1985 (7) TMI 185 - AT - Income Tax

Summary

Issues:
1. Whether the remuneration received by the individual from the partnership firm should be assessed as salary for standard deduction under section 16(1)?

Analysis:
The judgment revolves around the issue of whether the remuneration received by the individual from the partnership firm should be considered as salary for the purpose of claiming standard deduction under section 16(1) of the Income Tax Act. The assessee, a partner in a firm, claimed a deduction under section 16(1) for the salary received. Initially, the Income Tax Officer (ITO) disallowed the deduction citing the absence of an employer-employee relationship between the assessee and the firm. The Appellate Authority Commissioner (AAC) upheld the disallowance, directing the income to be assessed under the head "other sources" instead of "business." The Tribunal heard the appeal where the contention was whether the remuneration should be assessed as salary or as income of the Hindu Undivided Family (HUF) represented by the assessee. The Tribunal referred to previous decisions and concluded that an employer-employee relationship existed between the firm and the assessee, entitling the assessee to claim standard deduction under section 16(1).

Another issue arose within the Tribunal itself, leading to a difference of opinion between the members. The Third Member order clarified that the remuneration paid by the firm to the individual partner should be treated as the individual's income and not that of the HUF, even though the individual represented the HUF in the partnership firm. The Third Member held that the remuneration was for services rendered in the individual capacity, qualifying it as salary eligible for standard deduction under section 16(1). The Third Member's decision was based on the understanding that the remuneration was not merely a method of profit distribution but was specifically for services rendered by the individual.

Ultimately, the Third Member's decision was to be forwarded to the Division Bench for the final decision based on the majority view. The judgment emphasized the need for establishing a service contract between the firm and the individual partner to categorize the remuneration as salary eligible for standard deduction. It highlighted the distinction between income earned individually and income earned on behalf of the HUF, emphasizing the importance of proving the existence of a service contract for services rendered in the individual capacity.