1. The assessee in this case was assessed in the status of an individual for two assessment years 1951-52 and 1952-53, the accounting years ending on 31-8-1950 and 31-8-1951 respectively. In making these assessments, there was included in the income of the assessee salary and commission on sales received by his wife. This inclusion was made under the provisions of Section 16(3A)(1) and the dispute relates to this inclusion.
2. It appears that the assessee upto the end of June 1949 was carrying on business in partnership with one Gutmann under the style of Messrs. Metallica Works, a business of refining, melting and casting metals. The partnership was dissolved at the end of June, 1949 and on 1-7-1949, he entered into a partnership with his wife Mrs. Liselotte Magnus. The partnership deed was executed on 13-10-1949. Clause 7 of the partnership deed casts an obligation on both the partners to devote their time and attention exclusively to the business of the partnership; but there is no clause in the partnership deed entitling Mrs. Magnus to receive any salary or other remuneration for devoting her time. It was alleged by Mr. Magnus that by an oral agreement, the provision of this clause was varied and Mrs. Magnus was relieved of the obligation of devoting her time and attention to the partnership business. This state of affairs continued till the 1st January, 1950, when it was orally agreed that Mrs. Magnus should look after the administrative side of the partnership business and should receive a sum of Rs. 1,000/- per month as remuneration and also commission at 1 per cent., on the sales effected by the firm during the accounting year. The Tribunal did not consider it necessary to give any finding as to whether Clause 7 was varied orally as alleged, because they took the view that what they had to determine was the capacity in which Mrs, Magnus received the sum of Rs. 1,000/- a month and the commission at 1 per cent., on sales. They came to the conclusion that in law she could not be an employee of the firm in which she was a partner; and since she did not receive this remuneration as an employee of the firm, obviously she could only receive the remuneration by virtue of being a partner in the firm. The Tribunal, therefore, held that the salary and commission paid to the wife was rightly included in the income of the assessee. On these facts the following two questions have been referred to us by the Tribunal:
'1. Whether Mrs. Magnus, a partner of the firm of Messrs. Metalica Works, could be employed as an employee in the said firm?
2. If the answer to the first question is in the affirmative, whether there was any material on record to come to the conclusion that Mrs. Magnus, a partner of the said firm, was being remunerated by it in her capacity as a partner?'
Now, in so far as the first of these two questions is concerned, it appears to us that since a contract can only be bi-lateral and the same party cannot be a party on both the sides, there can hardly be a contract between A on the one side and A and B on the other side particularly a contract of personal employment. Lindley in his famous treatise on the Law of Partnership, 11th Edn. at page 154 states: 'In point of law, a partner cannot be employd by his firm for a man cannot be his own employer'. The true legal position, when an attempt is made to employ him by a firm was lucidly stated by Collins M.R. in Ellis v. Joseph Ellis and Co. 1905 1 KB 324. In that case, a partner in a firm which was formed for the purpose of working a mine himself worked in the mine; he met with an accident & his widow claimed compensation under the Workmen's Compensation Act. It was held by the Court of Appeal in England that the deceased was not employed by the firm, and, therefore, the case did not fall within the scope of the Act. Collins M.R. at page 328 in his judgment observed:
'The supposition that the deceased man was 'employed', within the meaning of that term as used in the Act, would appear to involve that he, as one of the partners, must be looked upon as occupying the position of being one of his own employers. It seems to me that, when one comes to analyse an arrangement of this kind, namely, one by which a partner himself works, and receives sums which are called wages, it really does not create the relation of employer and employed, but is, in truth, a mode of adjusting the amount that must be taken to have been contributed to the partnership assets by a partner who has made what is really a contribution in kind, and does not affect his relation to the other partners, which is that of co-adventurer and not employee. Such a partner cannot put himself in the position of not being a partner when he is one, or of being a workman employed, when that position would involve that he would be both employer and employee'.
Mathew and Cozens-Hardy, Lord Justices concurred with the said opinion. Mathew L.J., at page 329 observed:
'The argument on behalf of the applicant in this appeal appears to involve a legal impossibility, namely, that the same person can occupy the position of being both master and servant, employer and employed. The deceased man in this case was a partner; and the arrangement made between him and his co-partners as to the payment of wages to him was really an agreement with regard to the mode in which accounts were to be taken between the partners, and to the share of profits to be received by him in excess of that received by the other partners in consideration of the work done by him.'
Therefore, the position appears to us to be clear in law that a partner cannot be an employee of the firm, and this supplies the answer to the first question, which will have to be answered in the negative.
3. The second question relates to the fact found by the Tribunal that Mrs. Magnus was being remunerated as a partner, and all that we have to consider is whether there was any material on the record to enable them to come to that conclusion. Now, the relevant words of Section 16, Sub-section (3)(a)(i) are:
'In computing the total income of any individual for the purpose of assessment, there shall be included-
(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly-
(i) from the membership of the wife in a firm of which her husband is a partner.'
Therefore, what fell to be determined by the Tribunal was whether the remuneration and commission received by the wife arose directly or indirectly from the membership of the wife in the firm. Admittedly her husband Mr. Magnus was a partner in the firm. On this question, the facts as allegedby the assessee himself are, in our opinion, not only sufficient to enable the Tribunal to come to the conclusion which they did but are facts from which no other conclusion is possible. A joint affidavit was made on 19-10-1955 by Mr. and Mrs. Magnus which sets out what the so-called oral agreements were after the agreement of partnership. Part I of the affidavit recites the fact that there was an instrument of partnership on 13-10-1949 and then paragraphs 2 and 3 are as follows:
'2. Subsequently we had varied the terms of partnership as appearing in the aforesaid instrument of Partnership. Accordingly Mrs. Liselotte Magnus having been admitted to partnership in consideration of the natural love and affection by Mr. Sigmund Magnus, has been receiving her 10, per cent., share in the profits of the partnership without being required to devote her whole time and attention exclusively to the business of partnership.
3. In addition, inasmuch as she Mrs. Liselotte Magnus has been, at the instance of Mr. Sigmund Magnus, actually devoting her full time and attention to the business of partnership of which obligations she had been relieved as aforesaid, she is being paid salary and commission and the same have been duly recorded in the books of account of the firm.'
Reading this affidavit, it is clear that the agreement deposed to in paragraph 3 thereof constitutes a variation of the terms of the partnership. The opening words of para 3 ''in addition' clearly indicate this. We have, therefore, a case where an Instrument of Partnership is varied by providing that one of the partners shall be paid a remuneration for rendering services to the partnership. There can be little doubt, in our opinion, that such an agreement is an agreement under which the partner to be remunerated directly gets the remuneration from his or her membership of the firm. It is remuneration payable to a partner in her character as a partner; and, therefore, on the facts of this case, the Tribunal, in our opinion, rightly came to the conclusion that Mrs. Magnus received this amount of remuneration in her capacity as a partner and it fell within the scope of Section 16(3)(a)(i) and it was rightly included in the income of the assessee.
4. Our answer, therefore, to question (2) would be in the affirmative.
5. Assessee to pay the costs.
6. No order on the Notice of Motion.
7. Reference answered.