Commissioner of Income-Tax, Madras Vs.
R.M. Chidambaram Pillai [1976] INSC 288 (17 November 1976)
KRISHNAIYER, V.R.
KRISHNAIYER, V.R.
KHANNA, HANS RAJ
CITATION: 1977 AIR 489 1977 SCR (2) 111 1977
SCC (1) 431
CITATOR INFO :
F 1988 SC1435 (34) RF 1991 SC1806 (8)
ACT:
Income Tax Act, 1922--S. 16(1)(b)--Income Tax
Rules 1922--r. 24 Scope of-Assessees partners in firms owning tea estates
Salary paid to partners If whole salary exigible to tax.
HEADNOTE:
Rule 24 of the Income Tax Rules, 1922 states
that income derived from the sale of tea grown and manufactured by the seller
shall be computed as if it were income derived from business and 40 per cent of
such income shall be deemed to be income, profits and gains liable to tax.
The respondents were partners in firms which
owned tea estates, the composite income of which consisted largely of
agricultural and partly of nonagricultural income. In addition to their share
in profits, the respondents were entitled to salaries. Rejecting the contention
of the respondents that only 40% of the salaries which fell within the
non-agricultural income is exigible to tax and not the whole income, the Income
Tax Officer charged the whole of their salaries to tax under s. 10 of the
Income Tax Act, 1922. The Appellate Asstt. Commissioner held in favour of the
respondents; but on appeal the Appellate Tribunal held in favour of the
Revenue. The High Court allowed the respondents' appeal.
Dismissing the appeal to this Court,
HELD: Only 40 per cent of the income from the
tea sales is taxable; the balance, namely, 60 per cent is agricultural and
exempt. 60 per cent of the salaries to partners comes out of this exempted
gross sum and shares the benefit and the Central Income-tax cannot break into
its inviolability.
[116 B]
1. (a) The salary of a partner is but an
alias for the return by way of profits, for the human capital. The immediate
reason for payment of salary was service contract but the causa causans is
partnership. [121 F] (b) A partnership is only a collective of separate persons
and not a legal person in itself. The salary stipulated to be paid to a partner
from the firm is in reality a mode of division of the firms profits. [117 H]
(c) In the income tax law a firm is a unit of assessment, by special provisions,
but is not a full person.
Since contract of employment requires two
distinct persons, namely, the employer and the employee, there cannot be a
contract of service. between a firm and one of ,its partners. 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. [113 F-G] Lindley on Partnership referred to.
Dulichand, [1956] S.C.R. 154 and Narayanappa,
A.I.R.
1966 S.C. 1303. followed.
(d) Payment of salary to a partner represents
a special share. of the profits and is, therefore, part of the profits and
taxable as such. Section 10(4)(b) stipulates accordingly. [114 A] (2) Under s.
16(1)(b) in computing the total income of an assessee, when the assessee is a
partner of a firm, his share shall be taken to be, any salary payable to him by
the firm increased or decreased respectively by his share in 112 the balance of
the profit or loss of the firm after the deduction of any interest, salary etc.
payable to any partner. It is implicit that the share income of partner takes
in his salary. [114 F & H] (3) The portion of profits from tea sales by a
grower, which is agricultural, is insulated from incidence and exaction by r.
24, which means that by that modus operandi 60 per cent of the total income is
set aside as representing the agricultural sector, and the salary to partners
paid out of it, being only profits, enjoys the same invulnerability to
exigibility that r. 24 confers on the agrarian portion.
[115 B-C] Karimtharuvi Tea Estates [1963]
Supp. 1, SCR 823, Anglo-.American Direct Tea Trading Co. [1968] 69 ITR 667, 671
and Tea Estate India [1976] 103 ITR 785, 795 applied.
Mathew Abraham [2964] 51 I.T.R. 467 overruled.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 17 to 21 of 1976.
(From the Judgment and Order dated the 5th
December, 1969 of the Madras High Court in Tax Cases Nos. 114 & 115 of
1964-Ref. Nos. 48 and 49 of 1964) B.B. Ahuja and R.N. Sachthey for the
Appellant.
S. Swaminathan and Mrs. Saroja Gopalakrishnan
for Respondents.
