M/S. RELIABLE CONSTRUCTION CO. vs. COMMISSIONER OF INCOME TAX

Since, the issue involved in both the matters is common, they are heard together and disposed of by this common judgment.

ITR No. 67 of 1993 is preferred by the assessee, challenging the order of the learned ITAT, Ahmedabad Bench (for short, ‘the Tribunal’), rendered in ITA No. 955/Ahd/1989 for the A.Y. 1985-86 and ITA No. 2980/Ahd/1990 for the A.Y. 1986-87, whereby, the Tribunal partly allowed the appeals filed by the assessee.

The brief facts of the case, so far as ITR No.67 of 1993 is concerned, are that the assessee, which was consisting six partners during the relevant financial year, had one Shri. J.M. Doshi as one of its partners. Shri. Doshi was proprietor of two concerns, namely (1) Saurashtra Metal Supplying Company and (2) Jayant Trading Corporation. As the proprietor of the aforesaid firms, Shri. Doshi supplied financial assistance to the assessee, herein, and towards the same, the assessee, herein, paid a total sum of Rs.2,93,053/- at the rate of 18 per cent per annum to Shri. Doshi towards ‘commission’. The AO, during the relevant year, held that such payments made by the assessee were to its partner, i.e. Mr. Doshi, and hence, it cannot be allowed in view of the provisions of Section 40(b) of the Income Tax Act, 1961 (for short, ‘the Act’) and disallowed the same. The assessee, hence, preferred ITA No. 955/Ahd/1989 before the CIT(A).

Insofar as the facts leading to filing of the ITA No.2980/Ahd/1990 for the A.Y. 1986-87 are concerned, aforesaid Mr. Doshi was one of the trustees of a Trust, which was created by a Trust Deed in the year 1977. There were three beneficiaries of the said Trust, namely (1) Kumari Parul, (2) Shri. Kartik and (3) Shri. Haren, who were either partners or were given the benefits of partners. The trust made advances to the assessee, herein, and the assessee paid Rs.3,25,023/- towards commission to the Trust during the relevant assessment year. The AO, here again, placing reliance on the provisions of Section 40(b) of the Act, disallowed the aforesaid amount. Therefore, the assessee preferred ITA No. 2980/Ahd/1990 before the CIT(A).

The learned CIT(A) after hearing the parties, dismissed the aforesaid appeals filed by the assessee. Being aggrieved and dissatisfied with the same, the assessee approached the Tribunal by way of appeals, wherein, the Tribunal passed the impugned common order. Hence, the assessee filed the present reference, raising the following question for our consideration; “Whether, on the facts and circumstances of the case, the dis-allowance of the finance, commission of Rs.2,93,053/- paid to proprietory concern of the partner under provisions of Section 40(b) was justified in law?”

Tax Appeal No. 281 of 1999 is preferred by the Revenue, seeking to challenge the order of the learned ITAT, Rajkot (‘the Tribunal’, for short), Dated : 25.02.1999, rendered in ITA No. 4469/Ahd/1991 for the A.Y. 1987-88, whereby, it partly allowed the appeal of the Revenue.

In that case the assessee, herein, filed its return of income for the A.Y. 1987-88 on 30.06.1987, declaring a total income of Rs.17,963. Pursuant thereto, a notice under Section 143(2) of the Act came to be issued. During the assessment proceedings, the concerned AO noticed that the payment of commission made by the assessee for the relevant year was actually to its partners, and therefore, he passed the assessment order dated 23.03.1990. The assessee challenged the same before the CIT(A), which partly allowed the appeal of the assessee. Since, the assessee was not satisfied with the same, he carried the matter before the Tribunal, which passed the impugned order. Hence, the revenue preferred the present appeal, raising the following question of law; “Whether, the Appellate Tribunal is right in law and on facts in deleting the disallowance of commission payment of Rs.1,69,785/- holding that the provisions of section 40(b) are not attracted?”

