1996 (1) TMI 52 - HC - Income Tax

Summary

Issues:
Whether the assessee, as a partner in two firms, is entitled to claim standard deduction under section 16(i) of the Income-tax Act, 1961, from the sums paid as salary by the firms in which he and his Hindu undivided family were associated.

Detailed Analysis:

The assessee, as the karta of the Hindu undivided family, was paid salary by two firms for services rendered. The Income-tax Officer disallowed the standard deduction claim, stating the salary was a share of profits and no employer-employee relationship existed between the firms and the assessee. The Appellate Assistant Commissioner upheld this decision. The Tribunal, citing a Supreme Court decision, held that the remuneration received by the assessee from the firms was in the nature of salaries, allowing standard deduction under section 16 of the Act.

The Department argued that no employer-employee relationship exists between a partner and the firms. They contended that a firm is not a legal person, and a contract of employment requires distinct persons, making salary to a partner a special share of profits. They disagreed with the Tribunal's decision on considering the payments as salary for standard deduction under section 16.

The court considered previous judgments, including a Full Bench decision and a Supreme Court ruling, emphasizing that salary to a partner represents a special share of profits and retains the character of the firm's income. They also referred to a High Court case stating that a partner of a firm cannot be an employee, and salary paid to a partner is a share of profits.

The court noted the Finance Act's Explanation 2, clarifying that salary received by a partner of a firm shall not be regarded as salary for standard deduction. They analyzed the partnership deed's clause on salary payment and concluded that the amounts paid to the partner by the firms are deemed to be share of profits assessable in his individual capacity.

In light of the judicial pronouncements and the specific facts of the case, the court held that the Tribunal's decision was incorrect. They ruled that the amounts paid by the firms to the assessee were not salary, and the assessee was not entitled to standard deduction under section 16 of the Income-tax Act, 1961. The court answered the question in the negative and in favor of the Department, with no order as to costs.