The Judgment of the Court was delivered by
KRISHNA IYER, J. A fine point of law, which lends itself to subtle spinning of
gossamer webs of argument, falls for decision in these appeals by certificate.
Were the policy of the law been plain, the language should have been clearer
and the labours of courts could have been lesser. The arguments have been
exhaustive, the precedents, in profusion, cited to the point of no return and
the short issue expanded into learned length; but, at the end of the forensic
journey, we are hesitantly inclined to leave the judgment under appeal
undisturbed as the law set out therein has better appeal and theoretical
soundness than the rival view point well-presented by Sri Ahuja for the
appellant (Revenue). The planning and pruning of case law is perhaps necessary
if time-consuming court proceedings are to be curbed. 'All our life is crushed
by the weight of words:
the weight of deed', said Luingi Pirandello.
Heavy case-law must not clog judicial navigation.
Next to abbreviate statement of the facts
which project the legal issue canvassed before us. Two tea estates were owned
by two firms with several partners, two of whom were the respondents, in the
two sets of appeals, C. As. 17 to 19 and C. As. 20 & 21 of 1972. The tea
sold yielded income composite in character, being largely agricultural and
partly non-agricultural. The complex situation of apportionment between the two
heads for purposes of income-tax has been taken care of by rule 24 of the
Income-tax Rules, both the firms having been registered under the Act.
The respondents-partners were, in addition to
their share in profits, entitled to salaries for services under the firms. The
sole controversy turns on whether the sums so drawn as salaries were wholly 113
liable to income-tax or only to the extent of 40% thereof which fell within the
non-agricultural sector. Until the assessment year ending with March 31, 1959,
the income-tax was so assessed that the whole of the agricultural income i.e.,
60% of the total income, was out of bounds for income-tax (which included 60%
of the salaries of the respondent partners). But, for the years 1959/60 and
1960/61, the two assessment years involved in these appeals, a different course
was followed. The mechanics is simple but the bone of contention between the
Revenue and the assessees is as to whether any portion of the salaries so drawn
for services rendered are at all agricultural income to be non-exigible to
income-tax.
Departing from the previous practice and in
'the prescient light of the law later laid down in Mathew Abraham(1), the whole
salary was subjected by the Income-tax Officer to income-tax as income from
other sources in terms of s. 10 [The Income-tax Officer had almost anticipated
Mathew Abraham(1)]. This computation was contested successfully before the
Appellate Assistant Commissioner but that decision suffered a reversal before
the Appellate Tribunal since, by then, Mathew Abraham (supra) had been decided
in favour of the Revenue. The case escalated to the High Court where a full
Bench upset the earlier view and upheld the exclusionary argument of the
assessees. The Revenue has arrived before us to assail the interpretation of S.
10(4) (b), r.
24 and of other provisions the High Court has
adopted.
There is plausibility in both approaches but,
after some reflection on the scheme as expressed in the statutory text, we are
disposed to affirm the decision under appeal. If the intendment of a
legislation misfires in court, competency being granted, the answer is
amendment, not more litigation.
First principles plus the bare text of the
statute furnish the best guide light to understanding the message and meaning
of the provisions of law. Thereafter, the sophisticated exercises in precedents
and booklore. Here the first thing that we must grasp is that a firm is not a
legal person even though it has some attributes of personality.
Partnership is a certain relation between persons,
the product of agreement to share the profits of a business.
'Firm' is a collective noun. a compendious
expression to designate an entity, not a person. in income-tax law a firm is a
unit of assessment, by special provisions, but is not a full person; which
leads to the next step that since a contract of employment requires two
distinct persons, viz., the employer 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 s. 10 (4) (b) and s. 16 (1) (b). A firm, partner and
partnership, according to s. 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 51 I.T.R. 467.
9 ----1458SCI/76 114 provided in s. 10(1),
10(2)and 10(4). What is the real nature of the salary paid to a partner visa
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 s. 10(4) (b) stipulates accordingly. Maybe, we may
usefully read here s. 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 profit or gains of any business, profession or vocation
carried on by him.
x x x x x (4) Nothing in clause (ix) or
clause (xv) of subsection (2) shall be deemed to authorise the allowance of any
sum paid on account of any cess, rate or tax levied on the profits or gains of
any business, profession or vocation or assessed at a proportion of or
otherwise on the basis of any such profits or gains; and nothing in clause (xv)
of subsection (2) shall be deemed to authorise-x x x x x (b) any allowance in
respect of any payment by way of interest, salary, commission or remuneration
made by a firm to any partner of the firm;
x x x x x It is plain that salaries paid to
partners are regarded by the Income-tax Act as retaining the character of
profits and not excludible from the tax net, whatever the reason behind it be.
