{"id":227939,"date":"1976-11-17T00:00:00","date_gmt":"1976-11-16T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-r-m-chidambaram-pillai-etc-on-17-november-1976"},"modified":"2017-03-25T05:16:09","modified_gmt":"2017-03-24T23:46:09","slug":"commissioner-of-income-tax-vs-r-m-chidambaram-pillai-etc-on-17-november-1976","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-r-m-chidambaram-pillai-etc-on-17-november-1976","title":{"rendered":"Commissioner Of Income-Tax, … vs R.M. Chidambaram Pillai Etc on 17 November, 1976"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commissioner Of Income-Tax, … vs R.M. Chidambaram Pillai Etc on 17 November, 1976<\/div>\n
Equivalent citations: 1977 AIR 489, \t\t 1977 SCR (2) 111<\/div>\n
Author: V Krishnaiyer<\/div>\n
Bench: Krishnaiyer, V.R.<\/div>\n
           PETITIONER:\nCOMMISSIONER OF INCOME-TAX, MADRAS\n\n\tVs.\n\nRESPONDENT:\nR.M. CHIDAMBARAM PILLAI ETC.\n\nDATE OF JUDGMENT17\/11\/1976\n\nBENCH:\nKRISHNAIYER, V.R.\nBENCH:\nKRISHNAIYER, V.R.\nKHANNA, HANS RAJ\n\nCITATION:\n 1977 AIR  489\t\t  1977 SCR  (2) 111\n 1977 SCC  (1) 431\n CITATOR INFO :\n F\t    1988 SC1435\t (34)\n RF\t    1991 SC1806\t (8)\n\n\nACT:\n\t    Income  Tax\t Act, 1922--S.\t16(1)(b)--Income  Tax  Rules\n\t1922--r.  24 Scope of--\n\t    Assessees  partners in firms owning tea estates   Salary\n\tpaid to partners  If whole salary exigible to tax.\n\n\n\nHEADNOTE:\n\t    Rule 24 of the Income Tax Rules, 1922 states that income\n\tderived\t from the sale of tea grown and manufactured by\t the\n\tseller\tshall be computed as if it were income derived\tfrom\n\tbusiness  and 40 per cent of such income shall be deemed  to\n\tbe income, profits and gains liable to tax.\n\t    The\t respondents were partners in firms which owned\t tea\n\testates, the composite income of which consisted largely  of\n\tagricultural  and  partly of   nonagricultural\tincome.\t  In\n\taddition  to  their share in profits, the  respondents\twere\n\tentitled  to  salaries.\t  Rejecting the\t contention  of\t the\n\trespondents that only 40% of the salaries which fell  within\n\tthe  non-agricultural income is exigible to tax and not\t the\n\twhole  income, the Income Tax Officer charged the  whole  of\n\ttheir  salaries\t to tax under s. 10 of the Income  Tax\tAct,\n\t1922.\tThe Appellate Asstt. Commissioner held in favour  of\n\tthe  respondents; but on appeal the Appellate Tribunal\theld\n\tin  favour of the Revenue.  The High Court allowed  the\t re-\n\tspondents' appeal.\n\tDismissing the appeal to this Court,\n\t    HELD: Only 40 per cent of the income from the tea  sales\n\tis taxable; the balance, namely, 60 per cent is agricultural\n\tand  exempt.  60 per cent of the salaries to partners  comes\n\tout  of this exempted gross sum and shares the\tbenefit\t and\n\tthe Central Income-tax cannot break into its  inviolability.\n\t[116 B]\n\t    1.\t(a) The salary of a partner is but an alias for\t the\n\treturn by way of profits, for the human capital.  The  imme-\n\tdiate reason for payment of salary was service contract\t but\n\tthe causa causans is partnership.  [121 F]\n\t    (b)\t A  partnership\t is only a  collective\tof  separate\n\tpersons and not a legal person in itself.  The salary stipu-\n\tlated to be paid to a partner from the firm is in reality  a\n\tmode of division of the firms profits.\t[117 H]\n\t    (c)\t In the income tax law a firm is a unit\t of  assess-\n\tment,  by  special  provisions, but is not  a  full  person.\n\tSince contract of employment requires two distinct  persons,\n\tnamely,\t the  employer and the employee, there cannot  be  a\n\tcontract  of service. between a firm and one of\t ,its  part-\n\tners.\tAny  agreement\tfor remuneration of  a\tpartner\t for\n\ttaking part in the conduct of the business must be  regarded\n\tas  portion of the profits being made over as a\t reward\t for\n\tthe human capital brought in.  [113 F-G]\n\tLindley on Partnership referred to.\n\t    Dulichand,\t[1956]\tS.C.R. 154 and\tNarayanappa,  A.I.R.\n\t1966 S.C. 1303. followed.\n\t    (d) Payment of salary to a partner represents a  special\n\tshare. of the profits and is, therefore, part of the profits\n\tand taxable as such.  Section 10(4)(b) stipulates according-\n\tly.  [114 A]\n\t    (2)\t Under s. 16(1)(b) in computing the total income  of\n\tan  assessee, when the assessee is a partner of a firm,\t his\n\tshare shall be taken to be, any salary payable to him by the\n\tfirm increased or decreased respectively by his share in\n\t112\n\tthe  balance  of the profit or loss of the  firm  after\t the\n\tdeduction of any interest, salary etc. payable to any  part-\n\tner.  It is implicit that the share income of partner  takes\n\tin his salary.\t[114 F & H]\n\t    (3)\t The portion of profits from tea sales by a  grower,\n\twhich  is  agricultural, is  insulated\tfrom  incidence\t and\n\texaction  by r. 24, which means that by that modus  operandi\n\t60 per cent of the total income is set aside as representing\n\tthe agricultural sector, and the salary to partners paid out\n\tof  it, being only profits, enjoys the same  invulnerability\n\tto  exigibility that r. 24 confers on the agrarian  portion.\n\t[115 B-C]\n\t    Karimtharuvi  Tea  Estates\t[1963]\tSupp.  1,  SCR\t823,\n\tAnglo-.American\t Direct Tea Trading Co. [1968] 69  ITR\t667,\n\t671 and Tea Estate India [1976] 103 ITR 785, 795 applied.\n\tMathew Abraham [2964] 51 I.T.R. 467 overruled.\n\n\n\nJUDGMENT:\n<\/pre>\n
\t    CIVIL  APPELLATE JURISDICTION :Civil Appeals Nos. 17  to
\n\t21 of 1976.\n<\/p>\n
\t    (From  the\tJudgment and Order dated the  5th  December,
\n\t1969 of the Madras High Court in Tax Cases Nos. 114 & 115 of
\n\t1964-Ref. Nos. 48 and 49 of 1964)
\n\tB.B. Ahuja and R.N. Sachthey for the Appellant.
