1. This is an appeal filed by the assessee against the order of the AAC dated 1-10-1982 and it relates to the assessment year 1979-80. The facts leading to the present appeal are as follows.
2. The assessee is a registered firm of eight partners. We arc concerned with the assessment year 1979-80, for which the previous year is the Fasli year ending with 30-6-1979. While framing the assessment of the firm under Section 143(3) of the Income-tax Act, 1961 ('the Act'), the ITO added Rs. 10,000 said to be paid as remuneration to Shri N. Balakrishna, one of the partners of the firm, having 7.5 per cent share. Obviously, this is a disallowance made under Section 40(b) of the Act. As against the disallowance the assessee firm went in appeal before the AAC. It was contended before him that Shri N. Balakrishna is a cine artiste and had rendered professional service in that capacity in one of the pictures produced by the firm which is doing business as cinematographic film producers. The payment of Rs. 10,000 constitutes a legitimate business expenditure and even if some other cine artiste in the place of Shri N. Balakrishna happened to enact, he had to be paid and the payment would have been allowed as legitimate business expenditure. Simply because one of the partners enacted the role in a picture produced by the firm, the payment made to the said partner not qua partner but as a cine artiste who acted in a film produced by the firm should not have been disallowed under Section 40(b). Firstly, because the payment was not made from out of the income of the firm and secondly, because the payment was not made to the partner quapartner.
This argument did not find favour with the learned AAC who by his impugned orders confirmed the disallowance made by the ITO.3. Aggrieved the assessee-firm brought the second appeal before this Tribunal. Thus, the matter stands for our consideration. We heard Shri C.V.K. Prasad and Shri G. Rajagopala Rao, the learned Counsels for the assessee-firm, and Shri C. Satyanarayana, the learned senior departmental representative. It is submitted before us that Shri N.Balakrishna became major on 10-6-1968 and he elected to continue as a partner in the firm. Thus, he became a full-fledged partner during the whole of the previous year relevant to the assessment year under consideration. It is also submitted that this amount of Rs. 10,000 was shown as the professional income in the hands of Shri N. Balakrishna in his income-tax assessment. It is contended that the AAC is not justified in treating the professional income of Shri N. Balakrishna as an amount disallowable under Section 40(b). It is further contended that the AAC overlooked the fact that there was no stipulation in the partnership deed that the artistic or histrionic talents of Shri N.Balakrishna should be spared by him to the partnership firm and that he would not be remunerated for the same. It was further contended that the payment of Rs. 10,000 cames under business expenditure for specific work of an artiste not connected with his position as a partner and, thus, it is not a remuneration disallowable under Section 40(b) as Shri N. Balakrishna has not rendered services as a partner. Shri C.V.K.Prasad, the learned Counsel for the assessee submitted two-pronged arguments. Firstly, he contended that unless the amount disallowed constitutes a payment out of the income of the assessee-firm, it cannot be disallowed. Secondly, he contended that if payment is made to a partner, qua-partner, then only the disallowance is permissible In order to substantiate his first contention our attention was drawn to the decision of the Madras High Court in CIT v. Gemini Productions  110 ITR 847. Gemini Productions was a firm in which Gemini Pictures Circuit (P.) Ltd., which is a private limited company, was holding four-fifteenth share. The assessee-firm though constituted to produce as well as distribute cinema films, it confined its activities only to the production of films. It had entered into agreements with Gemini Pictures Circuit (P.) Ltd. Under Clause 4 of the last of the agreements the distributors were authorised, from the realisation of the exhibition and distribution of said pictures, to pay themselves their distribution commission in respect of the said pictures as provided in the agreement. The commission deducted by Gemini Pictures Circuit (P.) Ltd., for the assessment years 1957-58 to 1962-63, was first allowed as deduction but later while completing the assessment for 1963-64, the ITO realised that the distributors were only a partner of the assessee-firm and that, therefore, the commission taken by the distributors would come within the scope of Section 10(4)(b) of the Indian Income-tax Act, 1922 ('the 1922 Act') and, consequently, that amount should not have been deducted in computing the income of the assessee-firm. Section 10(4)(b) of the 1922 Act is analogous to Section 40(b) of the Act. The Madras High Court held that before application of Section 10(4)(b) two requirements must be satisfied. The first is that the income must be the income of the firm. The second is that out of the said income the payment must be made to a partner. Their Lordships found that the evil sought to be curtailed by enacting the provision of Section 10(4)(b) is to prevent diversion of profits of a firm to the hands of its partners. Ultimately the Madras High Court held as per the head note of the decision as follows : ...In this case, the Company was carrying on an independent business or distribution of films produced by various persons including the assessee-firm and hence the income which the company received in the course of carrying on their business was the income of the company and not that of the persons whose pictures they are exhibiting.