The procedure for computation of the total income of a partner, found in s.
16(1) (b) also fits into this understanding of the law behind the law. Section
16 (relevant part) reads thus:
"16(1) In computing the total income of
an assessee-x x x x x (b) When the assessee is a partner of a firm, then,
whether the firm has made a profit or a loss, his share (whether a net profit
or a net loss 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 the deduction of any interest, salary, commission or
other remuneration payable to any partner in respect of the previous year:
Provided that of his share so computed is a
loss, such loss may be set off or carried forward and set off in accordance
with the provisions of section 24;" The anatomy of the provision is
obvious, even if the explanation or motivation for it may be more than one. It
is implicit that the share income of the partner takes in his salary. The
telling test-is that where a firm suffers loss the salaried partner's share in
it goes to depress his share of income. Surely, therefore, salary is a
different label for profits, in the context of a partner's remuneration.
115 The scheme of the Act, eyeing it with
special reference to s. 10(4)(b) and 16(1) (b), designates employee's salary as
profit, where the servant is none other than a partner i.e., co-owner of the
business. If 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. The portion of profits
from tea sales, by a grower, which is agricultural, is insulated from incidence
and exaction by the Constitution worked out through r. 24. Which means that by
that modus operandi we set aside 60% of the total income as representing the
agricultural sector, and the salary to partners paid out of it, being only
profits, enjoys the same invulnerability to exigibility that r. 24 admittedly
confers on the agrarian portion.
Shri Ahuja has an attractive counter-theory
which merits disturbing attention. It is a variant version of the ratio in
Mathew Abraham (supra). He took us along a different street with plausible
insights. Ordinarily, salary for services to an employer is salary all the same
and there is no agricultural salary as such. Therefore, the item is taxable as
salary income under s. 10. The mere fact that its ultimate source was
agricultural will not make its current complexion agricultural income, because
the payment was received not as part of his profit from agricultural property
but as remuneration due to him for work done as employee. The source does not
leave an indelible stamp on the stream or its tributaries. The nature of the
income being salary, taxability is inevitable. Section 10(4)(b) is a special
provision; so also s. 16(1)(b). The Parliament has power to provide for
possible leakages and safeguard against loss of revenue. Oftentimes. partners
siphon off substantial profits in the guise of salaries and so arrange such
distribution of income via salaries that tax evasion becomes legally protected.
To pre-empt such possibility the law has gone out of its way to exclude
manipulation by including salaries as profits. This special provision cannot
alter the nature of salaries as is obvious in commercial calculations,.
striking of balance sheets, in suing for unpaid salaries and the like.
Moreover, Indian law does recognise a firm as a per.son for many purposes and
the contrary tenor of English law has no tenability in our country. The very
need for s. 10(4)(b) and 16(1)(b) stresses that otherwise 'salary' will retain
its true character and not be regarded as profits. The other categories in both
these sections also bring home the purpose to be to prevent evasion, not to
inject jurisprudential changes.
Both sides are armed cap a pie with rulings
for their respective positions. The weaponry in forensic battle is precedentry;
also their profusion is fraught with confusion for the laity in the law. We
will deal with citations presently but going by basics we feel that albeit the
forceful plea of Shri Ahuja, the Revenue is in the wrong.
The whole project of taxation of tea
plantations is disclosed in r. 24, Chidambaram Pillai(1) explains it and we
unfold it by reading here a relevant portion:
"Income derived from the sale of tea
grown and manufactured by the seller in the taxable territories shall be (1)
[1970] 77 I T R. 494, 503 116 computed as if it were income derived from
business, and 40 per cent of such income shall be deemed to be income, profits
and gains liable to tax." Plainly, only 40% of the income from tea sales
is treated as taxable. The balance viz., 60% is regarded as agricultural and
exempt. 60% of the salaries to partners comes out of his exempted gross sum and
shares the benefit.