\n\tS.  Swaminathan and Mrs. Saroja Gopalakrishnan for  Respond-
\n\tents.\n<\/p>\n
\tThe Judgment of the Court was delivered by
\n\t    KRISHNA IYER, J. A fine point of law, which lends itself
\n\tto  subtle spinning of gossamer webs of argument, falls\t for
\n\tdecision  in these appeals by certificate.  Were the  policy
\n\tof the law been plain, the language should have been clearer
\n\tand  the  labours  of courts could have\t been  lesser.\t The
\n\targuments  have been exhaustive, the precedents,  in  profu-
\n\tsion,  cited to the point of no return and the\tshort  issue
\n\texpanded into learned length; but, at the end of the  foren-
\n\tsic  journey, we are hesitantly inclined to leave the  judg-
\n\tment under appeal undisturbed as the law set out therein has
\n\tbetter appeal and theoretical soundness than the rival\tview
\n\tpoint  well-presented by Sri Ahuja for the appellant  (Reve-
\n\tnue).\tThe  planning  and pruning of case  law\t is  perhaps
\n\tnecessary  if  time-consuming court proceedings\t are  to  be
\n\tcurbed.\t  ‘All our life is crushed by the weight  of  words:
\n\tthe weight of deed’, said Luingi Pirandello.  Heavy case-law
\n\tmust not clog judicial navigation.\n<\/p>\n
\t    Next to abbreviate statement of the facts which  project
\n\tthe  legal issue canvassed before us.  Two tea estates\twere
\n\towned  by two firms with several partners, two of whom\twere
\n\tthe respondents, in the two sets of appeals, C. As. 17 to 19
\n\tand  C.\t As. 20 & 21 of 1972.  The tea sold  yielded  income
\n\tcomposite  in  character,  being  largely  agricultural\t and
\n\tpartly non-agricultural.  The  complex\tsituation  of appor-
\n\ttionment  between the two heads for purposes  of  income-tax
\n\thas  been taken care of by rule 24 of the Income-tax  Rules,
\n\tboth the firms having been registered under the Act.
\n\t    The\t respondents-partners  were, in\t addition  to  their
\n\tshare  in profits, entitled to salaries for  services  under
\n\tthe  firms.  The sole controversy turns on whether the\tsums
\n\tso drawn as salaries were wholly
\n\t113<\/span>
\n\tliable\tto income-tax or only to the extent of\t40%  thereof
\n\twhich  fell within the non-agricultural sector.\t  Until\t the
\n\tassessment  year ending with March 31, 1959, the  income-tax
\n\twas  so assessed that the whole of the\tagricultural  income
\n\ti.e.,  60%  of\tthe  total income, was\tout  of\t bounds\t for
\n\tincome-tax  (which included 60% of the salaries of  the\t re-
\n\tspondent partners).  But, for the years 1959\/60 and 1960\/61,
\n\tthe  two assessment years involved in these appeals, a\tdif-
\n\tferent course was followed.  The mechanics is simple but the
\n\tbone of contention between the Revenue and the assessees  is
\n\tas  to\twhether\t any portion of the salaries  so  drawn\t for
\n\tservices rendered are at all agricultural income to be\tnon-
\n\texigible to income-tax.\n<\/p>\n
\t    Departing  from the previous practice and in ‘the  pres-
\n\tcient light of the law later laid down in Mathew Abraham(1),
\n\tthe whole salary was subjected by the Income-tax Officer  to
\n\tincome-tax  as income from other sources in terms of  s.  10
\n\t[The Income-tax Officer had almost anticipated Mathew  Abra-
\n\tham(1)].  This computation was contested successfully before
\n\tthe  Appellate\tAssistant  Commissioner\t but  that  decision
\n\tsuffered a reversal before the Appellate Tribunal since,  by
\n\tthen,  Mathew Abraham (supra) had been decided in favour  of
\n\tthe  Revenue.  The case escalated to the High Court where  a
\n\tfull Bench upset the earlier view and upheld the  exclusion-
\n\tary  argument  of the assessees.  The  Revenue\thas  arrived
\n\tbefore\tus to assail the interpretation of S. 10(4) (b),  r.
\n\t24  and\t of  other provisions the High\tCourt  has  adopted.
\n\tThere  is  plausibility in both approaches but,\t after\tsome
\n\treflection on the scheme as expressed in the statutory text,
\n\twe are disposed to affirm the decision under appeal.  If the
\n\tintendment  of a legislation misfires in  court,  competency
\n\tbeing granted, the answer is amendment, not more litigation.
\n\t    First  principles  plus  the bare text  of\tthe  statute
\n\tfurnish the best guidelight to understanding the message and
\n\tmeaning of the provisions of law.  Thereafter, the sophisti-
\n\tcated exercises in precedents and booklore.  Here the  first
\n\tthing  that  we\t must grasp is that a firm is  not  a  legal
\n\tperson\teven though it has some attributes  of\tpersonality.
