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Taxability of interest earned by a partner of a firm engaged in tea manufacturing and the salary income of the partner received from that firm. Analysis: The judgment delivered by the High Court of Madras addresses the taxability of interest earned by partners of a firm engaged in tea manufacturing and the salary income received by the partners from the same firm. The court noted that all the revision petitioners were partners in the same firm, and the assessment years in question were 1974-75, 1975-76, 1976-77, and 1980-81. The learned counsel argued that income-tax had already been paid under the Indian Income-tax Act and could not be subjected to tax under the State Act, citing a previous court decision in B. M. Mehta v. State of Tamil Nadu [1993] 199 ITR 471. The court referred to Rule 7 of the Tamil Nadu Agricultural Income-tax Rules, 1955, which mandated that the portion of income assessed under the Indian Income-tax Act and left unassessed as agricultural income would be taxed under the State Act. However, the assessees failed to produce the assessment order made by the Income-tax Officer under the Indian Income-tax Act, which led to a lack of proof of tax payment under the Indian Income-tax Act. Consequently, the court held that the assessees were not entitled to the benefit of Rule 7 due to the absence of such proof. Regarding the tax treatment of salary income received by partners, the court relied on the Supreme Court's decision in CIT v. R. M. Chidambaram Pillai [1977] 106 ITR 292, which established that salary received by a partner retained the same character as income from the partnership. The court affirmed that salary and bonus received by partners were taxable to the extent of 60% of the income, in line with previous court decisions. The court also highlighted the principle that any interest, salary, bonus, or remuneration paid by a firm to its partners could not be deducted as business expenditure, as partners were entitled to the entire profits according to their shares in the business. In conclusion, the court upheld the Tribunal's decision to tax 60% of the salary and bonus representing agricultural income, finding no error in the Tribunal's order. As a result, the revisions were dismissed, affirming the taxability of the partner's income from the tea manufacturing firm.
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