Law: Income Tax Act, 1961

Section: 40(b)

Income-tax-----Firm---Business expenditure---Disallowance---Commission paid to partner ---HUF--- Member of HUF partner in representative capacity--¬Commission paid to such partner cannot be regarded as payment to HUF--¬Section 40(b) applies and payment has to be disallowed---Indian Income Tax Act, 1961, S.40(b). A firm is a compendious way of describing the individuals constituting the firm. A Hindu undivided family directly or indirectly cannot become a partner of a firm because the firm is an association of individuals. Under Hindu law, not all members of the joint family, but only such of its members as have, in fact entered into partnership with the stranger, become partners. The Partnership Act, 1932 contains various provisions regarding the relationship among partners. All these provisions relating to mutual rights and liabilities are only applicable to the individual partners who are members of the firm. There is no way that a Hindu undivided family can intrude into the relationship created by a contract between certain individuals. The only right of the Hindu undivided family is possibly to call upon its nominee partner to render accounts for the profits that he has made from the partnership business. But that is something between the nominee and the Hindu undivided family, with which the partnership is not concerned. The specific provisions in section 13 of the Partnership Act, 1932, that a partner is not entitled to receive any remuneration for taking part in the conduct of the business, has been interpreted to mean that every partner is bound to attend diligently to the business of the firm. For doing his duties, he cannot charge his co-partners any sum or remuneration, whether in the shape of salary, commission or otherwise, on account of the trouble taken by him in conducting the partnership business. There, however, can be special contract to the contrary in which case, the provisions of that contract will prevail. Section 40(b) of the Income Tax Act, 1961, will apply, even when there is such a special contract. Any commission paid by a firm to its partner will not be permitted as deduction from the business income of the firm. If a claim is made…

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