\n\tPartnership  is\t a  certain relation  between  persons,\t the
\n\tproduct\t of agreement to share the profits  of\ta  business.
\n\t‘Firm’\tis  a collective noun. a compendious  expression  to
\n\tdesignate an entity, not a person.  in income-tax law a firm
\n\tis a unit of assessment, by special provisions, but is not a
\n\tfull  person;  which  leads to the next step  that  since  a
\n\tcontract of employment requires two distinct persons,  viz.,
\n\tthe employer and the employee, there cannot be a contract of
\n\tservice, in strict law, between a firm and one of its  part-
\n\tners.\tSo that any agreement for remuneration of a  partner
\n\tfor  taking  part  in the conduct of the  business  must  be
\n\tregarded  as  portion of the profits being made\t over  as  a
\n\treward for the human capital brought in.  Section 13 of\t the
\n\tPartnership Act brings into focus this basis of\t partnership
\n\tbusiness.\n<\/p>\n
\t    This  legal ideology expresses itself in the  Income-tax
\n\tAct in s. 10 (4) (b) and s. 16 (1) (b).\t A firm, partner and
\n\tpartnership, according to s. 2(6B) of the Act bear the\tsame
\n\tsense  as  in the Partnership Act. The taxable income  of  a
\n\tfirm has to be its business profits, as
\n\t51 I.T.R. 467.\n<\/p>\n
\t9 —-1458SCI\/76
\n\t114<\/span>
\n\tprovided  in  s. 10(1), 10(2)and 10(4).\t What  is  the\treal
\n\tnature\tof the salary paid to a partner visa vis the  income
\n\tof  the firm?  On principle, payment of salary to a  partner
\n\trepresents  a special share of the profits and is  therefore
\n\tpart  of the profits and taxable as such. And s.  10(4)\t (b)
\n\tstipulates accordingly. Maybe, we may usefully read here  s.
\n\t10(1) and 10(4) to the extent relevant:\n<\/p>\n
\t\t\t    “10(1)  The tax shall be payable  by  an
\n\t\t      assessee under the head ‘Profits and gains  of
\n\t\t      business,\t profession or vocation’ in  respect
\n\t\t      of  the  profit  or  gains  of  any  business,
\n\t\t      profession or vocation carried on by him.\n<\/p><\/blockquote>\n
\t\t      x\t       x\tx\t x\t   x
\n\t\t\t    (4)\t Nothing in  clause (ix) or   clause\n<\/p><\/blockquote>\n
\t\t      (xv)  of\tsubsection (2) shall  be  deemed  to
\n\t\t      authorise\t the  allowance of any sum  paid  on
\n\t\t      account of any cess, rate or tax levied on the
\n\t\t      profits  or gains of any business,  profession
\n\t\t      or vocation or assessed at a proportion of  or
\n\t\t      otherwise on the basis of any such profits  or
\n\t\t      gains;   and   nothing  in  clause   (xv)\t  of
\n\t\t      subsection (2) shall be deemed to authorise–\n<\/p><\/blockquote>\n
\t\t      x\t       x\tx\t x\t   x\n<\/p><\/blockquote>\n
\t\t\t    (b)\t any  allowance in  respect  of\t any
\n\t\t      payment by way of interest, salary, commission
\n\t\t      or remuneration made by a firm to any  partner
\n\t\t      of the firm;\n<\/p><\/blockquote>\n
\t\t      x\t       x\tx\t x\t   x
\n\t    It is plain that salaries  paid to partners\t are regard-\n<\/p><\/blockquote>\n
\ted   by\t the Income-tax Act as retaining  the  character  of
\n\tprofits\t and not excludible from the tax net,  whatever\t the
\n\treason\tbehind it be.  The procedure for computation of\t the
\n\ttotal  income of a partner, found in s. 16(1) (b) also\tfits
\n\tinto this understanding of the law behind the law.   Section
\n\t16 (relevant part) reads thus:\n<\/p>\n
\t\t      “16(1)  In  computing the total income  of  an
\n\t\t      assessee–\n<\/p><\/blockquote>\n
\t\t      x\t       x\tx\t x\t   x\n<\/p><\/blockquote>\n
\t\t\t    (b) When the assessee is a partner of  a
\n\t\t      firm, then, whether the firm has made a profit
\n\t\t      or a  loss,  his\tshare (whether a net  profit
\n\t\t      or a net loss shall be taken to be any salary,
\n\t\t      interest,\t commission  or\t other\tremuneration
\n\t\t      payable  to him by the firm in respect of\t the
\n\t\t      previous\t  year\t increased   or\t   decreased
\n\t\t      respectively  by his share in the\t balance  of
\n\t\t      the  profit  or  loss of the  firm  after\t the
\n\t\t      deduction of any interest, salary,  commission
\n\t\t      or  other remuneration payable to any  partner
\n\t\t      in respect of the previous year:
\n\t\t      Provided\tthat of his share so computed  is  a
\n\t\t      loss,  such  loss may be set  off\t or  carried
\n\t\t      forward  and  set off in accordance  with\t the
\n\t\t      provisions of section 24;”\n<\/p><\/blockquote>\n
\tThe anatomy of the provision is obvious, even if the  expla-
\n\tnation\tor  motivation for it may be more than one.   It  is
\n\timplicit  that the share income of the partner takes in\t his
\n\tsalary.\t The telling test-is that where a firm suffers\tloss
\n\tthe salaried partner’s share in it goes to depress his share
\n\tof  income. Surely, therefore, salary is a  different  label
\n\tfor profits, in the context of a partner’s remuneration.\n<\/p>\n
\t115<\/span><\/p>\n
\tThe  scheme of the Act, eyeing it with special reference  to
