1967 (8) TMI 25 - HC - Income Tax

Whether any portion of the salary of a partner in a registered firm which carried on business of a tea plantation should be construed as his agricultural income - Held, no

Summary

Issues Involved:
1. Taxability of salary received by a partner from a partnership firm under Agricultural Income-tax.
2. Taxability of interest received by a partner on a loan advanced to a partnership firm under Agricultural Income-tax.

Issue-wise Detailed Analysis:

1. Taxability of Salary Received by a Partner from a Partnership Firm under Agricultural Income-tax:

The petitioner, a partner in a registered firm engaged in tea plantation, received a salary for his services. The Central Income-tax Officer excluded this salary from deductions under section 10(4)(b) of the Income-tax Act, 1922, and assessed it entirely under Central income-tax. However, the Agricultural Income-tax Officer included 60% of this salary as agricultural income. The Commissioner of Agricultural Income-tax supported this by stating that a partner's services are akin to providing capital in kind, and thus, salary is a contribution to the partnership.

The court disagreed, stating that the salary received by a partner for services rendered is not agricultural income but remuneration for services. This view is supported by the precedent set in Mathew Abraham v. Commissioner of Income-tax, where it was held that the entire salary is assessable to Central income-tax. The court emphasized that the principle from this decision applies here, meaning no portion of the salary is liable to agricultural income-tax. Consequently, Writ Petitions Nos. 2095, 2098, and 2099 of 1964 were allowed, and appropriate writs were issued.

2. Taxability of Interest Received by a Partner on a Loan Advanced to a Partnership Firm under Agricultural Income-tax:

In the second group of writ petitions, the issue was whether interest received by a partner on a loan advanced to the firm should be considered partially as agricultural income. The Central Income-tax Officer did not allow a deduction for this interest under section 10(4)(b) of the Income-tax Act, 1922, and assessed it entirely under Central income-tax. The Agricultural Income-tax Officer, however, treated 60% of this interest as agricultural income.

The court noted that the interest on a loan advanced by a partner is similar to salary received for services. The interest, like salary, is not part of the profits from agricultural property but a return on a loan. The court referenced E. C. Danby v. Commissioner of Income-tax, stating that the source of payment being agricultural does not make the interest agricultural income. The court highlighted that treating the interest as agricultural income could lead to double taxation, which should be avoided. Thus, the interest received by the partners should not be construed as agricultural income. Accordingly, Writ Petitions Nos. 2096, 2097, 2100, and 2101 of 1964 were allowed.

Conclusion:

The court emphasized the need to avoid double taxation and suggested that the Agricultural Income-tax Officer should generally adopt the Central Income-tax Officer's computation. The court allowed all seven writ petitions, with no order as to costs, and fixed the advocate's fee at Rs. 250, payable in W. P. No. 2095 of 1964.