Law:

Section:

Section 40(b), read with section 40A, of the Income-tax Act, 1961 - Business disallowance - Interest, salary, etc., paid by firm to partner - Assessment year 1974-75 - Assessee-firm paid salary to partners and claimed deduction as business expenditure, contending that section 40A was applicable and had an overriding effect on section 40(b) - Whether sections 40(b) and 40A operate in different fields and hence assessee's claim could not be upheld - Held, yes - Whether section 40A did not apply in instant case as services rendered by partners were not those contemplated by section 40A - Held, yes - Whether since section 40A did not apply, matter was covered by section 40(b) and payment of salary for partners by assessee-firm was rightly disallowed - Held, yes Section 40A of the Income-tax Act, 1961 - Business disallowance - Payment to relative/director - Whether section 40A has no application to payment made by assessee-firm as salary to its partners - Held, yes Facts For the assessment year 1974-75, the assessee-firm paid Rs. 18,0 0 as salary to three of its partners and claimed deduction as business ex-penditure. The ITO disallowed the deduction in view of section 40(b). The assessee contended before the AAC that the provisions of section, 40A were applicable and had an overriding effect on section 40(b). The AAC rejected the appeal. The Tribunal held that section 40(b) and section 40A operated in different fields and there was no conflict as was attempted to be made on behalf of the assessee. The Tribunal concluded that by virtue of section 40A, the ITO may restrict or modify a claim of payment of salary to a partner but in spite of such modified payment, the same had to be disallowed in view of the provisions of section 40(b). On reference: Held Expenditure dealt with in clause (a ) of sub-section (2) of section 40A has to be in regard to the fair market value of the goods, services or facilities for business purposes. Payment of salary to a partner of the firm, who may be working whole time for the assessee-firm, would not come within the ambit of services as the services provided under section 40A are those which have a market value and commercial in…

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