\n\ts. 10(4)(b) and 16(1)\t (b), designateIs employee’s  salary
\n\tas  profit, where the servant is none  other than a  partner
\n\ti.e., co-owner of the business.If such be the\trationale of
\n\tthe  relevant  provisions, the key to the  solution  of\t the
\n\tproblem is within easy reach.\n<\/p>\n
\t    Salaries are profits known by a different name and\tmust
\n\tbe  treated as such for taxation purposes.  The\t portion  of
\n\tprofits from tea sales, by a grower, which is  agricultural,
\n\tis insulated from incidence and exaction by the Constitution
\n\tworked\tout through r. 24.  Which means that by\t that  modus
\n\toperandi we set aside 60% of the total income as  represent-
\n\ting the agricultural sector, and the salary to partners paid
\n\tout of it, being only profits, enjoys the same invulnerabil-
\n\tity  to\t exigibility that r. 24 admittedly  confers  on\t the
\n\tagrarian portion.\n<\/p>\n
\tShri  Ahuja  has an attractive counter-theory  which  merits
\n\tdisturbing attention.  It is a variant version of the  ratio
\n\tin  Mathew  Abraham (supra).  He took us along\ta  different
\n\tstreet\twith  plausible\t insights.  Ordinarily,\t salary\t for
\n\tservices to an employer is salary all the same and there  is
\n\tno  agricultural  salary  as such. Therefore,  the  item  is
\n\ttaxable\t as salary income under s. 10.\tThe mere  fact\tthat
\n\tits  ultimate  source  was agricultural will  not  make\t its
\n\tcurrent complexion agricultural income, because the  payment
\n\twas  received  not as part of his profit  from\tagricultural
\n\tproperty  but  as remuneration due to him for work  done  as
\n\temployee.  The source does not leave an indelible  stamp  on
\n\tthe  stream  or its tributaries.  The nature of\t the  income
\n\tbeing  salary, taxability is inevitable.   Section  10(4)(b)
\n\tis a special provision; so also s. 16(1)(b).  The Parliament
\n\thas  power to provide for possible leakages  and   safeguard
\n\tagainst\t  loss of revenue.  Oftentimes. partners siphon\t off
\n\tsubstantial profits in the guise of salaries and sO  arrange
\n\tsuch  distribution of income via salaries that\ttax  evasion
\n\tbecomes legally protected.  To pre-empt such possibility the
\n\tlaw  has  gone\tout of its way to  exclude  manipulation  by
\n\tincluding  salaries  as\t profits.   This  special  provision
\n\tcannot alter the nature of salaries as is obvious in commer-
\n\tcial calculations,. striking of balance sheets, in suing for
\n\tunpaid\tsalaries  and the like.\t Moreover, Indian  law\tdoes
\n\trecognise  a  firm as a per.son for many  purposes  and\t the
\n\tcontrary  tenor\t of  English law has no\t tenability  in\t our
\n\tcountry.  The very need for s. 10(4)(b) and 16(1)(b) stress-
\n\tes  that otherwise ‘salary’ will  retain its true  character
\n\tand  not be regarded  as profits.  The\tother categories  in
\n\tboth  these  sections also bring home the purpose to  be  to
\n\tprevent evasion, not to inject jurisprudential changes.
\n\t    Both  sides are armed cap a pie with rulings  for  their
\n\trespective  positions.\tThe weaponry in forensic  battle  is
\n\tprecedentry; also their profusion is fraught with  confusion
\n\tfor  the  laity\t in the law.  We will  deal  with  citations
\n\tpresently but going by basics we feel that albeit the force-
\n\tful plea of Shri Ahuja, the Revenue is in the wrong.
\n\tThe  whole  project of taxation of tea plantations  is\tdis-
\n\tclosed\tin r. 24, Chidambaram Pillai(1) explains it  and  we
\n\tunfold it by reading here a relevant portion:\n<\/p>\n
\t\t\t      “Income  derived from the sale of\t tea
\n\t\t      grown and manu-\n<\/p><\/blockquote>\n
\t\t      factured\t by  the  seller  in   the   taxable
\n\t\t      territories  shall  be
\n\t\t      (1) [1970] 77 I T R. 494, 503
\n\t\t      116<\/span>
\n\t\t      computed\tas  if it were income  derived\tfrom
\n\t\t      business, and 40 per cent of such income shall
\n\t\t      be  deemed  to be income,\t profits  and  gains
\n\t\t      liable to tax.”\n<\/p><\/blockquote>\n
\t    Plainly, only 40% of the income from tea sales is treat-\n<\/p><\/blockquote>\n
\ted  as\ttaxable.   The balance viz.,  60%  is  regarded\t  as
\n\tagricultural   and exempt.  60% of the salaries to  partners
\n\tcomes out of his exempted gross sum and shares the  benefit.
\n\t(Of  course,  this may be exigible, by the  same  token,  to
\n\tagricultural  income-tax, if there be any). The core of\t the
\n\tlogic–and  failure to grasp this has faulted the  reasoning
\n\tin  Mathew  Abraham(1)–is that the true  character  of\t the
\n\tsalary\t(Le.,. the impugned 60%) is the same as that of\t the
\n\tprofits.   Both are agricultural and thus it is\t clear\tthat
\n\tthe amount does not escape tax if the State has–and now  it
\n\thas–a\tlevy  on agricultural income but the  title  of\t the
\n\tState to tax this sum is valid, not of the Union.
\n\t    We\tmay  now  embellish this brief\tjudgment  with\tsome
\n\ttext-book references and citation of rulings.