(Of course, this may be exigible, by the same
token, to agricultural income-tax, if there be any). The core of the logic--and
failure to grasp this has faulted the reasoning in Mathew Abraham(1)--is that
the true character of the salary (Le.,. the impugned 60%) is the same as that
of the profits. Both are agricultural and thus it is clear that the amount does
not escape tax if the State has--and now it has--a levy on agricultural income
but the title of the State to tax this sum is valid, not of the Union.
We may now embellish this brief judgment with
some text-book references and citation of rulings.
Is the firm a person or a mere shorthand name
for a collection of persons, commercially convenient but not legally
recognised? Under s. 3 of the Partnership Act it is not a person, but a
relationship among persons. Lindley, on Partnership,(2) has this:
"The firm is not recognised by English
lawyers as distinct from the members composing it. In taking partnership
accounts and in administering partnership assets, courts have to some extent
adopted the mercantile view, and actions may now, speaking generally, be
brought by or against partners in the name of their firm; but, speaking
generally, the firm as such has no legal recognition. The law, ignoring the
firm, looks to the partners composing it; any change amongst them destroys the
identity of the firm; what is called the property of the firm is their
property, and what are called the debts and liabilities of the firm are their
debts and their liabilities. In point of law,. a partner may be the debtor or
the creditor of his copartners, but he cannot be either debtor or creditor of
the firm of which he is himself a member, nor can he be employed by his firm,
for a man cannot be his own employer." The Indian law of partnership is
substantially the same and the reference in counsel's submissions to the
Scottish view of a firm being a legal entity is neither here nor there. Primarily
our study must zero on the Indian Partnership Act and not borrow courage from
foreign systems. In Bhagwanji Morarji Gokuldas(3) the Privy' Council ruled that
the Indian Partnership Act went beyond the English Partnership Act, 1890, the
law in India. attributing personality to a partnership being more in accordance
with the law of Scoff and. Even so, Sir John Beaumont, in that case, pointed
out that the Indian Act (1) (1964) 51 I.T.R. 467. (2) 12th Edition p. 28;
Sweet & Maxwell.
(3) A.I.R. 1948 P.C. 100=(1948) 18 Comp. Cas.
205,209.
117 did not make a firm a corporate body.
Moreover., we are not persuaded by that ruling of the Privy Council,
particularly since a pronouncement of this Court in Dulichand(1) strikes a
contrary note. We quote:
"In some systems of law this separate
personality of a firm apart from its members has received full and formal
recognition as, for instance, in Scotland. That is, however, not the English
common law conception of a firm. English lawyers do not recognise a firm as an
entity distinct from the members composing it. 'Our partnership law is based on
English law and we have also adopted notions of English lawyers as regards a
partnership firm." The life of the Indian law of partnership depends on
its own . terms although habitually courts, as a hangover of the past, have
been referring to the English law on the point. The matter is concluded by the
further observations of this Court:
"It is clear from the foregoing
discussion that the law, English as well as Indian, has, for some specific
purposes, some of which are referred to above, relaxed its rigid notions and
extended a limited personality to a firm. Nevertheless, the general concept of
a partnership, firmly established in both systems of law, still is that a firm
is not an entity or 'person' in law but is merely an association of individuals
and a firm name is only 'a collective name of those individuals who constitute
the firm. In other words, a firm name is merely an expression, only a compendious
mode of designating the persons who have 'agreed to carry on business in
partnership. According to the principles of English jurisprudence, which we
have adopted, for the purposes of determining legal rights 'there is no such
thing as a firm known to the law' as was said by James L.J., in Ex parte
Corbett: In re Shand (1880) 14 Ch. D. 122, 1.26). In these circumstances to
import the definition of the word 'person' occurring in section 3(42) of the General
Clauses Act, 1897, into section 4 of the Indian Partnership Act will, according
to lawyers, English or Indian, be totally repugnant to the subject of
partnership law as they know and understand it to be." In Narayanappa(2)
the view taken by this Court accords with the position above stated.
