COMMISSIONER OF INCOME TAX Vs. PRAMOD KUMAR JAIN

JUDGEMENT

(1.) THE only controversy which has been raised in the present matter is regarding the interpretation of the provision of Section 16(1) of the Income -tax Act, 1961, as to whether the salary received by the asses see -partner falls to be considered under the head 'Income from salaries' and consequently standard deduction is allowable under Section 16(1) of the Income -tax Act, 1961. The Income -tax Officer has rejected the claim of the assessee for standard deduction on the ground that the salary drawn by a partner from the partnership -firm does not qualify for deduction under Section 16(1) of the Income -tax Act. The appellate authority has considered the matter and was of the view that the character of salary received by a partner from a partnership -firm cannot be considered as chargeable under the head 'Salaries'. In these circumstances, the deduction under Section 16(1) was held not allowable to the assessee. The Income -tax Appellate Tribunal has, however, following its decision in the case of Chhilarmal Goyal allowed the standard deduction. On the request of the Revenue, the following question of law has been referred for the opinion of this court under Section 256(1) of the Income -tax Act, 1961, for 1982 -83 ;

(2.) WE have heard the arguments of learned counsel for the Department and have considered over the matter. Section 15 of the Income -tax Act has provided for the income chargeable to income -tax under the head 'Salaries'. The provisions of Section 15 of the Act contemplate the juralrelationship of employer and the employee. Various tests have been laid down with regard to the nature of the service rendered by a particular person including the existence of the right in the master to supervise and control the work done by the servant and the manner in which the work is to be done by him. In the case of an employment, the existence of a relationship of master and servant has to be established. The servant renders his services under the direct control and superintendence of his master. The control' and supervision of the employer is a sine qua non of the relationship between the employer and the employee. In accordance with the provisions of Section 16 of the Act, the deduction is allowable from the income which is chargeable under the head of 'Salary'. In the case of a partner, the income which is received by way of salary is of the same character as income from business. Even under the law, the firm is not a legal person nor has any legal existence apart from its partners and is merely a compendious name to describe its partners. Though under the income -tax law, it is a unit of assessment by virtue of the special provisions, but it cannot be considered that the firm is an employer of its partner. The payment of salary to a partner represents a special share of the profits. The matter was considered by the apex court in the case of CIT v. R.M. Chidambaram Pillai : [1977]10ITR292(SC) and it was held that there cannot be a contract of service, in strict law, between a firm and one of its partners. Payment of salary to a partner represents a special share of the profits. Salary paid to a partner retains the same character of the income of the firm as profit.

(3.) IN Champaran Cane Concern v. State of Bihar [1965] 49 ITR 152 it was pointed out by the apex court that in a partnership each partner acts as an agent of the other. The position of a partner qua the firm is thus not that of a master and a servant or employer and employee which concept involves an element of subordination but that of equals. The partnership business belongs to the partners and each of them is an owner thereof.