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TMI Blog1971 (1) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... so of gota, tila and zari goods and is being assessed on a substantial income from year to year. The firm was formed during the previous year for 1942-43 assessment year, for which it was granted registration under section 26A of the Act. Since then renewal of registration is being granted to the firm year after year. Before 1942-43 assessment year, the same business was being carried on by a Hindu undivided family of the same name. On September 4, 1956, the assessee entered into an agreement with each of the five partners whereby they were paid salaries as shown below in the four years with which we are concerned in this case : Partners 1958-59 1959-60 1960-61 1961-62 1. Baburam 9,600 14,400 15,600 14,400 2. Balkishan 8,800 13,200 14,300 13,200 3. Banwarilal 8,000 12,000 10,800 13,000 4. Muralilal 7,200 10,800 11,700 10,800 5. Devi Charan 6,400 9,000 10,420 9,600 The said amounts were claimed by the assessee as a permissible deduction in arriving at the net income from its business assessable under section 10 of the Act. The Income-tax Officer who dealt with the assessment for the years in question disallowed the claim as, according to him, salary paid to a par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Appellate Assistant Commissioner concerned. The Tribunal dismissed the appeals of all the four years holding that the issue before the Tribunal was not whether the salaries paid to the five partners were to be assessed in their hands as individuals or were to be included in the income of their respective Hindu undivided families. The Tribunal was informed by the counsel for the assessee that these salaries had been included in the assessment of the respective Hindu undivided families although the partners had also filed separate returns in their individual status showing their income from salaries only. Protective assessments have therefore been made on the individual partners separately. The Tribunal therefore held that when the appeals relating to that particular point would come up before it, the Tribunal will have occasion to decide whether in view of the agreement dated September 4, 1956, the salary income should be treated as the income of the joint Hindu family or that of the partners in their individual capacity, but so far as the assessee firm is concerned its income is assessable under section. 10 of the Act. Section 10(2)(xv) of the Act provides for the allowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artner which clearly showed that the investment was made by him in his representative capacity as a karta of his Hindu undivided family, the salary account clearly shows that the payment of salary was being made to each partner in his individual capacity and had nothing to do with his being a karta of the family. Each partner was required to carry out a specific job and was, therefore, entitled to be remunerated for the job done by him. It is true that each partner was, in a way, a proprietor of the firm but he was also an employee of the firm in the sense that he actually worked for the firm as any other employee who was an utter stranger to the firm would also work for it if and when he had been employed by the firm. There is no reason why a partner of the firm who, besides investing money, also works for the firm should not be remunerated for the services rendered by him. The dual capacity of a partner who has not only invested, money in the firm and is, therefore, entitled to the profits and losses arising out of the business but is also a partner who is working for the firm, is not something unknown to law. In this connection our attention was invited to section 13(a) of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a partner has been brought out. In Prem Nath v. Commissioner of Income-tax , which was decided on August 12, 1970, Prem Nath had entered the firm of K. C. Raj and Co. as a karta of his Hindu undivided family. He was also a working partner and was allowed a salary at the rate of Rs. 700 per mensem. The question before the Supreme Court was whether the remuneration received by him as a working partner was the income of his family or his individual income. The High Court answered the question holding that the income was the income of the undivided family. On appeal to the Supreme Court it was held that the income received by him was remuneration for services rendered by him and there was no real and sufficient connection between the investment of joint family assets and the remuneration paid to him. The decision of the High Court was set aside and the question was answered in the negative, This clearly brought out the distinction between the dual capacity of a partner, one in which he represents the family and the other when he represents none but himself. Mr. Bajaj also invited our attention to a decision of Addison J. (Bhide J. concurring) in Electric and Dental Stores, v. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court was whether, on the facts and in the circumstances of the case, the salary of Rs. 1,500 per mensem received by S. Bhagwant Singh from the firm styled as Sir Sobha Singh Co. (Builders), Nagpur, was income of S. Bhagwant Singh in his individual capacity. The question was answered against the assessee. In the judgment there is a reference to a passage from Lindley's Law of Partnership and to certain observations of Vice-Chancellor Willard in Caldwell v. Leiber. But it is not necessary to set out those passages in view of section 13(a) of the Partnership Act which makes it clear that if the contract so provides a partner may receive compensation for taking part in the conduct of the partnership business. In Raj Kumar Singh Hukam Chandji v. Commissioner of Income-tax the Supreme Court laid down the various tests for the purpose of determination as to whether the remuneration received by a coparcener in substance, though not in form, was but one of the modes of return made to the family because of the investment of the family funds in the partnership business or whether it was a compensation made for the services rendered by the individual coparcener. It was said ; " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management of the firm or claim any account of the partnership business or exercise any of the rights of a partner. So far as the outsiders are concerned, it is the karta who alone is, and is in law recognised as, the partner. " The assessee-firm is constituted by five persons and they were all there in their individual capacity. The relationship between the partnership and the karta partner was that of an individual appointed as a partner. And, therefore, so far as the assessment of the firm is concerned, any payment made by it to a partner on account of salary is not an admissible expenditure in terms of section 10(4)(b) of the Act. It does not make the slightest difference whether the person joining the firm as a partner enters it as an individual or as a karta of a Hindu undivided family. The partnership is a contractual relationship between individuals. If there is a fiduciary capacity between the individual and the family that he represents, it is a mater entirely between that individual and his family. The firm as such has nothing to do with it. It seems to us that the present agreements were entered into on September 4, 1956, after the Finance Act of 1956 came into for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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