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TMI Blog1985 (2) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... services rendered by Shri Chidambaram individually to the firm and is not a share of profit earned by any detriment or loss to the family property. The department has filed, in support of its contention, a copy of the order of the Tribunal in the case of S. Janagarajan [IT Appeal Nos. 957 and 958 (Mad.) of 1977-78, dated 31-1-1978]. 2. We have considered the facts and the contentions of the parties. We have also considered similar dispute in certain other cases. The order of the Tribunal, relied on by the departmental representative, is totally distinguishable as it was concerned with the claim of the HUF for deduction of salary payment by it to its karta out of its income and was not concerned with the question as to whether salary received by the karta for personal services rendered to the firm was income of the HUF, on behalf of which he is a partner, or it is his personal income. It is seen from the copy of the relevant partnership deed filed before us that the firm of C. Duraisamy Nadar and A. Somasundara Nadar consisted of six partners, of whom two are remunerated, namely, (1) Shri A. Somasundara Nadar and (2) Shri C.D. Chidambaram, evidently because they are required to pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apacity other than that of a partner. Clause 10 of the deed of partnership, dated 12-12-1977, reads as under : " 10. A monthly salary of Rs. 176 (Rupees one hundred and seventy-six only) to Shri A. Somasundara Nadar and Rs. 126 (one hundred and twenty-six) to Shri C.D. Chidambaram shall be paid and accounted for as salary expenditure. " A perusal of the aforesaid clause shows that the reason for payment of salary has not been specified. Further, a perusal of clause 6 of the deed of partnership shows that any one of the partners shall sign and receive the money orders, registered post, etc., on behalf of the firm. Clause 7 of the deed of partnership shows that all the partners shall have the right individually to operate the accounts in the banks on behalf of the firm. Similarly, clause 9 of the deed of partnership shows that any one of the partners can sign on behalf of the firm and prosecute civil court proceedings for the recovery of debts of the firm. In other words, the deed of partnership empowers all the partners to exercise all the powers relating to the partnership business and no extraordinary powers or duties were assigned to the partner, Shri C.D. Chidambaram, so as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bonus, commission or remuneration paid by a firm to any of its partners cannot be deducted by the firm as an expenditure in its profit-computation. The reason is this : The partners in a firm are ultimately entitled to the entire profits of the firm, according to their shares in the business. Therefore, the entirety of such profits should be brought to charge and no portion be exempted by giving the same away to a partner as his salary, bonus, commission, remuneration or interest. A partner is bound to find the necessary finances for the partnership and hence any interest on capital supplied by the partner is not deductible. A partner rendering services to the firm stands on the same footing as his providing capital ; only instead of in money, in kind. Further, no remuneration is permissible to a partner for his rendering services to the firm, since the carrying on of the business of the partnership is a primary duty which all the partners, or some of the partners acting for all, are required to do by the law relating to partnership. The matter may be looked at another way too. In law, a partner cannot be employed by his firm, for a man cannot be his own employer. A contract can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtner was in consideration of special services rendered to the firm. The decision of the Supreme Court in the case of CIT v. Gurunath V. Dhakappa [1969] 72 ITR 192, which has been relied upon by the AAC, is not applicable to the facts of the present case inasmuch as in that case the partner, Shri G.V. Dhakappa, was appointed manager of the partnership on a remuneration of Rs. 500 per month and, therefore, the facts could be distinguished. The Tribunal, Madras Bench 'C', in the case of Seventh ITO v. N.K.R.K. Sundararaj Nadar [IT Appeal No. 1848 (Mad.) of 1982, dated 3-8-1983] has held likewise in its order, to which one of us (the Accountant Member) was a party. Further, in this case the salary paid to the partner also cannot be treated as an expenditure or outgoing of the business, so that it does not enter into the divisible pool of net profits. Clause 13 of the deed of partnership reads as under : " 13. The accounts of the firm shall be closed as on 31st March of respective English calendar year and after all the trading expenses, the net profit or loss shall be debited or credited, as the case may be, in the respective accounts of the partners in the following manner : Shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf, his wife, two sons and one daughter. During the accounting periods relevant to the assessment years 1979-80 and 1980-81, he was a partner in the firm of C. Duraisamy Nadar and A. Somasundara Nadar, Kadayam, representing his HUF. Clause 10 of the partnership deed dated 12-12-1977 provided that a monthly salary of Rs. 126 would be paid to Shri C.D. Chidambaram. Accordingly, Shri C.D. Chidambaram received the salary of Rs. 1,512 from the firm of C. Duraisamy Nadar for each of the assessment years under consideration. In the original assessments for these years, the ITO accepted the claim of the assessee-HUF that the salary received by Shri C.D. Chidambaram from the firm for the services rendered by him to it, was not includible in its income. Later on, however, the ITO reopened the assessments under section 147(b) of the Act. In the reassessment proceedings, the ITO observed that there was no material to prove that Shri C.D. Chidambaram had rendered any special services apart from the ordinary services rendered by him as a partner, and so the amount of salary received by him was, in fact, the share of profit due to the assessee-HUF from the firm. He, therefore, assessed the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exclusion arose out of the overriding title of the karta by virtue of an agreement between him and the other members of the family to allow remuneration for the services rendered by the karta to the HUF. According to him, this was not the case here. The learned Accountant Member also observed that a contract of employment required two distinct persons, i.e., the employer and the employee, that there could not be a contract of service, under strict law, between a firm and one of its partners and, as such, the salary paid to a partner represented a special share in the profits of the firm. In this behalf, he relied upon the decision of the Supreme Court in the case of R.M. Chidambaram Pillai. Further, the learned Accountant Member observed that there was no material on the record to prove that Shri C.D. Chidambaram rendered any special or extraordinary services, so as to justify the payment of salary to him by the firm. According to him, therefore, the salary of Rs. 1,512 was earned by Shri C.D. Chidambaram by detriment to the HUF's funds and was, therefore, includible in the income of the assessee-HUF for each of the assessment years under consideration. 7. It is against this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income of the family. The payment of remuneration for making available to the business of the firm special skill would really be in the nature of compensation for services rendered by the exercise of such special skill, and so the receipt of salary by a partner for the services rendered by him to the firm would not partake the character of income of the HUF for the purpose of tax treatment. 11. Again, the Full Bench of the Patna High Court has held in CIT v. Atma Ram Budia [1984] 146 ITR 240 that if it is established that the remuneration received by the karta of an HUF from a firm in which he is a partner is for services rendered by him and there is no real and sufficient connection between the investment of the joint family funds in the firm and the remuneration paid to him, the remuneration received by the karta could not be treated as income of the family. 12. Now, in the present case, it is stated by the counsel for the assessee that Shri C.D. Chidambaram has 20 years' experience in timber and tiles trade, that he is in charge of the tiles manufacturing section of the firm in which he is a partner and that the salary paid to him by the firm has always been allowed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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