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TMI Blog2003 (11) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The appellant is aggrieved and hence the present appeal. 3. The learned counsel for the assessee submitted that the salary of partner is another mode of sharing of profit in the firm. Thus such salary is not remuneration as such, but share of profit only. Reliance was placed on the decision of Hon'ble Supreme Court in the case of CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292. It was submitted that earlier-section 64(1)(i) was on the statute book. As per section 64(1)(i) if the husband and wife both are partners in same firm, the share of profit was clubbed. In such situations section 64(1)(ii) was held not applicable. Reliance was placed on the decision of Hon'ble Madras High Court in Sivasankari Chandrasekaram and Brinda Jayaraman v. CIT [1991] 189 ITR 51. Section 64(1)(i) has been deleted in view of new scheme of assessment of firm and its partners and the remuneration payable to the partners are now held allowable provided conditions stated in section 40(b) is complied with. In the present case, it is found that the wife of assessee is working partner in the firm and the remuneration payable to her is held allowable. In such situation, section 64(1)(ii) is not applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the taxpayer to endeavour to reduce liability to tax by admitting the spouse as a partner in which the taxpayer himself was a partner, sections 64(1)(i) and 64(1)(ii) which are relevant in the present case read as under: "In computing the total income of an individual, there shall be included all such income as arises, directly or indirectly, (i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner; (ii) to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest. Provided that nothing in this clause shall apply in relation to any income arising to the spouse, where the spouse possess technical or professional qualification and the income is solely attributable to the application of his/her technical or professional knowledge and experiences.' 5.2 Section 64(1)(ii) in the present form was not there in the Indian Income-tax Act, 1922. This provision of section was also not there when the Act of 1961 was enacted. The above provision was brought on statute book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, is liable for inclusion in the hands of the husband under section 16(3a)(i) of the Indian Income-tax Act, 1922 [corresponding to section 64(1)(i) of the present Act]. 5.4 A similar question arose for the consideration of Madras High Court in the case of Sivasankari Chandrasekaram and Brinda Jayaraman. The facts in that case - "The next question we have to examine is whether the salary received by the husbands of the assessee's in pursuance of clause (8) of the deed of partnership can be considered as income arising directly or indirectly from their membership of the firm. In R.M. Chidambaram Pillai v. CIT [1970] 77 ITR 494 (Mad.) (FB), a Full Bench of this court, while considering the nature and character of salary paid to a partner, held that the salary received by a partner of a firm for services rendered by him to it is only a mode of adjustment in his share of the firm's income and continues to bear, for the purposes of charge at his hands, the same character as part of the total income of the firm, which has to be shared between its partners. The Supreme Court, in the decision in CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292 (SC), while confirming the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm shall be considered as the income of the partner chargeable under the head "Profits and gains from business/profession". Similarly, explanation 2 to section 15 clarifies the position that any salary received by a partner of a firm shall not be regarded as salary for the purposes of section 15 (Refer 194 ITR 133 Statute). The reason for treating the salary received by a partner of a firm as a share of profits is to be seen from the decision of the Supreme Court in R.M. Chidambaram Pillai's case. Reference may be made to the following two paragraphs appearing at page 309 of the Report: "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 a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, part of the profits and taxable as such and section 10(4)(b) stipulate 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 business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him...... (4) Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorize the allowance of any sum paid on account of any cess, rate of tax levied on the profits or gains and nothing in clause (xv) of sub-section (2) shall be deemed to authorize...... (b) any a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the affairs of the firm. Therefore, the latter part of the proviso which requires that the income in question must be solely attributable to the application of the knowledge and experience is fully satisfied. No special technical or professional qualification is necessary to become a working partner of a firm carrying on the business of hardware. As submitted, the spouse is a graduate in arts and in the backdrop of the business of the firm this qualification shall be construed as a technical qualification required to run a hardware shop is minimum and it is sufficient if the partner knows the different brands of the items dealt with by the firm, and their different uses etc. Consequently, it is held that the proviso is applicable and hence the inclusion of income is not warranted. The decision of Hon'ble Gauhati High Court will also be not applicable as in the said case, the spouse of the assessee was not receiving salary as partner thereof and it was also held that she does not possess any professional or technical knowledge, section 64(1)(iii) was held applicable which is not so in the present case. In the result, the appeals of the assessee are allowed and the cross-objections ..... X X X X Extracts X X X X X X X X Extracts X X X X
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