1984 (1) TMI 162 - AT - Income Tax

Summary

Issues:
1. Allowance of standard deduction under s. 16(i) of the IT Act, 1961 for remuneration received by a partner in a firm.
2. Determining whether the remuneration received by the partner should be treated as salary and entitled to standard deduction.

Analysis:
1. The appeal was filed by the assessee, a partner in a firm, against the order of the AAC upholding the ITO's decision to assess the remuneration received from the firm under 'Other sources' without allowing standard deduction under s. 16(i) of the IT Act, 1961. The assessee contended that the remuneration was for services rendered as an individual employee to the firm. The ITO and AAC held that there was no employer-employee relationship between the firm and the partners, and the remuneration should be treated as a special share of profits, not entitled to standard deduction.

2. The AAC concurred with the ITO's view that there was no employer-employee relationship between the firm and the partners. The partners' allocation of functions was by mutual consent, and there was no control or supervision by the firm over the partners. The Deed of Partnership did not contain provisions for overall control and supervision by the firm. The AAC also noted that the concept of agency was different from that of an employer-employee relationship, emphasizing that a partner in an HUF cannot be an employee but can be a manager.

3. The Tribunal considered the arguments presented by the assessee's counsel, who referred to the Partnership Act, 1932, stating that remuneration for services rendered by partners should be allowed. The Departmental Representative argued that the remuneration paid to a partner is part of the profits and should not be treated as salary. The Tribunal observed that the remuneration paid to a partner represents a special share of profits and is taxable as such, following the Supreme Court's ruling. As there cannot be a contract of service between a firm and its partners, the remuneration received by a partner should be considered a special share of profits and not eligible for standard deduction under s. 16(i).

4. The Tribunal upheld the orders of the authorities, concluding that the remuneration received by the partner should be treated as a special share of profits and taxable accordingly. Since the payment of salary to a partner is considered part of the profits, the question of allowing standard deduction under s. 16(i) does not arise. Therefore, the Tribunal dismissed the appeal, affirming the decision of the AAC and rejecting the grounds raised by the assessee.