1984 (12) TMI 113 - AT - Income Tax

Issues Involved:
1. Entitlement to standard deduction under section 16(i) of the Income-tax Act, 1961.
2. Nature of remuneration received by a partner from a firm.
3. Applicability of the Supreme Court's decision in R.M. Chidambaram Pillai's case.
4. Interpretation of sections 40(b) and 67 of the Income-tax Act, 1961.
5. Assessment of income received by a partner under the head 'Salaries'.

Issue-wise Detailed Analysis:

1. Entitlement to Standard Deduction under Section 16(i) of the Income-tax Act, 1961:
The core issue was whether the assessee, a partner in a firm, was entitled to standard deduction under section 16(i) of the Income-tax Act, 1961. The AAC had directed the allowance of standard deduction, following a previous appellate order in a similar case. However, the revenue contested this conclusion, arguing that the amount received by the assessee from the firm, described as 'salary', did not qualify for standard deduction under section 16(i).

2. Nature of Remuneration Received by a Partner from a Firm:
The remuneration described as 'salary' paid to the assessee, who was a partner in the firm, was scrutinized. The revenue's representative argued that, based on the Supreme Court's decision in R.M. Chidambaram Pillai's case, a firm cannot enter into a contract of employment with its partner, and thus, there is no employer-employee relationship. Consequently, the 'salary' paid to a partner is essentially a special share of the firm's profits and not true salary.

3. Applicability of the Supreme Court's Decision in R.M. Chidambaram Pillai's Case:
The decision in R.M. Chidambaram Pillai's case was pivotal. The Supreme Court had held that a firm is not a legal person and cannot have an employer-employee relationship with its partners. Therefore, remuneration described as 'salary' paid to a partner is actually a mode of profit distribution. This principle was reinforced, indicating that any amount paid to a partner by the firm could not be considered salary for tax purposes.

4. Interpretation of Sections 40(b) and 67 of the Income-tax Act, 1961:
Section 40(b) disallows deductions for payments of salary, interest, bonus, commission, or remuneration made by a firm to any of its partners. Such payments, when disallowed, form part of the firm's profits and gains. Section 67 outlines the method for computing a partner's share in the firm's income, emphasizing that amounts described as salary should be added back to the partner's share of profits. The Tribunal concluded that such payments are essentially profits and not salaries.

5. Assessment of Income Received by a Partner under the Head 'Salaries':
The Tribunal examined whether the remuneration received by the assessee-partner could be assessed under the head 'Salaries'. Section 15 specifies that income chargeable under the head 'Salaries' must be due from an employer or former employer. Given the Supreme Court's ruling that a firm cannot be an employer to its partner, the Tribunal concluded that no portion of the amount received by the assessee from the firm could be assessed under the head 'Salaries'. Consequently, the assessee was not entitled to standard deduction under section 16(i).

Conclusion:
The Tribunal concluded that the remuneration described as 'salary' paid to a partner is not assessable under the head 'Salaries' and, therefore, standard deduction under section 16(i) is not permissible. The computation made by the ITO, assessing the entire income obtained from the firm as share income without any bifurcation, was upheld. The order of the AAC was reversed, and the appeal of the revenue was allowed.

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