The necessary inference from the premise that
a partnership is only a collective of separate-persons and not a legal person
in itself lends to the further conclusion that the salary stipulated to be paid
to a partner from the firm is in reality a mode of division of the firm's
profits, no person being his own Servant in law since a contract of service
postulates two different persons.
(1) [1956] S.C.R. 154. (2) A./.R. 1966 S.C.
1300, 1303.
118 Counsel for the respondent cited the
'Australian Income Tax Law and Practice' by F.C. Bock and F.F. Mannix(1) in
support of the proposition that a partner's salary is but a portion of the
profits:
"It follows that where the partnership
income consists of income from property, the salary is also income from
property." In an early Madras case Commissioner of Income-tax v.B.S.
Mines(2) the Madras High Court had held, with reference to the 1918 Income-tax
Act: "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 question raised being one with reference to the
character of salaries paid to partners.
Other cases from other High Courts have ,been
brought to our notice but strong reliance was placed on Ramniklal Kothari(3) of
this Court for reaching the conclusion that the business of a firm was business
of the partners, that the profits of the firm were profits of the partners and
that the expenditure incurred by partners in earning such share was admissible
for deduction in arriving at the total income under s. 10(1).
Contrary views are not wanting in some
rulings, but a catalogue of cases on the other side may be productive Of
confusion and not resolution of conflict. We abstain from that enterprise and
confine ourselves to the statement of the law that although, for, purposes of
the Income-tax Act, a firm has certain attributes simulative of personality, we
have to take it that a partnership is not a person but a plurality of persons.
Coming to basics over again, this Court, in
Karimtharuvi Tea Estates(1) and in Anglo-American Direct Tea Trading Co.(5) has
set out the nature of and manner of assessment of composite income-tax derived
by the sale of tea:
"In Karimtharuvi Tea Estates Ltd. v. State
of Kerala this Court held that Explanation 2 to section 5 of the Kerala
Agricultural Income-tax Act added in 1961 disallowing certain deductions in the
computation of agricultural income did not apply to computation of agricultural
income derived from tea plantations. The reasons for this conclusion may be
summarised thus: The definition of agricultural income in the Constitution and
the Indian Income-tax Act, 1922, is bound up with rule 24 of the Income Tax
Rules, 1922. Income derived from the sale of tea grown and manufactured by the
seller is to be computed under rule 24 as if it were income derived from
business in accordance with the provisions of section 10 of the Indian
Income-tax Act. The Explanation to (1) 1968 Edn. Vol. 3, p. 3092. (2) (1922) 1
I.T.C. 176, i77 (F.B.).
(3) (1969) 74 I.T.R-57 (S.C.). (4) [1963].
Supp. I, S.C.R. 823.
(5) (1968) 69 I.T.R. 667, 672.
119 section 2(a)(2) of the Kerala Act adopts
this rule of computation. Of the income so computed, 40 per coat, is to be
treated as income liable to income-tax and the other 60 per cent only is deemed
to be agricultural income within the meaning of that expression in the
Income-tax Act. The power of the State legislature to make a law in respect of
taxes on agricultural income arising from tea plantations is limited to
legislating with respect to agricultural income so determined.
The legislature cannot add to the amount of
the agricultural income so determined by disallowing any item of deductions
allowable under rule 24 read with section 10(2) (xv) of the Indian Income-tax
Act. Explanation 2 to section 5 of the Kerala Act if applied to income from tea
plantations would create an agricultural income which is not contemplated by
the Income-tax Act and the Constitution and would be void, and it should
therefore be construed not to apply to the computation of income from tea
plantations." In Tea Estate India(1) this Court summarised the scope and
implications of r. 24:
"Income which is realised by sale of tea
by a tea company which grows tea on its land and thereafter subjects it to
manufacturing process in its factory is an integrated income. Such income
consists of two elements or components. One element or component consists of
the agricultural income which is yielded in the form of green leaves purely by
the land over which tea plants are grown. The second element or component
consists of nonagricultural income which is the result of subjecting green
leaves which are plucked from the tea plants grown on the land to a particular
manufacturing process in the factory of the tea company. Rule 24 prescribes the
formula which should be adopted for apportioning the income realised as a
result of the sale of tea after it is grown and subjected to the manufacturing
process in the factory. Sixty per cent is taken to be agricultural income and
the same consists of the first element or component, while 40 per cent
represents non-agricultural income and the same comprises the second element or
component.
