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TMI Blog1976 (11) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... l view-point well presented by Sri Ahuja for the appellant (revenue). The planning and pruning of case law is perhaps necessary if time-consuming court proceedings are to be curbed. " All our life is crushed by the weight of words : the weight of the dead ", said Luingi Pirandello. Heavy case-law must not clog judicial navigation. Next to a breviate statement of the facts which project the legal issue canvassed before us. Two tea estates were owned by two firms with several partners, two of whom were the respondents, in the two sets of appeals, C.As. Nos. 17 to 19 and C.As. Nos. 20 and 21 of 1972. The tea sold yielded income composite in character, being largely agricultural and party non-agricultural. The complex situation of apportionment between the two heads for purposes of income-tax has been taken care of by rule 24 of the Income-tax Rules, both the firms having been registered under the Act. The respondents-partners were, in addition to their share in profits, entitled to salaries for services under the firms. The sole controversy turns on whether the sums so drawn as salaries were wholly liable to income-tax or only to the extent of 40% thereof which fell within the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious expression to designate an entity, not a person. In income-tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in. Section 13 of the Partnership Act brings into focus this basis of partnership business. This legal ideology expresses itself in the Income-tax Act in section 10(4)(b) and section 16(1)(b). A firm, partner and partnership, according to section 2(6B) of the Act, bear the same sense as in the Partnership Act. The taxable income of a firm has to be its business profits, as provided in sections 10(1), 10(2) and 10(4). What is the real nature of the salary paid to a partner vis-a-vis the income of the firm ? On principle, payment of salary to a partner represents a special share of the profits and is, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, salary is a different label for profits, in the context of a partner's remuneration. The scheme of the Act, eyeing it with special reference to sections 10(4)(b) and 16(1)(b), designates employee's salary as profit, where the servant is none other than a partner, i.e., co-owner of the business. If such be the rationale of the relevant provisions, the key to the solution of the problem is within easy reach. Salaries are profits known by a different name and must be treated as such for taxation purposes. The portion of profits, from tea sales by a grower, which is agricultural, is insulated from incidence and exaction by the Constitution worked out through rule 24. Which means that by that modus operandi we set aside 60% of the total income as representing the agricultural sector, and the salary to partners paid out of it, being only profits, enjoys the same invulnerability to exigibility that rule 24 admittedly confers on the agrarian portion. Shri Ahuja has an attractive counter-theory which merits disturbing attention. It is a variant version of the ratio in Mathew Abraham v. Commissioner of Income-tax [1964] 51 ITR 467 (Mad). He took us along a different street ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, and 40 per cent. of such income shall be deemed to be income, profits and gains liable to tax. " Plainly, only 40% of the income from tea sales is treated as taxable. The balance, viz., 60% is regarded as agricultural and exempt. 60% of the salaries to partners comes out of this exempted gross sum and shares the benefit (of course, this may be exigible, by the same token, to agricultural income-tax, if there be any). The core of the logic--and failure to grasp this has faulted the reasoning in Mathew Abraham v. Commissioner of Income-tax [1964] 51 ITR 467 (Mad)--is that the true character of the salary (i.e., the impugned 60%) is the same as that of the profits. Both are agricultural and thus it is clear that the amount does not escape tax if the State has--and now it has--a levy on agricultural income but the title of the State to tax this sum is valid, not of the Union. We may now embellish this brief judgment with some text-book references and citation of rulings. Is the firm a person or a mere shorthand name for a collection of persons, commercially convenient but not legally recognised ? Under section 3 of the Partnership Act it is not a person, but a relationship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a partnership firm. " The life of the Indian law of partnership depends on its own terms although habitually courts, as a hangover of the past, have been referring to the English law on the point. The matter is concluded by the further observations of this court : " It is clear from the foregoing discussion that the law, English as well as Indian, has, for some specific purposes, some of which are referred to above, relaxed its rigid notions and extended a limited personality to a firm. Nevertheless, the general concept of a partnership, firmly established in both systems of law, still is that a firm is not an entity or 'person' in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership. According to the principles of English jurisprudence, which we have adopted, for the purposes of determining legal rights 'there is no such thing as a firm known to the law' as was said by James L.J. in Ex parte, Corbett : In re Shand [1880] 14 Ch D 122, 126 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income-tax Act, a firm has certain attributes simulative of personality, we have to take it that a partnership is not a person but a plurality of persons. Coming to basics over again, this court, in Karimtharuvi Tea Estates v. State of Kerala [1963] 48 ITR 83 (SC) ; [1963] Supp 1 SCR 823 and in Anglo-American Direct Tea Trading Co. v. Commissioner of Agricultural Income-tax [1968] 69 ITR 667, 671 (SC) has set out the nature of and manner of assessment of composite income-tax derived by the sale of tea : " In Karimtharuvi Tea Estates Ltd v. State of kerala [1963] 48 ITR 83 (SC) ; [1963] Supp 1 SCR 823, this court held that Explanation 2 to section 5 of the Kerala Agricultural Income-tax Act added in 1961 disallowing certain deductions in the computation of agricultural income did not apply to computation of agricultural income derived from tea plantations. The reasons for this conclusion may be summarised thus : The definition of agricultural income in the Constitution and the Indian Income-tax Act, 1922, is bound up with rule 24 of the Income-tax Rules, 1922. Income derived from the sale of tea grown and manufactured by the seller is to be computed under rule 24 as if i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions of this court in the cases of Karimtharuvi Tea Estates Ltd. v. State of Kerala [1963] 48 ITR 83 (SC), 88 and Anglo-American Direct Tea Trading Co. Ltd. v. Commissioner of Agricultural Income-tax [1968] 69 ITR 667 (SC). In the case of Karimtharuvi Tea Estates Ltd. [1963] 48 ITR 83 (SC), it was observed while dealing with the income derived from the sale of tea grown and manufactured by the seller in the context of rule 24 : 'Of the income so computed, 40 per cent. is, under rule 24, to be treated as income liable to income-tax and it would follow that the other 60 per cent. only will be deemed to be " agricultural income " within the meaning of that expression in the Income-tax Act.' In the case of Anglo-American Direct Tea Trading Co. Ltd. [1968] 69 ITR 667 (SC) the Constitution Bench of this court held that income from the sale of tea grown and manufactured by the assessee is derived partly from business and partly from agriculture. This income has to be computed as if it were income from business under the Central Income-tax Act and the rules made thereunder. Forty per cent. of the income so computed is deemed to be income derived from business and assessable to no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employee must be looked upon as occupying the position of one of his own employers, which is legally impossible. Consequently, when an arrangement is made by which a partner works and receives sums as wages for services rendered, the agreement should in truth be regarded as a mode of adjusting the amount that must be taken to have been contributed to the partnership's assets by a partner who has made what is really a contribution in kind, instead of contribution in money. Hence, all the aforesaid payments are non-deductible. " The contrary view favoured by Mathew Abraham v. Commissioner of Income-tax [1964] 51 ITR 467, 471 (Mad) proceeds on the following reasoning : " Though for purposes of computation of income his share income of the firm is clubbed along with the allowance and commission, it is obvious that the character of the receipt of the latter amounts, though related to the business, cannot be said to partake of the same character of their receipt by the firm. The assessee who is a managing partner was entitled to receive the amount not by virtue of the relationship between him and the other member of the firm as partners but by virtue of the special agreement betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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