Law:

Section:

Section 34(2)(ii) of the Income-tax Act, 1961 [Corresponding to section 10(4)(b) of the Indian Income-tax Act, 1922] - Business disallowance - Interest, salary etc. paid by firm to partner - Karta of a HUF became a partner in assessee-firm in his representative capacity - He was rendering services to firm and earned remuneration therefor - Whether relationship between partnership and 'karta' was that of an individual appointed as a partner and partnership was not in any way concerned with fiduciary relationship in which karta stood with family which he represented - Held, yes - Whether, therefore, assessee-firm was not entitled to claim remuneration paid to Karta as business expenditure as he was serving firm in his capacity as partner - Held, yes FACTS The assessee was a registered firm. One 'P' became a partner in the firm in his representative capacity, as karta of a HUF. Before P' became a partner of the assessee-firm, he had been rendering services to the partnership and was earning a remuneration. After he became a partner in the assessee firm, he continued to render services to the firm and earn remuneration therefor. The assessee claimed the remuneration paid to 'P' as business expenditure. The ITO found in favour of the claim and allowed the claim for deduction on the theory that the services were being rendered by 'P' not in his capacity as a partner of the firm but in his individual capacity. The remuneration thus constituted the personal income of 'P' and not the income of the joint family which he represented. The AAC, however, differed from the ITO on the relief granted to the assessee regarding the amount of remuneration paid to P. The reasons which weighted with the AAC were that a HUF could not enter into a contract of partnership with another person and, accordingly, the ITO's observation that the HUF was a partner in the firm, was entirely incorrect. The contract of partnership was between the individual 'P' and certain other persons. It might be that 'P' had entered into the partnership on behalf and for the benefit of his joint family. But from the point of view of the firm he alone was the partner, and not the HUF of which he was the…

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