Anjaneyulu, J. - (1.)This reference arises under section 256(1) of the Income-tax Act, 1961 ("the Act" for short). The reference is made by the Income-tax Appellate Tribunal, at the instance of the Commissioner of Income-tax. The question referred for consideration of this court is :
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 40,000 paid to two partners, Sri M. Venkataramana and Sri Laxminarayana, are allowable in view of section 40(b) of the Income-tax Act, 196 ?"

(2.)A partnership firm consisting of three partners, M. Venkataramana, S. Laxminarayana alias Bapu and N. S. Murthy, was constituted under a deed of partnership dated 23/02/1969. It was agreed that the partnership firm shall carry on the business of production, distribution and exploitation of films, and also that of taking on lease territorial rights in films for dubbing and exploitation and any other business incidental thereto, in the name and style of "CHITRA KALPANA". The partnership deed is not marked among the documents forwarded by the Tribunal. For the purpose of disposing of the reference, we found it necessary to peruse the partnership deed and note the terms and conditions governing the said partnership. We accordingly directed learned counsel for the assessee, Sri T. Anantha Babu, to make available a copy of the partnership deed. A copy is furnished to us. According to the deed of partnership, each one of the three partners contributed capital of Rs. 50,000. No interest is payable on the capital. The three partners are to share the profits and losses in equal shares. The first partner, M. Venkataramana, shall be in charge of the control and management of all the affairs and business of the firm. He is designated as the "managing partner". It was agreed that the managing partner and N. S. Murthy shall operate the bank accounts of the firm jointly. The partnership deed contains other usual covenants which are not relevant for our purposes.
(3.)For the income-tax assessment year 1971-72, the accounts of the partnership firm were closed on 31/08/1970, and a return of income was filed declaring a total income of Rs. 67,400. In declaring the above income, the partnership firm claimed deduction of Rs. 25,000 paid to the managing partner, Sir M. Venkataramana, and Rs. 15,000 paid to another partner, Sri S. Laxminarayana, known as Bapu. It was explained that the managing partner, M. Venkataramana, is a reputed story writer for films and carries on individually the profession of writing stories for films and receives consideration from various film producers. It is said that the partnership firm embarked on the production of a movie, called "Buddhimantudu" for which the story was written by managing partner, M. Venkataramana, in consideration of which the partnership firm paid him Rs. 25,000. S. Laxminarayana alias Bapu is a reputed film director. He directed the aforementioned film for which purpose the partnership firm paid him remuneration of Rs. 15,000. The claim of the partnership firm for deduction of the aforementioned two items, in the computation of its total income for the income-tax assessment year 1971-72, was rejected by the Income-tax Officer on the short ground that in term of section 40(b) of the Act, the payments made to the partners fall to be disallowed. Aggrieved by the disallowance of the aforementioned two sums, the assessee-firm filed an appeal before the Appellate Assistant Commissioner of Income-tax, who allowed the appeal, and directed that the sum of Rs. 40,000 should be allowed as a deduction in computing the income of the assessee-firm. The Income-tax Officer filed on appeal before the Tribunal against the order of the Appellate Assistant Commissioner of Income-tax, directing allowance. After consideration of the rival contentions, the Tribunal upheld the order of the Appellate Assistant Commissioner and dismissed the appeal filed by the Income-tax Officer. Thereupon, the Commissioner of Income-tax filed an application before the Tribunal for reference under section 256(1) of the Act of the question of law referred in para 1 (p. 679) supra.