TMI Blog1969 (12) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... sees were partners in two firms-Kavukal Estates and Tuttapallam Estates-which owned tea estates in the Nilgiris. In addition to their right to share the profits of the firms, the partners were, under the terms of the deed of partnership, entitled each to draw specified salaries for their services to the firms. Till the assessment years ended March 31, 1959, the total income of each firm was computed with reference to section 10(4)(b) which was apportioned between agricultural and business incomes in accordance with rule 24 of the Income-tax Rules. As the firms were registered under the provisions of the Act, the non-agricultural portion of the income was apportioned between the partners and brought to tax in their hands. For the assessment year 1959-60, the Income-tax Officer, being of opinion that the income received by the assessees as salary from the firms would not constitute agricultural income but represented income from other sources, recomputed the income on that basis. As a result, the entire salaries paid to the partners were included in the total chargeable income of each of them. The Appellate Assistant Commissioner of Income-tax did not accept that basis, but proceeded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for that purpose, there is nothing in section 3 which qualifies or in any way modifies the legal position of a firm or the principles applicable to it under the Indian Partnership Act. The procedure of assessing a firm, however, varied under section 23(5) according to whether it was registered or not. The head of the income of the firm depended on the character of its source. If the firm, as in these references, derived business income, such income should have to be computed after making the allowance permissible under section 10(2), but subject to section 10(4). In view of clause (b) of sub-section (4) of the section, any salary, commission or remuneration paid by a firm to any of its partners would not be entitled to deduction in the computation of the firm's income. The procedure for computing the total income of a partner of a firm is to be found in section 16(1)(b), according to which, whether the firm has made a profit or a loss, his share shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also in consonance with the principles of the law of partnership. Notwithstanding the fact that a firm like an association of persons is for the purpose of assessment treated as a separate entity, it is not a legal person having a corporate character distinct from that of its members. A firm is but a compendious expression of the relationship between the partners, who, by an agreement between them, embark on a commercial venture and contribute capital or labour and share profit and loss according to mutual understanding. In mercantile practice the trade seems to look upon the firm as a kind of a body distinct from its members and capable in its right of owning property and entering into dealings and creating rights and liabilities binding on the partners. But in law that clearly is not the position. The Indian Partnership Act, by section 4, defines " partnership " as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all and that such persons collectively are called a firm and individually as partners. It is true that looked at from certain circumstances permitted by the provisions of the Partnership Act, a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y distinct from the persons constituting it, the law in India in that respect being more in accordance with the law of Scotland, than with that of England. " But by this observation we do not think that Sir John Beaumont, who spoke for the Judicial Committee, meant to say that a firm under the Indian law is a legal entity distinct from its partners. In fact, the further observations in the judgment make this clear, namely : The Indian Act, like the English Act, avoids making a firm a corporate body enjoying the rights of perpetual succession. As a matter of fact, the rule in that case was that when all the members who entered into a partnership originally ceased to be members of the firm by death or assignment, there was no longer any privity such as to sustain the continued existence of the firm and that consequently upon the change in the membership of the firm, the agreement came to an end. In Dulichand Laxminarayan v. Commissioner of Income-tax, the Supreme Court held that a firm was not a person and as such was not entitled to enter into a partnership with another firm or Hindu undivided family or individual. It was pointed out there : " In some systems of law this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording the fact of dissolution of partnership and relinquishment of interest of a partner in a partnership asset by way of adjustment. This is on the view that the property brought into the firm by the partners became the property of the firm and what the partners, on dissolution, would be entitled to was but a share in the money representing the value of the property. In saying that the Supreme Court observed : " No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48." It is because of the fact that a firm is not a legal person in India, it should be taken as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the individual assessment of each partner." The contention for the revenue in the references before us that the immediate source for the partners' salary is the service and not the share in the profits of the firm cannot, therefore, be accepted. This view receives support from other decided cases. In Commissioner of Income-tax v. B. S. Mines a Full Bench of this court held, with reference to the provisions of Income-tax Act, 1918, that the salaries paid to the partners of a firm were not admissible as deductions in the computation of the profits of the firm for income-tax purposes and so the partners' drawings were taxable. The entire judgment was only this : " On the facts stated we have no hesitation, in answering that the drawings of the partners, by whatever name they are described, are part of the profits and therefore taxable." The ratio of this case is clearly that salary drawn by partners being part of the profits, it was assessable in the hands of the partner as part of his profits, that is to say, the salary drawn by a partner from the firm was not to be regarded as emanating from a source different from that from which he derived a share of the profits. Evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its and gains liable to tax." We are not here concerned with the proviso to the rule. This rule is applied the moment the total composite income is arrived at under section 10(4)(b). Once by application of rule 24 agricultural income from tea plantations is arrived at, only the rest of the income shall be treated as from business which is chargeable to tax. Beyond this, rule 24 has no effect. Salary paid to a partner being treated as part of the profit of the firm by disallowance of the amount, there is no warrant for the view that after applying rule 24 to the total composite income the entire salary paid to the partner will enter into the computation under section 16(1)(b). What is apportioned by application of rule 24 is the total composite income of the firm inclusive of the salary paid to the partner and it follows, therefore, that such salary is necessarily apportioned and it is only 40 per cent. of the salary that can properly be taken for the purpose of computation of the total income under section 16(1)(b). Mathew Abraham v. Commissioner of income-tax, however, held a contrary view, but, with due respect, we are of opinion, that it cannot be upheld as correct. In that ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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