LAWS(MAD)-1962-11-26

MATHEW ABRAHAM Vs. COMMISSIONER OF INCOME TAX

Decided On November 19, 1962
MATHEW ABRAHAM Appellant
V/S
COMMISSIONER OF INCOME TAX Respondents

JUDGEMENT

(1.) A firm of partnership of five persons called Mahendragiri Tea Estate was constituted by a deed dt. 28th Feb., 1955. Each of the partners had an one fifth -share in the profits or losses of the firm. The managing partner was one Mathew Abraham, who will hereinafter be referred to as the assessee. Under the terms of the partnership, the assessee was entitled as managing partner to a monthly allowance of Rs. 250 and also a commission at the rate of twelve per cent. on the net profits available for distribution amongst the partners after meeting all the expenses relating to the business of the partnership an charging the monthly allowance of Rs. 250. The assessee received allowance and commission for the asst. yrs. 1956 -57, 1957 -58 and 1958 -59 as per particulars given below :

(2.) BESIDES the said allowance and commission he also received the share income of Rs. 10,087, Rs. 6,612 and Rs. 14,825 for the three assessment years respectively. The ITO assessed forty per cent. of the share income on the footing that such forty per cent. was subject to tax under r. 24 of the IT Rules, but brought to tax the whole of the allowance and commission. The view of the ITO was that the allowance and commission was not agricultural income and was also not income of the assessee derived by sale of tea grown or manufactured by him in accordance with r. 24. There was an appeal to the AAC, who give relief to the assessee excluding the allowance and commission from the taxable assessment by reason of the decision of the Tribunal in an appeal preferred by the assessee in relation to a prior year, though personally he was of the view that the decision of the officer was right. The Department preferred an appeal to the Tribunal, and this time the Tribunal agreed with the contention of the Department and allowed the appeal. The view of the Tribunal was that even though sixty per cent. of the share income of the assessee from the firm might be exempt from taxation under r. 24 of the IT Rules, yet the amounts which he received by way of allowance and commission under the terms of the partnership agreement were of a different character and were in full subject to levy of tax. The assessee having preferred an application Previous year Assessment year Allowance Commission year ended . Rs. Rs. 31 -3 -1956 1956 -57 3,000 8,811 31 -3 -1957 1957 -58 3,000 4,332 31 -3 -1958 958 -59 13,000 5,930 under S. 66 (1) of the Act before the Tribunal, the following question of law has been referred to this Court :

(3.) CAN it be said that the allowance and commission earned by the assessee was income derived from sale of tea grown and manufactured by him ? In our opinion the answer must be in the negative. The tea estate is owned by the firm and the activities of growing, manufacturing and selling tea are those of the firm. The assessee's contention is that the firm is not a legal entity and what is done in the name of a firm is really done by the partners individually and collectively. But this general proposition which is essentially sound under the law governing partnership cannot be unreservedly imported into the income -tax law which treats the firm as a unit of assessment. If the assessee is a firm, "the seller" in r. 24 can only refer to the firm as such and not to each and every partner of the firm. In computing the income of a firm growing, manufacturing and selling tea, 40 per cent. of its total income is alone taxable as income, profits or gains of a business. The distribution of the share income of the partners amongst the partners is no doubt an appropriation of the profits or losses of the firm in proportion to their respective shares. But the receipt by a partner of any amount over and above his share income from the firm, though warranted by the special terms of the articles of partnership, would not stamp such receipt with the same character as that possessed by the total income of the firm which is divided in accordance with the shares. The fact that the extra allowance and commission received by a partner also emanate from the business income cannot justify the inference that the character of the receipt is not different from the character of the business income of the firm as such. In support of this position we may refer to the decision of the Patna High Court in E.C. Danby vs. CIT (1944) 12 ITR 351(Pat). In that case a partnership consisting of the assessee and his brother owned agricultural properties. Under an arrangement between them the assessee received in the course of the accounting year a sum of Rs. 5,805 as remuneration for managing the agricultural properties. The question was whether that remuneration was exempt from income -tax as agricultural income. It was held that the remuneration was in the nature of salary and it was not exempt from taxation under S. 4 (3) (viii). Fazl Ali C.J. observed thus at page 353 :