1962 (9) TMI 97 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of salary paid to a nephew by a partner from his share income in a firm.
2. Applicability of sections 10(2), 16(1)(b), and 23(5) of the Income-tax Act.
3. Interpretation of relevant case law and precedents.

Detailed Analysis:

1. Deductibility of Salary Paid to a Nephew by a Partner from His Share Income in a Firm:
The assessee, a partner in General Swadeshis, claimed a deduction of Rs. 2,000 paid as salary to his nephew for services rendered related to the firm. The Income-tax Officer disallowed this claim, stating there was no evidence that this expenditure was incurred to earn the share income and that section 16(1)(b) prohibited any such deduction once the share income was ascertained. The Appellate Assistant Commissioner and the Tribunal upheld this decision, emphasizing that no further deductions were permissible from the share income of a partner after its computation.

2. Applicability of Sections 10(2), 16(1)(b), and 23(5) of the Income-tax Act:
The court examined whether the salary paid to the nephew could be considered a permissible deduction under any provisions of the Income-tax Act. It was noted that while the firm could claim deductions for salaries paid to employees under section 10(2), the question was whether the partner could claim deductions for expenses incurred individually to earn his share income. The court found it illogical for a partner to claim such deductions, as the share income is already earned by the firm on behalf of the partner.

Section 23(5) mandates that the share income of a partner must be included in his total income for assessment. Section 16(1)(b) specifies that the partner's share of income includes any salary, interest, commission, or other remuneration payable by the firm, but does not prohibit deductions from the share income after its determination. The court found no warrant in section 16(1)(b) for prohibiting such deductions.

3. Interpretation of Relevant Case Law and Precedents:
The court referred to several precedents:
- Shanthikumar Narottam Morarji v. Commissioner of Income-tax: The Bombay High Court held that a partner could claim deductions necessary to earn his share income, as true profits must be ascertained from the point of view of commercial accounting.
- Moolchand v. Commissioner of Income-tax: The Hyderabad High Court allowed interest paid by a partner on borrowed capital for investment in the partnership as a deductible allowance.
- Commissioner of Income-tax v. New Digvijaysinhji Tin Factory: It was held that remuneration paid by a partner to representatives for managing partnership affairs was a legitimate deduction if it was a bona fide transaction and the partner was under a duty to manage the partnership.
- Jitmal Bhuramal v. Commissioner of Income-tax: The Supreme Court distinguished between salaries paid to family members for services to the family business (allowable) and for services to the firm (not allowable).

In the present case, the assessee claimed the deduction on the grounds that he employed his nephew to look after his interests in the firm due to his inability to do so personally. However, no evidence was provided to show that the partnership agreement required the assessee to perform specific duties. The nephew's duties were related to the firm's operations, indicating that he was serving the firm rather than the individual partner.

Conclusion:
The court concluded that the payment of Rs. 2,000 to the nephew was not an allowable deduction from the share income of the assessee. The expenditure was not incurred wholly and exclusively for earning the share income, as the nephew's services were rendered to the firm. The question was answered against the assessee, who was ordered to pay the costs of the department.