PANNALAL GIRDHARILAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This Income Tax reference under section 66(1) of the Income Tax Act, 1922 (hereinafter referred to as "the Act"), consists of four reference applications which were consolidated and disposed of by a common order of the Income Tax Appellate Tribunal, having regard to the same question being involved in all the references. The four assessment years are 1958-59, 1959-60, 1960-61 and 1961-62 of which the relevant accounting years ended on June 28, 1957, June 19, 1958, July 17, 1959, and June 25, 1960, respectively. The applicant, Panna Lal Girdhari Lal, who will hereafter be referred to as the assessed, is a registered firm consisting of five partners, each having an equal share. The assessed carries on business of manufacture of copper wire and also of gota, tila and zari goods and is being assessed on a substantial income from year to year. The firm was formed during the previous year for 1942-43 assessment year, for which it was granted registration under section 26A of the Act. Since then renewal of registration is being granted to the firm year after year. Before 1942-43 assessment year, the same business was being carried on by a Hindu undivided family of the same name. On September 4, 1956, the assessed entered into an agreement with each of the five partners whereby they were paid salaries shown below in the four years with which we are concerned in this case : <FRM>JUDGEMENT_624_ITR81_1971.html</FRM>

(2.) Being dissatisfied with the decision of the Appellate Assistant Commissioner, the assessed took a second appeal to the Income Tax Appellate Tribunal and challenged the decision of the authorities below. It was pointed out that it was in dispute that the five persons were partners of the assessed-firm in their representative capacity as kartas of their respective Hindu undivided families and the funds belonging to the families were invested in the firm by way of capital on which not only interest was being received, but share of profit was also received, both of which were shown as income of the family. It was, however, contended that as the salary was specifically made payable to each of the five partners for services rendered by them in their individual capacity as contained in the written agreement dated September 4, 1956, such salaries were income of the partners in their individual capacity and not in their representative capacity as the karta of their respective Hindu undivided families and hence it was urged that the salary should have been allowed as a deduction in computing the income of the assessed from its business. The part assigned to each partner was specifically mentioned before the Appellate Assistant Commissioner concerned. The Tribunal dismissed the appeals of all the four years holding that the issue before the Tribunal was not whether the salaries paid to the five partners were to be assessed in their hands as individuals of were to be included in the income of their respective Hindu undivided families. The Tribunal was informed by the counsel for the assessed that these salaries had been included in the assessment of the respective Hindu undivided families although the partners had also filed separate returns in their individual status showing their income form salaries only. Protective assessments have Therefore been made on the individual partners separately. The Tribunal Therefore held that when the appeals relating to that particular point would come up before it, the Tribunal will have occasion to decide whether in view of the agreement dated September 4, 1956, the salary income should be treated as the income of the joint Hindu family or that of the partners in their individual capacity, but so far as the assessed firm is concerned its income is assessable under section 10 of the Act. Section 10(2) (xv) of the Act provides for the allowance of the expenditure not being an allowance of the nature described in clauses (i) to (xiv) inclusive and not being in the nature of capital expenditure or personal expenses of the assessed, laid out or expended wholly and exclusively for the purposes of such business, profession or vocation. Salaries paid to the five partners would ordinarily be claimable by them as a permissible deduction under section 10(xv) of the Act, but for the specific prohibition in section 10(4) (b) which is to the following effect :

(3.) Mr. Kirpa Ram Bajaj, learned counsel for the assessed, has invited our attention to pages 92 to 96 of the account maintained by the assessed for the assessment year 1959-60 which shows the capital account of each of the five partners. At pages 98 the details of the salaries paid by the assessed to each of the five partners for the assessment years in question have been mentioned. According to Mr. Bajaj, apart from the amount to capital invested by each partner which clearly showed that the investment was made by him in this representative capacity as a karta of his Hindu undivided family, the salary account clearly shows that the payment of salary was being made to each partner in his individual capacity and had nothing to do with his being a karta of the family. Each partner was required to carry out a specific job and was, Therefore, entitled to be remunerated for the job done by him. It is true that each partner was, in a way, a proprietor of the firm but he was also an employee of the firm in the sense that he actually worked for the firm as any other employee who the sense that he actually worked for the firm as any other employee who was an utter stranger to the firm would also work for it if and when he had been employed by the firm. There is no reason why a partner of the firm who, besides investing money, also works for the firm should not be remunerated for the services rendered by him. The dual capacity of a partner who has not only invested money in the firm and is, Therefore, entitled to the profits and losses arising out of the business but is also is partner who is working for the firm, is not something unknown to law. In this connection our attention was invited to section 13(a) of the Indian Partnership Act, 1932, which lays down :