PATHAK C.J. - The facts of these two reference are similar and a common question of law arises. Hence, this judgment will cover both these cases.
In Income-tax Reference No. 12 of 1973, the following question of law has been referred by the Income-tax Appellate Tribunal, Gauhati Bench, under section 256(1) of the Income-tax Act, 1961, hereinafter referred to as "the Act", to this court for decision :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that only 40% of the salary and interest payable to the assessee, Shri M. L. Mahindra, by the firm, M/s. Amsoi Tea Estate, of which he is a partner, should assessed to tax ?"
The facts of this case may be briefly stated as follows :
The assessee, M. L. Mahindra, is a partner in the firm, M/s. Amsoi Tea Estate, which derives income from a tea garden. His share of profit from the firm includes salary and interest. Since the salary and interest were received from the firm having income from the tea garden, the assessee claimed that 60% of his salary and interest also should be exempted. The assessee contended that since 60% of the total income was to be exempted according to rule 8 of the Income-tax Rules, 1962, and since his salary and interests were added back in computing the total income of the firm, he was entitled to exemption for the same reasons. The Income-tax Officer took the view that for the purpsoe of 60% exemption of income from tea garden the income is to be computed as if it were income from business and since the word used in "business" and not total income, he did not accept the assessees contention. He also took the view that after computing the income of tea garden and after exempting 60%, necessary addition, such as, salary, interest and commission, etc., paid to partners, should be added back to the balance of 40% of income computed and on account of this reasoning the Income-tax Officer rejected the assessees claim for rectification under section 154 of the Act in the assessment years 1960-61, 1961-62, 1962-63, 1963-64 and, 1965-66, in respect of which separate assessment orders were passed.
On appeals by the assessee against the orders of the Income-tax Officer, the Appellate Assistant Commissioner by his consolidated order dated August 6, 1970, held that the salary and interest received by a partner from the firm doing business in tea manufacturing was also exempt to the extent of 60% and, taking this view of the matter, he allowed the appeals.
On appeals by the department against the order of the Appellate Assistant Commissioner, the Tribunal held that the Appellate Assistant Commissioner was correct in holdign that only 40% of the salary and interest payable to the assessee by the firm, M/s. Amsoi Tea Estate, should be assessed to tax and the Tribunal dismissed all the six departmental appeals by its consolidated order dated December 12, 1972.
On the above facts the above-mentioned question of law has been referred.
In Income-tax Reference No. 25 of 1973, the Tribunal has referred the following question of law under section 256(1) of the Act to this court for decision :
Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in cancelling the order of the Additional Commissioner of Income-tax that 100% of the salary and interest should be assessed in the hands of the firm and allocated for the purpose of arriving at the share income to be assessed in the hands of the partners ?"
The facts of this case may be briefly stated as follows :
The assessee, M/s. Amsoi Tea Estate, Nowgong, is a registered firm having two partners, namely, M. L. Malpani and M. L. Mahindra, having equal shares in the profit and loss of the tea garden business of the firm. M. L. Mahindra was in receipt of salary, while both the partners also received interest on the investments made by them in the firm. These references relate to the assessment years 1966-67, 1967-68, 1968-69 and 1969-70. In computing the total income of the firm, the Income-tax Officer included in the assessment of the firm and the partners only 40% of the salary and interest paid to them on the ground that salary and interest paid out of profits also constituted a part of tea garden profits. The Income-tax Officer added back the salary and interest paid to the partners and after deducting depreciation, deducted 60% as agricultural income and arrived at the taxable income in the assessment year 1966-67 at Rs. 13,520, in the assessment year 1967-68 at Rs. 21,182, and in the assessment year 1968-69 at total loss of Rs. 16,421. For the purpose of allocation of the income between the partners also the Income-tax Officer took into consideration only 40% of the salary and interest paid to the partners.