\n\t    Is\tthe  firm a person or a mere shorthand\tname  for  a
\n\tcollection  of\tpersons, commercially convenient   but\t not
\n\tlegally\t recognised? Under s. 3 of the Partnership Act it is
\n\tnot a person, but a relationship among persons.\t Lindley, on
\n\tPartnership,(2) has this:\n<\/p>\n
\t\t\t    “The  firm is not recognised by  English
\n\t\t      lawyers as distinct from the members composing
\n\t\t      it.   In taking partnership accounts  and\t  in
\n\t\t      administering   partnership   assets,   courts
\n\t\t      have  to\tsome extent adopted  the  mercantile
\n\t\t      view, and actions may now, speaking generally,
\n\t\t      be brought by or against partners in the\tname
\n\t\t      of  their firm; but, speaking  generally,\t the
\n\t\t      firm  as such has no legal  recognition.\t The
\n\t\t      law, ignoring  the firm, looks to the partners
\n\t\t      composing it; any change amongst them destroys
\n\t\t      the  identity of the firm; what is called\t the
\n\t\t      property\tof the firm is their  property,\t and
\n\t\t      what  are called the debts and liabilities  of
\n\t\t      the   firm   are\t their\t debts\t and   their
\n\t\t      liabilities.  In point of law,. a partner\t may
\n\t\t      be  the  debtor  or  the\tcreditor   of\t his
\n\t\t      copartners, but he cannot be either debtor  or
\n\t\t      creditor of the firm of which he is himself  a
\n\t\t      member,  nor can he be employed by  his  firm,
\n\t\t      for a  man cannot\t be  his  own employer.”<\/p><\/blockquote>\n
\t    The Indian law of partnership is substantially the\tsame
\n\tand  the reference in counsel’s submissions to the  Scottish
\n\tview   of  a  firm being a legal entity is neither here\t nor
\n\tthere.\tPrimarily our study must zero on the Indian Partner-
\n\tship  Act and not borrow courage from foreign  systems.\t  In
\n\tBhagwanji Morarji Gokuldas(3) the Privy’ Council ruled\tthat
\n\tthe Indian Partnership Act went beyond the English  Partner-
\n\tship Act, 1890, the law in India. attributing personality to
\n\ta partnership being more in accordance with the law of Scoff
\n\tand.  Even so, Sir John Beaumont, in that case, pointed\t out
\n\tthat the Indian Act
\n\t  (1)  (1964) 51 I.T.R. 467.\t   (2) 12th Edition  p.\t 28;
\n\tSweet & Maxwell.\n<\/p>\n
\t  (3) A.I.R. 1948 P.C. 100=(1948) 18 Comp. Cas. 205,209.\n<\/p>\n
\t 117<\/span><\/p>\n
\tdid not make a firm a corporate body.  Moreover., we are not
\n\tpersuaded by that ruling of the Privy Council,\tparticularly
\n\tsince  a pronouncement of this Court in Dulichand(1) strikes
\n\ta contrary note. We quote:\n<\/p>\n
\t\t\t    “In\t some systems of law  this  separate
\n\t\t      personality  of a firm apart from its  members
\n\t\t      has  received full and formal recognition\t as,
\n\t\t      for instance, in Scotland.  That\tis, however,
\n\t\t      not  the\tEnglish common law conception  of  a
\n\t\t      firm. English lawyers do not recognise a\tfirm
\n\t\t      as   an  entity  distinct\t from  the   members
\n\t\t      composing\t it.  ‘Our partnership law is  based
\n\t\t      on  English  law\tand  we\t have  also  adopted
\n\t\t      notions  of  English  lawyers  as\t regards   a
\n\t\t      partnership firm.”<\/p><\/blockquote>\n
\t      The  life of the Indian law of partnership depends  on
\n\tits own . terms although habitually courts, as a hangover of
\n\tthe  past,  have been referring to the English\tlaw  on\t the
\n\tpoint.\tThe matter is concluded by the further\tobservations
\n\tof this Court:\n<\/p>\n
\t\t\t    “It\t  is   clear  from   the   foregoing
\n\t\t      discussion  that the law, English as  well  as
\n\t\t      Indian, has, for some specific purposes,\tsome
\n\t\t      of  which are referred to above,\trelaxed\t its
\n\t\t      rigid   notions\tand   extended\t a   limited
\n\t\t      personality  to  a  firm.\t  Nevertheless,\t the
\n\t\t      general  concept\tof  a  partnership,   firmly
\n\t\t      established  in both systems of law, still  is
\n\t\t      that  a firm is not an entity or\t‘person’  in
\n\t\t      law   but\t  is  merely   an   association\t  of
\n\t\t      individuals  and\ta  firm\t name  is  only\t  ‘a
\n\t\t      collective  name\tof  those  individuals\t who
\n\t\t      constitute  the firm.  In other words, a\tfirm
\n\t\t      name is merely an expression,  only a  compen-
\n\t\t      dious   mode  of designating the\tpersons\t who
\n\t\t      have   ‘agreed   to  carry  on   business\t  in
\n\t\t      partnership.  According  to the principles  of
\n\t\t      English jurisprudence, which we have  adopted,
\n\t\t      for  the purposes of determining legal  rights
\n\t\t      ‘there is no such thing as a firm known to the
\n\t\t      law’  as was said by James L.J., in  Ex  parte
\n\t\t      Corbett:\tIn  re Shand (1880) 14 Ch.  D.\t122,
\n\t\t      1.26).   In these circumstances to import\t the
\n\t\t      definition  of the word ‘person’ occurring  in
\n\t\t      section  3(42)  of the  General  Clauses\tAct,
\n\t\t      1897,   into   section  4\t  of   the    Indian
\n\t\t      Partnership   Act will, according to  lawyers,
\n\t\t      English\tor Indian, be totally  repugnant  to
\n\t\t      the  subject of partnership law as  they\tknow
\n\t\t      and understand it to be.”\n<\/p><\/blockquote>\n
\tIn Narayanappa(2) the view taken by this Court accords\twith
\n\tthe position above stated.\n<\/p>\n
\t    The necessary inference from the premise that a partner-
\n\tship  is  only a collective of separate-persons\t and  not  a
\n\tlegal person in itself lends to the further conclusion\tthat
\n\tthe salary stipulated to be paid to a partner from the\tfirm
\n\tis  in reality a mode of division of the firm’s profits,  no
\n\tperson\tbeing  his own Servant in law since  a\tcontract  of
\n\tservice postulates two different persons.
