1969 (12) TMI 21 - HC - Income Tax

Whether the salary as referable to agricultural income can be taken as salary in computing the total income of a partner of a firm - Held yes

Summary

Issues Involved:
1. Whether the sums received by the partners from the firms as salaries were rightly brought to tax as income from other sources under the provisions of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Whether the sums received by the partners from the firms as salaries were rightly brought to tax as income from other sources under the provisions of the Indian Income-tax Act, 1922:

The assessees were partners in two firms owning tea estates. Under the partnership deeds, they were entitled to draw specified salaries for their services to the firms. Initially, the total income of each firm was computed with reference to section 10(4)(b) and apportioned between agricultural and business incomes per rule 24 of the Income-tax Rules. The non-agricultural portion was taxed in the partners' hands. For the assessment year 1959-60, the Income-tax Officer opined that the salary received by the assessees from the firms was not agricultural income but income from other sources, thus recomputing the income on that basis and including the entire salaries in the total chargeable income of each partner.

The Appellate Assistant Commissioner disagreed, allowing the appeals on the view that only 40% of such salary could be taxed in the partners' hands. The Tribunal, following Mathew Abraham v. Commissioner of Income-tax, allowed the appeals, stating that the partners drew salaries for services rendered to the firms, and thus rule 24 had no application.

The Division Bench in its reference to a Fuller Bench suggested that sections 10(4)(b) and 16(1)(b) and rule 24 implied that only 40% of the salary paid could be charged to income-tax at the hands of the partners, notwithstanding the immediate source of the salary being the service to the firm.

The court held that the salary received by a partner for services rendered to the firm continues to bear the same character as part of the total income of the firm shared between its partners. The application of rule 24 to the total income of the firm computed per section 10(4)(b) means that only 40% of the salary as referable to agricultural income can be taken as salary in computing the total income of a partner under section 16(1)(b). This view aligns with the principles of partnership law.

A firm, partner, and partnership have the same meanings as in the Indian Partnership Act, and for income-tax purposes, a firm is treated as an entity. The procedure for computing the total income of a partner of a firm is found in section 16(1)(b), which implies that the total income of a partner includes his share of the firm's profits and salary. Section 10(4)(b) does not regard salary paid to a partner for his services to the firm as deductible expenditure, recognizing that such salary is part of his share of the firm's profits.

The court emphasized that the salary drawn by a partner from the firm is a mode of division of the firm's profits and retains its character in the assessments of the partners. The contention that the immediate source for the partners' salary is the service and not the share in the profits of the firm was rejected. The court concluded that Mathew Abraham v. Commissioner of Income-tax was not correctly decided.

The court also noted that rule 24 of the Income-tax Rules applies to the total composite income of the firm, including the salary paid to the partner, and thus only 40% of the salary can be taken for the purpose of computation under section 16(1)(b).

The court answered the common question in favor of the assessee, stating that the salary received by a partner from the firm is part of his share of the firm's profits and should be taxed accordingly.