We are 'fortified in the above conclusion by
two decisions of this Court in the cases of Karimtharuvi Tea Estate Ltd. v. State
of Kerala (supra) and Anglo-American Direct Tea Trading Co. Ltd. v. Commissioner
of Agricultural Income tax (supra). In the case of Karimtharuvi Tea Estates
Ltd. (supra) it was observed while dealing with the income derived from the
sale of tea grown and manufactured by the seller in the context of rule 24:
"Of the income so computed, 40 per cent
is, under rule 24, to be treated as income liable to income-tax and it would
(1) 1976) 103 I.T.R. 785,795.
120 follow that the other 60 per cent only
will be deemed to be 'agricultural income' within the meaning of that
expression in the Income-tax Act." In the case of Anglo-American Direct
Tea Trading Co. Ltd. (supra) the Constitution Bench of this court held that
income from the sale of tea grown and manufactured by the assessee is derived
partly from business and partly from agriculture. This income has to be
computed as if it were income from business under the Central Income-tax Act
and the Rules made there under. Forty per cent of the income so computed is
deemed to be income derived from business and assessable to nonagricultural income-tax.
The balance of 60 per cent of the income so computed is agricultural income
within the meaning of the Central Income-tax Act." It follows that by
statutory dichotomy, 60% of the tea income is agricultural in character and
central income-tax cannot break into its inviolability. This conceded, the
flexible arrangement among partners regarding distribution of this sum may take
many forms but the essential agricultural character and consequential
legislative immunity cannot be lost because of tags and labels: 'That which we
call a rose, By any other name would smell as sweet'.
Needless to say, the position is different if
the situation.-is of a stranger--not a partner--drawing a salary.
With ideological clarity, this legal position
has been set forth by a learned author whom we refer(1) 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 as his providing
capital; only instead of in money, in kind.
Further, no remuneration is permissible to a
partner for his rendering services to the firm, since the carrying on of the
business of the partnership is a' primary duty which, all the partners, or some
of the partners acting for all, are required to do by the law relating to
partnership.
The matter may be looked at another way too.
In law, a partner cannot be employed by his firm, for a man can(1) Law of
Income-tax by A.C. Sampath Iyengar, 6th Edn., 1973--pp. 10631064 (Vol. II).
121 not be his own employer. A contract can
only be bilateral and the same person cannot be a party on both sides,
particularly in a contract of personal employment. A supposition that a partner
is employed by the firm would involve that the employee must be looked upon as
occupying the position of one of his own employers, which is legally
impossible.
Consequently, when an arrangement is made by
which a partner works and receives sums as wages for services rendered, the
agreement should in truth be regarded as a mode of adjusting the amount that
must be taken to have been contributed to the partnership's assets by a partner
who has made what is really a contribution in kind, instead of contribution in
money. Hence, all the aforesaid payments are non-deductible." The contrary
view favoured by Mathew (supra) proceeds on the following reasoning:
"Though for purposes of computation of
income his share income of the firm is clubbed along with the allowance and
commission, it is obvious that the character of the receipt of the latter
amounts, though related to the business, cannot be said to partake of the same
character of their receipt by the firm.
The assessee who is a managing partner was
entitled to receive the amount not by virtue of the relationship between him
and the other members of the firm as partners but by virtue of the special
agreement between the partners by which his services to the partnership were
agreed to be remunerated." (p. 471) We regard this conclusion as unsound,
the source of the error being a failure to appreciate that the salary of a
partner is but an alias for the return, by way of profits, for the human
capital--sweat, skill and toil are, in our socialist republic, productive
investment---he has brought in for common benefit. The immediate reason for
payment of salary was service contract but the causa causans is partnership.
We dismiss the appeals. When this Court, as
the apex adjudicator declaring the law for the country and invested with
constitutional credentials under Art. 141, clarifies a confused juridical
situation, its substantial role is of legal mentor of the nation. Such is the
spirit of the ruling in Trustees of Port, Bombay(1). If parties have been fair,
the costs of the litigation must come out of the national exchequer, not out of
as party's purse. We direct both sides to bear their costs throughout.
P.B.R. Appeals dismissed.
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