\n\t(1) [1956] S.C.R. 154.\t\t (2) A.\/.R. 1966 S.C.  1300,
\n\t1303.\n<\/p>\n
\t118<\/span><\/p>\n
\t    Counsel for the respondent cited the  ‘Australian Income
\n\tTax  Law  and Practice’ by F.C. Bock and F.F.  Mannix(1)  in
\n\tsupport of the proposition  that a partner’s  salary is\t but
\n\ta  portion of the profits:\n<\/p>\n
\t\t\t    “It\t follows that where the\t partnership
\n\t\t      income  consists of income from property,\t the
\n\t\t      salary is\t also income from property.”<\/p><\/blockquote>\n
\t    In\tan  early  Madras case\tCommissioner  of  Income-tax
\n\tv.B.S. Mines(2) the Madras High Court had held, with  refer-
\n\tence  to the 1918 Income-tax Act: “We have no hesitation  in
\n\tanswering  that\t the drawings of the partners,\tby  whatever
\n\tname they are described, are part of the profits and  there-
\n\tfore taxable”, the question raised being one with  reference
\n\tto the character of salaries paid to partners.
\n\t    Other cases from other High Courts have ,been brought to
\n\tour  notice  but  strong reliance was  placed  on  Ramniklal
\n\tKothari(3)  of this Court for reaching the  conclusion\tthat
\n\tthe  business of a firm was business of the  partners,\tthat
\n\tthe profits of the firm were profits of the partners and
\n\tthat  the expenditure incurred by partners in  earning\tsuch
\n\tshare was admissible for deduction in arriving at the  total
\n\tincome under s. 10(1).\n<\/p>\n
\t     Contrary  views are not wanting in some rulings,  but  a
\n\tcatalogue  of cases on the other side may be  productive  Of
\n\tconfusion  and not resolution of conflict.  We abstain\tfrom
\n\tthat  enterprise and confine ourselves to the  statement  of
\n\tthe law that although, for, purposes of the Income-tax\tAct,
\n\ta firm has certain attributes simulative of personality,  we
\n\thave  to  take it that a partnership is not a person  but  a
\n\tplurality of persons.\n<\/p>\n
\t    Coming to basics over again, this  Court,  in  Karimtha-
\n\truvi  Tea Estates(1) and in Anglo-American Direct Tea  Trad-
\n\ting  Co.(5) has set out the nature of and manner of  assess-
\n\tment of composite income-tax derived by the sale of tea:\n<\/p>\n
\t\t\t    “In\t Karimtharuvi  Tea Estates  Ltd.  v.
\n\t\t      State   of   Kerala<\/a>  this\t Court\t held\tthat
\n\t\t      Explanation  2  to  section 5  of\t the  Kerala
\n\t\t      Agricultural  Income-tax\tAct  added  in\t1961
\n\t\t      disallowing    certain   deductions   in\t the
\n\t\t      computation  of  agricultural income  did\t not
\n\t\t      apply  to computation of\tagricultural  income
\n\t\t      derived from tea plantations.  The reasons for
\n\t\t      this  conclusion may be summarised  thus:\t The
\n\t\t      definition  of  agricultural  income  in\t the
\n\t\t      Constitution  and the Indian  Income-tax\tAct,
\n\t\t      1922,  is bound up with rule 24 of the  Income
\n\t\t      Tax Rules, 1922. Income derived from the\tsale
\n\t\t      of tea grown and manufactured by the seller is
\n\t\t      to  be  computed under rule 24 as if  it\twere
\n\t\t      income  derived  from business  in  accordance
\n\t\t      with  the\t provisions  of section\t 10  of\t the
\n\t\t      Indian Income-tax Act. The Explanation to
\n\t\t       (1)  1968  Edn.\tVol. 3,\t p.  3092.\t (2)
\n\t\t      (1922) 1 I.T.C. 176, i77 (F.B.).
\n\t\t       (3)  (1969)  74\tI.T.R-57  (S.C.).\t (4)
\n\t\t      [1963]. Supp. I, S.C.R. 823.\n<\/p><\/blockquote>\n
\t\t\t (5) (1968) 69 I.T.R. 667, 672.\n<\/p><\/blockquote>\n
\t\t      119<\/span><\/p>\n
\t\t      section 2(a)(2) of the Kerala Act adopts\tthis
\n\t\t      rule   of\t computation.\tOf  the\t income\t  so
\n\t\t      computed,\t 40  per coat, is to be\t treated  as
\n\t\t      income  liable to income-tax and the other  60
\n\t\t      per  cent\t only is deemed to  be\tagricultural
\n\t\t      income  within  the meaning of that expression
\n\t\t      in the Income-tax Act. The power of the  State
\n\t\t      legislature to make a law in respect of  taxes
\n\t\t      on   agricultural\t income\t arising  from\t tea
\n\t\t      plantations  is  limited to  legislating\twith
\n\t\t      respect to agricultural income so\t determined.