Mr. Soparkar, learned Sr. Advocate for the assessee, submitted that the Tribunal erred in passing the impugned order inasmuch as it failed to appreciate the provisions of Section 40(b) of the Act in its proper perspective. He, further, submitted that the finance was made by Mr. Doshi from his own fund, and therefore, the Tribunal ought to have held that the AO could not have disallowed the said amount. He, therefore, prayed that the present Reference be allowed.

In support of his submissions, Mr. Soparkar, placed reliance on a decision of this Court in “BHUPENDRA NAVNITLAL AND CO. VS. COMMISSIONER OF INCOME TAX”, (1994) 209 ITR 972. In that case, this Court, while refereeing to an earlier decision of this Court in “CHHOTALAL AND CO. VS. CIT”, [1984] 150 ITR 276, observed that in computing the business profits of the assessee-Firm, the interest paid to an individual on monies advanced by him from his individual fund could not be disallowed on the ground that he was partner of the assessee-Firm, as a ‘Karta’ of Hindu Undivided Family. This Court, further, held that when the assessee represents an HUF, the interest paid to the HUF is to be disallowed and not any interest paid to the assessee in his account for the advances made by him personally and under Section 40(b) of the Act, it is only the interest paid to the partner, which is not allowed to be deducted.

Mr. Parikh, learned Advocate for the Revenue, is not in a position to dispute the principle of law, as above, enunciated by this Court in “CHHOTALAL AND CO.” (Supra) and followed by this Court in “BHUPENDRA NAVNITLAL AND CO.” (Supra).

Heard, learned Counsel for the parties and perused the material on record as well as the orders of the CIT(A) and the Tribunal. Before adverting to the merits of the matter, here, it would be relevant to refer to the provisions of Section 40 and sub-Section (b), thereof, as enumerated in the Act, which reads as under; “40. Notwithstanding anything to the contrary in sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,- (a) ... (b) in the case of any firm assessable as such,- (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as “remuneration”) to any partner who is not a working partner; or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or (iii) any payment of remuneration to any partner who is a working partner; or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance

Thus, from the above provisions, it become clear that Section 40(b) deals with the commission or interest etc. made to a partner and not to an individual, where amounts were advanced by such individual from his personal fund.

In the case on hand, it is an admitted position that Shri. Doshi was the sole proprietor of Saurashtra Metal Supplying Co. and Jayant Trading Company, which provided financial assistance to the assessee during the relevant assessment year. It is on the basis of this that the Tribunal held that what was paid to Mr. Doshi, whether, it is ‘Commission’ or ‘interest’, is liable to be disallowed under Section 40(b) of the Act. However, while doing so the Tribunal overlooked the fact that the assessee had not paid any amount towards interest or commission to any other party for the advances made to it. Meaning thereby, the advances made by Mr. Doshi to the assessee firm were from his personal fund and the commission or interest paid by the assessee to Shri. Doshi was in his individual capacity and not as a partner. Hence, same was not liable to be disallowed in view of the clear provisions of Section 40(b) of the Act and the decisions of this Court cited, herein above.

In the case of Trust also, which provided financial assistance to the assessee, Shri. Doshi was one of the trustees and on the basis of the same, the AO hold that the amount was paid by the assessee to one of the partners, i.e. Shri. Desai, which is also quite contrary to the principle of law laid down by this Court in its decisions, which are referred herein above. As a outcome of the above discussion, we are of the opinion that in view of the decisions of this Court in “CHHOTALAL AND CO.” (Supra) and in “BHUPENDRA NAVNITLAL AND CO.” (Supra) and the clear provisions of Section 40(b) of the Act, as stated above, the AO could not have disallowed the amounts paid by the assessee to Shri. Doshi.

In the result, the reference is ALLOWED and the question referred, herein, is answered in favour of the assessee and against the Revenue.

In view of the reasons assigned by us, while allowing the ITR No. 67 of 1993 filed by the assessee, the appeal filed by the Revenue, which is on the similar issue, requires to be dismissed and is DISMISSED. The question raised, therein, is also answered in favour of the assessee and against the Revenue, accordingly. No order as to costs. (K.S.JHAVERI, J.) (K.J.THAKER, J) UMESH