COMMISSIONER OF INCOME TAX Vs. YOGANAND TEXTILES

JUDGEMENT

(1.) THE assessee, a registered partnership firm, filed return of its income for the assessment year 1976 -77 in respect of accounting period of Samvat year 2031 declaring a total income of Rs. 3,14,483. The Income -tax Officer Circle I.E. (Rev.), Surat, by his order dated March 25, 1977, framed the assessment under section 143(1) of the Income -tax Act, 1961, (hereinafter referred to as 'the said Act'). The business of the assessee -firm was of manufacturing art silk cloth and Shri Suresh Nagindas and Shri Mahesh Nagindas who were partners in the firm were paid Rs. 54,796 and Rs. 51,969 being 'majuri' payments for job work done by them for the assessee -firm. Thereafter, proceedings under section 263 of the said Act were initiated by the Commissioner of Income -tax Baroda, on the ground that the Income -tax Officer failed to disallow under section 40(b) of the said Act, the sums of Rs. 54,796 and Rs. 51,963 paid by way of 'majuri' to these two partners.

(2.) THE Commissioner was of the view that, since the job work for which 'majuri' payments were made by the assessee -firm to these two partners was admittedly carried out on the machinery belonging to the assessee firm and that they had done the 'majuri' work for none else but he assessee -firm, it was obvious that the arrangement between the firm and these partners amounted to a device to reduce the taxable profits of the firm as such. Relying upon the ratio of the decision of the Madras High Court in R. A. Goodsir and Co., v. CEPT : [1948]16ITR367(Mad) and the Kerala High Court in CIT v. Veeriah Reddiar : [1969]73ITR162(Ker) , the Commissioner held that the 'majuri' payments of Rs. 54,796 and Rs. 51,963 were nothing but 'remuneration' for the labour work done for the assessee -firm by the two partners and such payments had to be disallowed by virtue of the provisions of section 40(b) of the aid Act. An alternative contention was raised before the Commissioner that only the net surplus received by these two partner which can be termed as remuneration could be added to the assessee -firm's income. The Commissioner held that what the assessee -firm had claimed as deduction was the gross amount of 'majuri' paid by it to the two partners and disbursements made by the them from those amounts to the labourers was a matter entirely of their concerned. The Commissioner observed that he alternative claim that he net surplus alone could be added to the assessee's income ran counter to its own claim that the business carried on by these two partners was distinct was, therefore, rejected by the Commissioner and it was held that these amounts paid to the partners on accounts of 'majuri' work done by the them for the assessee -firm have to be disallowed under section 40(b) of the said Act.

(3.) IN compliance with the directions issued by this court, the Tribunal has referred to this court, the following four questions for its opinion under section 256(2) of the said Act :