Therefore, the requirement for applying Section 10(4)(b), namely, that the amount out of which the Commission was paid must be the income of the firm of which the recipient is a partner, was absent in the instant case and appropriation of commission due to the company by it from and out of the realisations from the exhibition and distribution of films cannot be said to constitute 'payment of commission' to a partner attracting Section 10(4)(b).
In this case also it is argued that what is paid to the cine artiste is not out of the income of the assessee-firm. Suppose, he did not act in the picture produced by the assessee-firm and some other artiste had acted in his place, the payment made to him would certainly constitute a permissible deduction. There is no contradiction from the revenue to the assertion made by the assessee-firm that the operative deed of the firm for the time being did not contain any clause whereunder Shri N.Balakrishna has to render his services to the assessee-firm without expecting any pay for his services as a partner. Therefore, the argument continued that the services Shri N. Balakrishna rendered were independent of his duties and obligations as a partner. The argument further continued that, say for instance, if a partner lets out his private building for the business of the firm, the rent payable over it cannot be disallowed under Section 40(b). If an authority is needed, it is found in Heastie v. Veitch & Co.  2 ITR 456 (CA). Under the said authority Sampath Iyengar in his book Law of Income-tax, Vol. 2, Seventh edn. revised by Justice S. Ranganathan, had to say the following : Again, payments made to a partner for something altogether unconnected with the partnership business, for example, as remuneration due on an independent contract, would not come under this clause. If, for instance, in a partnership doing hotel business, one of the partners who is a wine merchant should supply wine, the cost of the wine supplied would be a deductible expenditure ....
Ultimately, it was argued that a partner acting in a picture produced by the assessee-firm and getting remuneration on a separate contract is quite akin to getting rent by a partner from the firm for any of his buildings let out to the business of the firm. Further, the remuneration paid to Shri N. Balakrishna would have constituted part of the cost of the film produced and the remuneration thus paid certainly would not have been out of the income of the firm. Elaborating the second argument advanced, the learned Counsels for the assessee-firm submitted that if a person becomes a partner in his individual capacity and if some advances were made to the firm by the HUF to which the partners were kartas, the interest paid and remitted to the accounts of the HUF are not disallowable under Section 40(b). Reliance was placed upon a decision of the Andhra Pradesh High Court in CIT v. K.Krishnaiah Chetty & Sons  131 ITR 410 where it is held that Section 40(b) had no application in the circumstances stated above. The learned departmental representative sought to counter the arguments advanced on behalf of the assessee by relying upon the decision of the Delhi High Court in Sanghi Motors v. CIT 135 ITR 359 where it is held that for purposes of application of Section 40(b), there is no logical reason for distinguishing between one payment made by the firm to the partner and another whatever may be the capacity in which he receives it and argued that in whichever capacity Shri N. Balakrishna received payment, it is disallowable under Section 40(b).
4. Thus, we heard both sides fully and completely. We are of the view that the Delhi High Court decision in the case of Sanghi Motors (supra), relied upon by the learned departmental representative, is rendered in the case of interest payment to HUF while the individual is a partner in his individual capacity. However, we have already pointed out that the Andhra Pradesh High Court in K. Krishnaiah Chetty & Sons' case (supra) had taken a contrary view on the subject and we are bound to follow the Andhra Pradesh High Court decision over that of the Delhi High Court. Further, we are inclined to agree with the arguments advanced on behalf of the assessse-firm. We are of the view that the remuneration received by Shri N. Balakrishna is not from out of the income of the firm. Suffice it to say that the remuneration paid to Shri N. Balakrishna is not disallowable under Section 40(b).