\n\t\t      The  legislature cannot add to the  amount  of
\n\t\t      the  agricultural\t income\t so  determined\t  by
\n\t\t      disallowing  any item of deductions  allowable
\n\t\t      under rule 24 read with section 10(2) (xv)  of
\n\t\t      the  Indian Income-tax Act.  Explanation 2  to
\n\t\t      section  5  of the Kerala Act  if\t applied  to
\n\t\t      income  from tea plantations would  create  an
\n\t\t      agricultural income which is not\tcontemplated
\n\t\t      by the Income-tax Act and the Constitution and
\n\t\t      would  be\t void, and it  should  therefore  be
\n\t\t      construed\t not to apply to the computation  of
\n\t\t      income from tea plantations.”\n<\/p><\/blockquote>\n
\t\t      In  Tea Estate India(1) this Court  summarised
\n\t\t      the scope and implications of r. 24:
\n\t\t\t    “Income which is realised by sale of tea
\n\t\t      by  a tea company which grows tea on its\tland
\n\t\t      and  thereafter subjects it  to  manufacturing
\n\t\t      process  in  its\tfactory\t is  an\t  integrated
\n\t\t      income.  Such income consists of two  elements
\n\t\t      or   components.\tOne  element  or   component
\n\t\t      consists\tof the agricultural income which  is
\n\t\t      yielded in the form of green leaves purely  by
\n\t\t      the land over which tea plants are grown.\t The
\n\t\t      second  element or component consists of\tnon-
\n\t\t      agricultural  income  which is the  result  of
\n\t\t      subjecting green leaves which are plucked from
\n\t\t      the  tea\tplants\tgrown  on  the\tland  to   a
\n\t\t      particular   manufacturing  process   in\t the
\n\t\t      factory of the tea company. Rule 24 prescribes
\n\t\t      the  formula  which  should  be  adopted\t for
\n\t\t      apportioning  the income realised as a  result
\n\t\t      of  the  sale  of tea after it  is  grown\t and
\n\t\t      subjected to the manufacturing process in\t the
\n\t\t      factory.\tSixty  per  cent  is  taken  to\t  be
\n\t\t      agricultural  income and the same consists  of
\n\t\t      the  first element or component, while 40\t per
\n\t\t      cent  represents non-agricultural\t income\t and
\n\t\t      the  same\t comprises  the\t second\t element  or
\n\t\t      component.\n<\/p><\/blockquote>\n
\t\t\t    We\t are   ‘fortified   in\t the   above
\n\t\t      conclusion  by two decisions of this Court  in
\n\t\t      the  cases of Karimtharuvi Tea Estate Ltd.  v.
\n\t\t      State  of\t Kerala<\/a> (supra)\t and  Anglo-American
\n\t\t      Direct   Tea Trading Co. Ltd. v.\tCommissioner
\n\t\t      of  Agricultural Income<\/a> tax (supra).   In\t the
\n\t\t      case of Karimtharuvi Tea Estates Ltd.  (supra)
\n\t\t      it was observed while dealing with the  income
\n\t\t      derived  from  the  sale\tof  tea\t grown\t and
\n\t\t      manufactured  by the seller in the context  of
\n\t\t      rule 24:\n<\/p><\/blockquote>\n
\t\t\t    “Of the income so computed, 40 per\tcent
\n\t\t      is,  under  rule 24, to be treated  as  income
\n\t\t      liable to income-tax and it would
\n\t\t      (1) 1976) 103 I.T.R. 785,795.\n<\/p><\/blockquote>\n
\t\t      120<\/span><\/p>\n
\t\t      follow that the other 60 per cent only will be
\n\t\t      deemed to be ‘agricultural income’ within\t the
\n\t\t      meaning  of that expression in the  Income-tax
\n\t\t      Act.”\n<\/p><\/blockquote>\n
\t\t      In  the  case  of\t Anglo-American\t Direct\t Tea
\n\t\t      Trading  Co.  Ltd.  (supra)  the\tConstitution
\n\t\t      Bench of this court held that income from\t the
\n\t\t      sale  of\ttea grown and  manufactured  by\t the
\n\t\t      assessee\tis derived partly from business\t and
\n\t\t      partly from agriculture. This income has to be
\n\t\t      computed\tas if it were income  from  business
\n\t\t      under the Central Income-tax Act and the Rules
\n\t\t      made thereunder.\tForty per cent of the income
\n\t\t      so  computed  is deemed to be  income  derived
\n\t\t      from   business\tand   assessable   to\tnon-
\n\t\t      agricultural  income-tax.\t The balance  of  60
\n\t\t      per   cent  of  the  income  so  computed\t  is
\n\t\t      agricultural income within the meaning of\t the
\n\t\t      Central Income-tax Act.”<\/p><\/blockquote>\n
\t    It\tfollows that by statutory dichotomy, 60% of the\t tea
\n\tincome\tis agricultural in character and central  income-tax
\n\tcannot\tbreak  into its inviolability.\tThis  conceded,\t the
\n\tflexible  arrangement among partners regarding\tdistribution
\n\tof  this  sum  may  take  many\tforms\tbut   the  essential
\n\tagricultural character and consequential legislative immuni-
\n\tty  cannot be lost because of tags and labels:\t‘That  which
\n\twe  call  a rose, By any other name would smell\t as  sweet’.
\n\tNeedless   to  say,  the  position  is\tdifferent   if\t the
\n\tsituation.-is  of a stranger–not a partner–drawing a\tsal-
\n\tary.\n<\/p>\n
\t    With  ideological clarity, this legal position has\tbeen
\n\tset  forth  by a learned author whom we refer(1) to  (by  no
\n\tmeans, rely on) compendious as his summary is:\n<\/p>\n
\t\t\t    “Any interest, salary, bonus, commission
\n\t\t      or  remuneration\tpaid by a firm to   any\t  of
\n\t\t      its  partners  cannot  be deducted by the firm
\n\t\t      as  an expenditure in its\t profit-computation.
