1967 (12) TMI 11 - HC - Income Tax

Agreement for avoidance, double taxation between India and Pakistan - salary paid - held that, in whichever capacity partner of the assessee-firm was appointed, the remuneration paid could not be claimed as deduction, because he was serving the firm for remuneration in his capacity as partner

Summary

Issues:
1. Whether the remuneration paid to a partner of a firm can be claimed as a business expenditure under the Indian Income-tax Act, 1922?

Comprehensive Analysis:
The judgment involved a reference under section 66(1) of the Indian Income-tax Act, 1922, regarding the deduction claimed by the assessee firm for remuneration paid to a partner, Prahladrai, who was a karta of a Hindu undivided family. The Income-tax Officer allowed the deduction, considering the remuneration as personal income of Prahladrai. However, the Appellate Assistant Commissioner disagreed, stating that a Hindu undivided family cannot enter into a partnership, and only the individual partner should be recognized. The Appellate Tribunal also upheld this view, emphasizing that any salary paid to a partner must be disallowed under section 10(4)(b) of the Income-tax Act, irrespective of representation of a family. The Tribunal held that the remuneration paid to Prahladrai was to be considered as his personal income, disallowing the deduction claimed by the assessee.

The main argument presented by the assessee's counsel was that Prahladrai was a partner in one capacity and a servant in another, and the remuneration received in his capacity as a servant should be deductible as business expenditure under section 10(2)(xv) of the Act. However, the court clarified that a Hindu undivided family, as such, cannot enter into a partnership, and when the karta of the family enters into a partnership, only the karta is recognized as the partner vis-a-vis outsiders. The relationship between the partnership and Prahladrai was that of an individual partner, regardless of his representation of the family. The court emphasized that the profit earned by Prahladrai as a partner may become the family's income, but the remuneration paid to him for services rendered cannot be claimed as a deduction under section 10(2)(xv) of the Act.

Ultimately, the court held that the remuneration paid to Prahladrai could not be claimed as a deduction since he was serving the firm for remuneration in his capacity as a partner. The court answered the reference in favor of the revenue, concluding that the Commissioner of Income-tax was entitled to costs of the reference. Both judges concurred with the decision, and the question was answered in the affirmative.