CHANDMUL RAJGARHIA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN these references under Section 256(1) of the INcome-tax Act (to be called " the Act "), we are concerned with the assessment years 1965-66 to 1969-70. The questions referred for our opinion are :

(2.) THE assessee is a partnership firm. THE firm came into existence in 1953. Prior to it, Chandmul Rajgarhia, father of Ram Ratanlal Rajgarhia and Maniklal Rajgarhia, alone was managing the business. THE partnership firm set up in 1953 consisted of Ram Ratanlal Rajgarhia and Maniklal Rajgarhia, as partners. Five others who were their minor children were admitted to the benefits of the partnership. While assessing the firm during the relevant assessment years, the firm claimed deduction of salary and interest paid to Ram Ratanlal Rajgarhia and Maniklal Rajgarhia. THEse salary and interest payments were paid to them by the firm besides their share of profits of the firm. THE Income-tax Officer rejected the claim of deduction of salary and interest payable to them. According to the Income-tax Officer, Section 40(h) was a bar to deduction of salary and interest paid to the partners.

(3.) THE matter is now beyond the pale of controversy. Payments of salary cannot be allowed to be deducted. In CIT v. R. M. Chidambaram Pillai [1977] 106 ITR 292, the Supreme Court held that payment of salary to a partner represents a special share of the profits and that salary paid to a partner retains the same character as income of the firm. Salary being part of the profit, there is no justification for deducting it from the taxable income. THE object of Section 40(b), which was Section 10(4)(b) of the 1922 Act, was to pre-empt partners siphoning off substantial profits in the guise of salary and so arranging such distribution of income by salary that tax evasion becomes legally protected. THE view that I have taken finds support in A. S. K. Rathnaswamy Nadar Firm v. CIT [1965] 58 ITR 312 (Mad), Giridharilal Ghasimm v. CIT [1968] 69 ITR 890 (Cal), CIT v. Jainarain Jagannath [1945] 13 ITR 410 (Pat) and V. D. Dhanwatey v. CIT [1968] 68 ITR 365 (SC). I have, therefore, not the least doubt that the salary paid to Ram Ratanlal Rajgarhia and Maniklal Rajgarhia had been correctly added while computing the income of the assessee-firm by applying the provisions of Section 40(b) of the Act, THE first question in that limited respect is answered accordingly in favour of the Revenue.