The Additional Commissioner of Income-tax having considered that the assessment orders of the Income-tax Officer were erroneous in so far as they were prejudicial to the interest of the revenue, initiated proceedings for revising the assessment orders under section 263 of the Act. The Additional Commissioner of Income-tax held that the immediate source of the salary was the service and that of the total interest, the user of the money. According to the Additional Commissioner they did not partake the character of the income of the firm, whose income may be only partly taxable on the ground that part of its income was agricultural income. The Additional Commissioner, therefore, directed that the correct procedure to be adopted in computing the income in these cases was to take 40% of the total income derived from the tea garden, then add back the entire interest and salary paid to the partners to find out the total income of the firm. Thereafter allocation of profits between the partners should made. He, therefore, directed the modification of the assessment orders accordingly.
The assessee then preferred appeals before the Tribunal. The Tribunal held that only 40% of the salary and interest had to be considered while assessing the profits of the firm. Similarly, the Tribunal held that only 40% of the salary and interest should be allocated for the purpose of arriving at the share income which has to be assessed in the hands of the partners also. In this view the appeals of the assessee were allowed.
On the above facts the above mentioned question of law has been referred.
An identical question of law arose for consideration before this court in Income-tax Reference No. 1 of 1973 (Commissioner of Income-tax v. Amsio Tea Estate decided on January 3, 1977.
After noticing some of the case laws referred to at the Bar on the point and more particularly relying on a very recent decision of the Supreme Court in Commissioner of Income-tax v. R. M. Chidambaram Pillai : 10ITR292(SC) , this court has held in Income-tax Reference No. 1 of 1973 (Commissioner of Income-tax v. Amsoi Tea Estate that the Tribunal was right in law in holding that only 40% of the salary and interest should be allocated for the purpose of arriving at the share income to be assessed in the hands of the partners.
We have perused the judgment of the Supreme Court in the case of Commissioner of Income-tax v. R. M. Chidambaram Pillai : 10ITR292(SC) and we find that the presen two referencews are covered by the said decision of the Supreme Court, wherein the Supreme Court has observed (page 295) :
"Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. Firm is a collective noun, a compendious expression to designate an entity, not a person. In income-tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contact of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in. Section 13 of the Partnership Act brings into focus this basis of partnership business.
Thereafter, quoting the provisions of sections 2, 10 and 16 of the Act. the Supreme Court has observed (pages 296, 301) :
"The anatomy of the provisions is obvious, even if the explanation or motivation for it may be more than one. It is implicit that the share income of the partner takes in his salary. The telling test is that where a firm suffers loss the salaried partners share in its goes to depress his share of income. Surely, therefore, salary is a different label for profits, in the context of a partners remuneration..........
Salaries are profits known by a different name and must be treated as such for taxation purposes. The portion of profits, from tea sales by a grower, which is agricultural, is insulated from incidence and exaction by the Constitution worked out through rule 24. Which means that by that modus operandi we set aide 60% of the total income as representing the agricultural sector, and the salary to partners paid out of it, being only proifts, enjoys the same invulnerability to exigibilty that rule 24 admittedly confers on the agrarian protion.........
It follows that by statutrory dichotomy, 60% of the tea income is agricultural in character and Central income-tax cannot break into its inviolability. This conceded, the flexiable arrangement among partners regarding distribution of this sum may take many forms but the essential agricultural character and consequential legislative immunity cannot be lost because of tags and labels : That which we call a rose, by any other name would smell as sweet. Needless to say, the position is different if the situation is of a stranger-not a partner-drawing a salary."
Having considered the decision of the Madras High Court in the case of Mathew Abraham : 51ITR467(Mad) the Supreme Court has observed - See : 10ITR292(SC) :
"We regard this conclusion as unsound, the source of the error being a failure to appreciate that the salary of a partner is but an alias for the return, by way of profits, for the human capital - sweat, skill and toil are, in our socialist republic, productive investment-he has brought in for common benefit. The immediate reason for payment of salary was service contract but the causa causans is partnership."
In the result, on the basis of the above Supreme Court decision on which this court has relied in Income-tax Reference No. 1 of 1973 (Commissioner of Income-tax v. Amsoi Tea Estate ). we answer the two questions referred in both these references in the affirmative and against the department.
The references are accordingly disposed of. There will be no order as to costs.
B. N. SARMA J. - I agree.