\n\t\t      The  reason is this:  The partners in  a\tfirm
\n\t\t      are ultimately entitled to the entire  profits
\n\t\t      of the firm, according to their shares in\t the
\n\t\t      business.\t  Therefore,  the entirety  of\tsuch
\n\t\t      profits  should  be brought to charge  and  no
\n\t\t      portion  be exempted by giving’ the same\taway
\n\t\t      to a partner as his salary, bonus, commission,
\n\t\t      remuneration or  interest.  A partner is bound
\n\t\t      to   find\t the  necessary\t finances  for\t the
\n\t\t      partnership and hence any interest on  capital
\n\t\t      supplied by the partner is not deductible.   A
\n\t\t      partner’s\t rendering  services  to  the\tfirm
\n\t\t      stands  on the same footing as  his  providing
\n\t\t      capital;\tonly instead of in money,  in  kind.
\n\t\t      Further,\tno remuneration is permissible to  a
\n\t\t      partner  for  his rendering  services  to\t the
\n\t\t      firm, since the carrying on of the business of
\n\t\t      the partnership is a’ primary duty which,\t all
\n\t\t      the  partners, or some of the partners  acting
\n\t\t      for  all,\t are  required\tto  do\tby  the\t law
\n\t\t      relating to partnership.\n<\/p><\/blockquote>\n
\t\t\t    The matter may be looked at another\t way
\n\t\t      too.  In law, a partner cannot be employed  by
\n\t\t      his firm, for a man can-\n<\/p><\/blockquote>\n
\t\t\t  (1)  Law  of Income-tax  by  A.C.  Sampath
\n\t\t      Iyengar,\t6th Edn., 1973–pp.  10631064  (Vol.
\n\t\t      II).\n<\/p><\/blockquote>\n
\t\t      121<\/span><\/p>\n
\t\t      not be his own employer.\tA contract can\tonly
\n\t\t      be  bilateral and the same person cannot be  a
\n\t\t      party   on  both\tsides,\tparticularly  in   a
\n\t\t      contract of personal employment. A supposition
\n\t\t      that  a partner is employed by the firm  would
\n\t\t      involve that the employee must be looked\tupon
\n\t\t      as  occupying the position of one of his\t own
\n\t\t      employers,   which   is\tlegally\t impossible.
\n\t\t      Consequently,  when an arrangement is made  by
\n\t\t      which  a\tpartner works and receives  sums  as
\n\t\t      wages  for  services rendered,  the  agreement
\n\t\t      should  in  truth\t be regarded as\t a  mode  of
\n\t\t      adjusting\t the  amount that must be  taken  to
\n\t\t      have  been  contributed to  the  partnership’s
\n\t\t      assets   by   a partner who has made  what  is
\n\t\t      really  a\t contribution in  kind,\t instead  of
\n\t\t      contribution   in\t money.\t  Hence,   all\t the
\n\t\t      aforesaid payments are non-deductible.”
\n\t\t\t  The  contrary\t view  favoured\t by   Mathew
\n\t\t      (supra)  proceeds on the following reasoning:
\n\t\t\t    “Though  for purposes of computation  of
\n\t\t      income his share income of the firm is clubbed
\n\t\t      along with the allowance and commission, it is
\n\t\t      obvious  that the character of the receipt  of
\n\t\t      the  latter  amounts, though  related  to\t the
\n\t\t      business,\t cannot\t be said to partake  of\t the
\n\t\t      same  character of their receipt by the  firm.
\n\t\t      The  assessee  who is a managing\tpartner\t was
\n\t\t      entitled\tto receive the amount not by  virtue
\n\t\t      of the relationship between him and the  other
\n\t\t      members of the firm as partners but by  virtue
\n\t\t      of the special agreement between the  partners
\n\t\t      by which his services to the partnership\twere
\n\t\t      agreed to be remunerated.”\n<\/p><\/blockquote>\n
\t\t\t\t\t\t\t\t      (p.<\/p>\n
\t\t      471)
\n\t    We regard this conclusion as unsound, the source of\t the
\n\terror  being  a failure to appreciate that the salary  of  a
\n\tpartner\t is but an alias for the return, by way of  profits,
\n\tfor  the  human capital–sweat, skill and toil are,  in\t our
\n\tsocialist  republic, productive investment—he has  brought
\n\tin for common benefit.\tThe immediate reason for payment  of
\n\tsalary\twas service contract but the causa causans is  part-
\n\tnership.\n<\/p>\n
\t    We\tdismiss\t the appeals. When this Court, as  the\tapex
\n\tadjudicator  declaring the law for the country and  invested
\n\twith constitutional credentials under Art.  141, clarifies a
\n\tconfused  juridical  situation, its substantial role  is  of
\n\tlegal  mentor  of  the nation.\tSuch is the  spirit  of\t the
\n\truling in Trustees of Port, Bombay(1).\tIf parties have been
\n\tfair,  the  costs  of the litigation must come\tout  of\t the
\n\tnational exchequer, not out of as party’s purse.  We  direct
\n\tboth sides to bear their costs throughout.\n<\/p>\n
\tP.B.R.\t\t\t\t\t      Appeals\tdis-\n\tmissed.\n\t(1) [1974] 4 S.C.C 710\n\t122<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commissioner Of Income-Tax, … vs R.M. Chidambaram Pillai Etc on 17 November, 1976 Equivalent citations: 1977 AIR 489, 1977 SCR (2) 111 Author: V Krishnaiyer Bench: Krishnaiyer, V.R. PETITIONER: COMMISSIONER OF INCOME-TAX, MADRAS Vs. RESPONDENT: R.M. CHIDAMBARAM PILLAI ETC. DATE OF JUDGMENT17\/11\/1976 BENCH: KRISHNAIYER, V.R. BENCH: KRISHNAIYER, V.R. KHANNA, HANS RAJ […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-227939","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommissioner Of Income-Tax, ... vs R.M. 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