ORDER
J.K. Verma, Accountant Member
1. The assessee, inter alia, derives income as salary from M/s. Shashi Properties & Industries Ltd., Bombay in which he is a whole time Director and has been paid salary of Rs. 18,000 for the year ended on 31-3-1986. He derives share income from M/s. Mohatta Builders & Associates, Bombay a firm, and also gets salary from that firm. The dispute before us is whether the assessee is entitled to the standard deductions provided under Section 16(i) of the Income-tax Act in respectof the salaries received from the limited company in which he is a Director and from the firm in which he is a partner. The ITO has mentioned in his order that the assessee had not filed any evidence to establish the relationship of employer and the employee between the so called employers and himself. He has further mentioned that he had not filed a copy of Articles of Association and the terms of his employment by which he could be considered to be an employee of the Company. The ITO also mentioned that deductions under Section 16(i) were not allowable in the case of salary as a partner because there was no relation as employee of the firm; the assessee partner is an owner of the firm.
2. When the matter went before the CIT (Appeals) he gave the decision in favour of the assessee mentioning in his order that the assessee had filed evidence regarding his appointment as a whole-time Director of M/s. Shashi Properties & Industries Ltd., Bombay and had also filed Salary Certificates from the Company as well as the firm. The learned CIT(A) relying on the decision of this Bench in the case of Chhitermal Goyal v. ITO [ 1985] 21 TTJ (Jp.) 46 held that the appellant was entitled to deduction under Section 16(i).
3. In the appeal before us while the Revenue has not challenged the admission of fresh evidence by the CIT(A), it has challenged the deductions under Section 16(i) directed to be allowed to the assessee.
4. The learned Departmental Representative relied on the order of the ITO so far as the question in respect of salary as Director was concerned. However, regarding the deductions in respect of salary as partner, the learned Departmental Representative submitted that a partner is in fact the owner of the firm and a partner cannot be, therefore, his own servant or employee. In these circumstances a partner is not entitled to deductions under Section 16(i) in respect of salary received from the firm even if the payment is termed as salary.
5. The learned counsel for the assessee vehemently argued that the Director of the Company is its employee and in the instant case it had been proved with the Certificate from the Company and the copy of Board’s resolution. He submitted that in earlier years also these deductions were allowed to the assessee although the assessments were framed under Section 143(1).
6. So far as salary from the firm was concerned, the learned counsel heavily relied on the decision of this Bench in the case of Chhitermal Goyal (supra) holding that a partner drawing salary was entitled to deductions under Section 16(i). He also referred to the decision of the Bombay Bench of the Tribunal in the case of Mohammed Ibrahim Shahdad v. ITO where also it had been held that a partner was entitled to standard deductions under Section 16(i) from the salary received by him from the firm.
7. We have carefully considered the arguments from both the sides and have perused the record. We have also carefully gone through the decisions of the Jaipur and the Bombay Benches cited by the learned counsel for the assessee. In the case of CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292 (SC) mentioned in the case of Chittermal Goyal (supra) by the Jaipur Bench of ITAT, the Supreme Court had Lald down that a firm is not a legal person even though it has some attributes of personality. In Income-tax Law a firm is a unit of assessment, by special provisions, but is not a full person. Since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in Contract 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. While pronouncing the decision, the Hon’ble Supreme Court (pages 302-303 of the report) had over-ruled the decision of the Hon’ble Madras High Court in the case of Mathew Abraham v. CIT [1964] 51 ITR 467 where on page 471 of that report the Madras High Court had held that ‘the assessee who was 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’. The relevant provisions of Sections 15 and 16 of the Income-tax Act read as under :-
Salaries :
15. The following income shall be chargeable to Income-tax under the head “Salaries” –
(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.
Deductions from salaries :
16. The income chargeable under the the head “Salaries” shall be computed after making the following deductions, namely :–
(i) a deduction of a sum equal to thirty-three and one-third per cent of the salary or twelve thousand rupees, whichever is less.
In our opinion it is not every payment termed “salary” by an assessee which is assessable under Section 15 of the Income-tax Act. It is only salary from an employer or a former employer which is chargeable under the head “Salaries” and which alone is entitled to deduction provided under Section 16(i) of the Income-tax Act.
8. The decision of the Madras High Court in the case of CA1T v. Tipperary Estates Co. [1970] 76 ITR 396, referred to in the case of Mohd. Ibrahim Shahdad (supra) was on the provisions of Madras Agricultural Income-tax Act, 1955 and the question involved was whether the remuneration paid to two persons including salary paid to the Managing Partner for rendering service other than that expected of a partner could be allowed as an expenditure Lald out wholly and exclusively for the purposes of the estate or whether it was paid to evade tax and whether it was only a machinery adopted by them as a device to escape tax. The Hon’ble Madras High Court had held that it was an allowable expenditure and on the basis of the findings of the Tribunal the High Court held that it was not a device to evade tax. In the issue involved before us it is obvious that the question is not whether the salary paid to a partner is an allowable deduction or not; the question which has to be considered in the present case is whether it is a salary paid by an employer to the assessee, which alone could bring it within the purview of Sections 15 and 16(i) of the Income-tax Act.
9. A comprehensive reading of all the provisions of law and the decision of the Hon’ble Supreme Court in this regard makes it clear that firstly the relationship between a firm and its partner cannot be that of an employer and an employee; secondly, salary said to be paid by a firm to its partner is in fact only a mode of distribution of profits of the firm; thirdly, since the relationship between the firm and its partner cannot be that of an employer and an employee, the payment of salary by the firm to its partner does not come within the purview of Section 15 of the Income-tax Act and hence is not chargeable under the head “Salaries”, of the IT Act, 1961, and fourthly since the salary paid by a firm to the partner is not chargeable under the head “Salaries”, it is not entitled to deduction under Section 16(i) of the Income-tax Act.
10. Taking all these facts and the aforesaid decisions into account, we hold that salary paid by firm to its partner is not eligible for standard deduction under Section 16(i) of the Income-tax Act. In view of the above discussion and the cases referred to above the assessee cannot derive any benefit out of the decisions of Jaipur and Bombay Benches referred to by Sh. Ranka.
11 to 12. [These paras are not reproduced here, as they involve minor issue].