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TMI Blog1987 (1) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... et Singh each having 10 per cent share. Smt. Jai Kaur is having 5 per cent share only. S. Boota Singh represented his HUF in the partnership. New firm took over the assets and the liabilities of the old firm including the telephone connection. The business is cloth merchants and it is carried on at Jalandhar. Certain clauses of the partnership deed wee referred to in the course of arguments and these are reproduced below: 5. That the capital of the partnership firm shall be contributed by the partners. The capital of the business shall be the amount as standing in the respective ledger account of each partner in the books of account of the firm. The capital of the firm may be increased or decreased according to the needs of the firm and with the mutual consent of the partners. 6 to 8. ** ** ** 9. That no salary shall be paid to any partner for the work done or for taking active part in the conduct of the Partnership business at present but it can be done at any later stage with mutual consent of the Partners. Anyhow, the partners may have drawing account if so desired. 10 and 11. ** ** ** 12. That the partners shall carry on the business of the firm honestly, diligently a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in order to earn the profits. He further observed that the case law quoted by the assessee's authorized representative was not relevant on the point in hand since in those judgments the point in dispute related to payment of salary by the HUF to its karta for rendering the services to the family whereas in the assessee's case the point related to disallowance of salary under section 40(b) in the case of the firm. He dismissed both the appeals of the assessee. 5. The assessee has come in further appeal to the Tribunal for both the assessment years. Shri Prem Singh, the learned counsel of the assessee, contended that as the salary was paid to S. Boota Singh in his individual capacity while he was partner in the firm in his representative capacity, it could not be disallowed under section 40(b). He referred to clause 5 of the deed (quoted above) and stated that the contribution of capital is not the whole ingredient as each partner has not to contribute capital or any fixed amount. He next submitted that S. Boota Singh was the only experienced person to conduct the business of the firm and he was earlier partner in Navrattan Emporium, Jalandhar dealing with the same type of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two Supreme Court authorities-Mathura Prasad v. CIT [1966] 60 ITR 428 and CIT v. Kalu Babu lal chand [1959] 37 ITR 123. 7. We have carefully considered the rival submissions. Section 40(b) provides for disallowance of any payment of interest, salary, bonus, commission or remuneration made by the firm to any of its partners in the firm's assessment. Certain Explanations have been inserted in clause (b) of section 40 by the Taxation Laws (Amendment) Act, 1984 with effect from 1-4-1985 but these refer only to any payment of interest made by the firm to its partners or interest received by the firm from a partner. These do not in any way modify the position in law in respect of other payments made by a firm to a partner such as salary. In other words, the question of representative capacity of a partner in the context of payment of interest only has been dealt with in the Explanations inserted from 1-4-1985. In regard to other payments, the position about the representative capacity of a partner remains the same in the matter of disallownce under section 40(b) and the law, as interpreted earlier by the Courts, will continue to apply. There are a number of High Court decisions on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 partner ship, 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 section 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, part of the profits and taxable as such. And section 10(4) (b) stipulates accordingly. May be, we may usefully read here sections 10(1) and 10(4) to the extent relevant: '10 (1) The tax shall be payable by an assessee under the head "Profits and gains of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business. It 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... With ideological clarity, this legal position has been set forth by a learned author (Law of Income-tax by A. C. Sampath Iyengar, 6th edn., 1973, pages 1063-1064, Vo1. II) whom we refer to (by no means, rely on) compendious as his summary is: Any interest, salary, 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's rendering services to the firm stands on the same footing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of above passages that salary paid to a partner in the case of a firm is nothing but sharing of profits and the Act has taken note of that position by inserting section 40(b) and 67. It will also be interesting to refer to the authority of the Patna High Court in Dwarka Prasad's case cited by the assessee's counsel. That decision was rendered by the Court by following its Full Bench decision in CIT v. Atma Ram Budhia's Atma Ram Budhia (1984) 146 ITR 240 (Pat.) We will refer to the Full Bench decision in case which deals with the question in great detail. In that case both the Supreme Court authorities cited by the assessee's counsel as well as the above quoted Supreme Court authority, R. M. Chidambaram Pilla's case along with certain other authorities of the Supreme Court were considered by the Full Bench of the High Court. It may be stated at the outset that that was also a case where the issue arose in the case of an HUF about the payment of salary to its karta for looking after the interest of the HUF in a firm and not the case like the one now before us about the disallowance of salary paid to a partner in representative capacity under section 40(b). But the High Court had to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already indicated the nature of the Patna High Court case in Dwarka Prasad cited by the assessee. It will therefore, be clear that none of the authorities cited by the assessee's counsel will be of any help in this case. 9. The only authority and that comes from the Supreme Court, which is of assistance is the one quoted above in extentso, i.e., R. M. Chidambaram Pillai's case . Another case come to notice was the Gauhati High Court in CIT v. Amsoi Tea Estates [1978] 112 ITR 234 (FB) which follows the aforementioned Supreme Court authority. In the instant case, S. Boota Singh has to work for the partnership as a condition of partnership agreement and if he were not working, on the submissions of the assessee's own console, the business of the firm will not run. He is admittedly the most experienced partner and was having 50 per cent share and his sons and the lady partner were not experienced to carry on the business of cloth merchants. When a partner as a condition of partnership agreement is to carry on the business of the partnership, it is difficult to see how the salary income earned by him can be separated from the share of profit earned by him. The Supreme Court in R. M. C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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