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TMI Blog1984 (12) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... ship, for which he is entitled to a remuneration of Rs. 250 (Rupees two hundred and fifty only) per month. The said remuneration to the party of the second part may be increased or decreased with the mutual consent of all the parties from year to year. " 2. For the previous year ended 31-3-1982, relevant to the assessment year 1982-83, now under consideration, the assessee furnished a return showing total income of Rs. 15,960 which was arrived at as under : " BUSINESS 20 per cent share income from Laxminarasimha Fertilisers, Gadwal, as per the firm's return (GIR No. 303). Rs. Salary 9,100 Less : Standard deduction at the rate of 20 per cent 1,820 -------------------- 7,280 -------------------- Share of profit 10,586 -------------------- 17,866 Less : L.I.P. paid from 19-12-1980 1,912 -------------------- 15,956 or 15,960 " -------------------- The ITO framed the assessment order, observing as under : Present : Shri B. Prahalad, Sekhar Co., C. As. Rs. Business income : Income returned 15,960 Assessed share income from Laxmi- narasimha Fertilisers, Gadwal : 19,686 -------------------- Taxable income rounded off 19,690 ------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the argument of the learned departmental representative was the ratio of the judgment of the Supreme Court in R.M. Chidambaram Pillai's case. He submitted that this decision was authority for the proposition that though a firm had some attributes of personality, it was not a legal person and though it was a unit of assessment in terms of the special provisions of the Act, it was not in law a full person. Since the firm was not a full person, it could not enter into a contract of employment with one of its partner. Therefore, there was no employer-employee relationship. What was described as 'salary' paid to a partner, was nothing but a special share of the profits and partook of the same character as the income of the firm. Elaborating further, attention was drawn to the provisions of section 40(b) of the Act, which provided : " Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',-- (a) (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artner A, should be assessed in the hands of partner A and the balance of profits should be assessed in the hands of any separate entity such as the HUF, of which A was the karta, etc., would be dependent on the facts of each case. However, as far as the assessment made in the individual case of A was concerned, he submitted that what was assessable was part of the share of profits alone from business or profession, be it described as 'salary' or 'share income'. He then referred us to the provisions of section 16 and submitted that standard deduction was permissible under section 16(i) only from income " chargeable under the head 'Salaries'. " The income which was chargeable to income-tax under the head 'Salaries', it is stated, was fully set out in section 15 of the Act and the various criteria enunciated therein specified in each case that the amount should have been received from an employer or a former employer. Since any amount received by a partner from the firm could not partake of the nature of receipt from an employer, since a partner was not an employee of the firm following the ratio of the judgment of the Supreme Court in the case of R.M. Chidambaram Pillai, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an assessee in terms of the statute. This was the ratio of the decision of the Andhra Pradesh High Court in CWT v. Narendra Ranjalker [1981] 129 ITR 203. Another case referred to was the Full Bench decision of the Andhra Pradesh High Court in CIT v. G. Parthasarathy Naidu Sons [1980] 121 ITR 97 in support of the provision that a firm could be construed to be a distinct legal entity, which has a separate personality and existence of its own de hors the partners. Another point made out was that the provisions of section 67(2) laid down only an artificial method of computation of income and they did not affect the real nature of payments, which were described as 'salary'. The learned counsel also went on to clarify that though the assessee may not have contributed capital in the form of money but only gave his skill, it was considered that part of remuneration should be given as share of profits, viz., 20 per cent and part of remuneration should be paid as salary in terms of the deed of partnership. What was decided in terms of the deed to be two separate amounts, he submitted, could not be coalesced into an amount of a single nature for the purposes of assessment. For all these r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how the apportioned amount is to be assessed, do not erode into the principles enunciated by the Supreme Court in the case of R.M. Chidambaram Pillai nor do they conflict with the ratio of the aforesaid decision. As observed by the Supreme Court itself in R. M. Chidambaram Pillai's case, a fine point of law had been raised therein which lent itself to subtle spinning of gossamer webs of argument. The Supreme Court, in the aforesaid decision, had considered the provisions of section 10(1)(b) of the Indian Income-tax Act, 1922 ('the 1922 Act'), which is in pari materia with those of section 40(b) of the 1961 Act, as also the provisions of section 16(1)(b) of the 1922 Act, which incorporates most of the principles enunciated in section 67 of the 1961 Act. The Supreme Court emphasised that the provisions of the Act clearly designated that what was described as salary in the case of a partner who was a co-owner of a business, was nothing but profit. The special provisions did not, the Supreme Court states, change the true nature of what was described as 'salary', viz., that it was profits, but only stressed the same. The arguments put forth based on the use of the term 'salary' in secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm known to the law, as was said by James L.J. in ex parte Corbett : in re. Shand [1880] 14 Ch. D 122, 126 (CA). In these circumstances to import the definition of the word 'person' occurring in section 3(42) of the General Clauses Act, 1897, into section 4 of the Indian Partnership Act will, according to lawyers, English or Indian, be totally repugnant to the subject of partnership law as they know and understand it to be. ' In Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300, 1303 the view taken by this Court accords with the position above stated. The necessary inference from the premise that a partnership is only a collective of separate persons and not a legal person in itself lends to the further conclusion that the salary stipulated to be paid to a partner from the firm is in reality a mode of division of the firm's profits, no person being his own servant in law since a contract of service postulates two different persons. " There is, therefore, the clear pronouncement of the Supreme Court that salary stipulated to be paid to a partner by a firm is in reality only a mode of division of the firm's profits, because no person could be his own servant in law an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it shall not be included again in the total income of the person when the salary becomes due. " It is clear that what is chargeable under the head 'Salaries', would be only amount which emanated from an employer or a former employer to an assessee. The assessee, in the present case, is the individual before us. However, no amount has come to him from an employer or a former employer, for the firm, of which he is a partner, is not an employer following the ratio of the judgment of the Supreme Court referred to. Therefore, no portion of the amount which has been received by the assessee-individual, whose case is before us, from the firm of which he is a partner, would be assessable under the head 'Salaries' in his hands. For the purposes of the present appeal, it is sufficient to state that no portion of the amount received by the assessee from the firm of which he is a partner, would be chargeable to tax under the head 'Salaries' and, therefore, the assessee would not be entitled to standard deduction under section 16. 13. In view of the above discussion, we conclude as follows : 1. There is no contradiction in the decisions of the Supreme Court in the cases of Raj Kumar Sing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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