81. Rashiklal was the Karta of a Hindu Undivided Family (HUF) and had an agreement with the firm to receive commission per tonne of mineral sold. The firm contended that the commission was paid to Rashiklal as an individual, not as Karta of the HUF, and thus Section 40(b) of the Income Tax Act, 1961, was not attracted. The Income Tax Officer disallowed the deduction. The Appellate Assistant Commissioner allowed the assessee's appeal, holding the payment was not to a partner. However, the Income Tax Appellate Tribunal reversed this, finding Section 40(b) applicable. The High Court upheld the Tribunal's decision. The firm appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that a firm is an association of individuals, and an HUF cannot directly or indirectly become a partner. Even if a person nominated by an HUF joins a partnership, the partnership is between that nominated person and the other individuals. Such a nominated person joins the firm only as an individual, and their rights and obligations are governed by the Partnership Act, 1932, not Hindu Law. The HUF has no rights or obligations under the Partnership Act. Section 13 of the Partnership Act states that a partner is not entitled to remuneration unless there is a special contract. However, Section 40(b) of the Income Tax Act, 1961, disallows any commission paid by a firm to its partner as a deduction. This applies even if the partner claims to represent an HUF or has an agreement to share the commission with the HUF. The Court followed the decision in Dulichand Laxminarayan v. CIT and CIT v. Bagyalakshmi & Co. The appeal was dismissed.

What were the issues?

1. 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 Section 40(b) of the Income Tax Act, 1961, as a deduction while computing the business income of the assessee. Assessee's Contention: The assessee argued that Rashiklal was representing an HUF, which was the real partner, and therefore, the commission paid to him did not fall within the mischief of Section 40(b) of the Income Tax Act, 1961. The assessee relied on the principle that an HUF, not being a 'person' under the Partnership Act, could not be a partner, and payment to its nominee should not be treated as payment to a partner for the purpose of Section 40(b). Revenue's Contention: The revenue contended that Rashiklal was a partner of the firm, and any commission paid to him was a payment to a partner, attracting the provisions of Section 40(b) of the Income Tax Act, 1961. The revenue argued that an HUF cannot directly or indirectly become a partner of a firm.

Which sections of the Income-tax Act were involved?

Section 40(b),Section 13,Section 4,Section 14,Section 256(1),Section 184

AI-generated summary — verify with the full judgment below

RASHIK LAL AND CO. A v. COMMISSIONER OF INCOME TAX, ORISSA DECEMBER 9, 1997 (SUHAS C. SEN ANDS. SAGHIR AHMAD, JJ.] B Income Tax Act, 1961 : Section 40(b ).

Income Tw.--Pwtnership finn-AY 1980-81--Commission paid-To a parlner as a member of HUF-Deductibility of-From income of Jinn-Held: C Not deductible-Furthe1; HUF cannot itself become a partner of a finn-Pa1tnership Act. 1932, Ss.4, 13 and 14. The appellant-assessee, the Karta of an HUF, was a partner of a firm, which was carrying on a number of businesses including mining.

There was an agreement between the appellant and the firm th.at the D appellant would receive a certain amount per tonne of the mineral sold by the firm. In the assessment year 1980-81 the appellant-assessee received a certain amount as commission. The firm claimed deduction of this amount from its income. The Income Tax Appellate Tribunal and the High Court negatived the claim. Hence this appeal.

On behalf of the appellant-assessee it was contended that the appel- lant had not joined the firm as an individual but was really representing an HUF; that the real partner of the firm was the HUF; and that the amount of commission paid by the fi

The order continues below.

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