Law:

Section:

Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, salary, etc., paid by firm to partner - Assessment year 1983-84 - Whether payment of salary to partner in individual capacity by firm is hit by section 40(b) even if partner represents his HUF - Held, yes - Whether Explanation 2 in section 40(b) speaks only of interest paid to partners by firm providing an escape route for such payments from rigour of section 40(b) and an interpretation cannot be handed out enlarging scope and reading into Explanation additional words like 'salary', 'commission', 'remuneration', etc. - Held, yes - Whether Explanation 4 by which remuneration or salary paid to working partner has been brought on par with interest paid by firm to partner for which an escape route was provided vide Explanation 2, with effect from 1-4-1993, could be applied to assessment year in question, i.e., 1983-84 so as to allow salary paid by assessee-firm to partners - Held, no FACTS The assessee-firm during the assessment year 1983-84, paid salary to its partner in his individual capacity who represented his HUF in the firm. The assessee claimed that amount as the allowable expenditure relying on Explanation 2 to section 40(b). That claim was disallowed by the ITO. On appeal, the Commissioner (Appeals) and the Tribunal upheld the disallowance. On reference, the assessee contended that in view of Explanation 2, the payment of interest to a partner representing a HUF is not hit by clause (b) of section 40 and does not become disallowable expenditure; and that what is obtained in case of 'interest payment' has also to be applied in respect of the 'salary payments' to the partners. The assessee also contended that the amendment made by the Finance Act, 1992 with effect from 1-4-1993 provides that the remuneration paid to the partner, if the terms of the partnership deed provides for the same, is outside the purview of section 40(b) and since the Legislature has treated such salary at par with, and identically as, the interest paid by the firm to the partners, one should hold that the remuneration or salary in the instant case for the assessment year 1983-84 was not hit by section…

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