GANESH FACTORY Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) DURING the period relevant to the assessment year 1974-75, the asses-see, a partnership concern, paid Rs. 18,000 as salary to three of its partners and during the assessment proceedings claimed deduction thereof as business expenditure. The Income-tax Officer disallowed the deduction as, the payment of salary to the partners was not allowable in view of Section 40 (b) of the Income-tax Act, 1961 (hereinafter called "the Act" ). The contention of the assessee before the Appellate Assistant Commissioner that the provisions of Section 40a of the Act were applicable and had overriding effect on Section 40 (b) did not prevail and the assessee remained unsuccessful. Their further appeal before the Income-tax Appellate Tribunal, Chandigarh, also remained unsuccessful. The Tribunal came to the conclusion that Section 40 (b) and Section 40a of the Act operate in different fields and that there was no conflict as was attempted to be made on behalf of the assessee. At the instance of the assessee, the Tribunal has referred the following questions for the opinion of this court: "1. Whether the Tribunal has been in error in holding that the provisions of sections 40 (b) and 40a (2) of the Income-tax Act, 1961, operate in different fields ?

(2.) WHETHER the Tribunal has been right in law in holding that though the income-tax authorities may restrict or modify a claim of payment of salary to a partner but even such restricted or modified payment is disallowable under Section 40 (b) of the Income-tax Act, 1961, and thereby upholding the disallowance of Rs. 18,000 in the appellant's case in respect of the assessment year 1974-75 ?" 2. By virtue of Section 40, the amounts detailed in the various Sub-clauses of Clauses (a) to (d) shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession" notwithstanding anything to the contrary contained in Sections 30 to 39 of the Act. The relevant provisions for our consideration in this section would be clause (b), the relevant portion of which is as follows : " (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm. "

(3.) BY virtue of clause (b), if a firm pays interest, salary, bonus, commission or remuneration to any of the partners of the firm, the same has to be disallowed. Here, we are concerned with payment of salary to partners and by virtue of the aforesaid provision, the salary would be disallowed from the deductions as Section 40, by virtue of the non obstante clause, has an overriding effect over the provisions of sections 30 to 39 under which, possibly, deduction could be allowed.