1. This is an application under Section 66 (2), Income-tax Act praying for the issue of a writ of mandamus on the Income-tax Appellate Tribunal to state a case for the decision of this Court.
2. The material facts are these: The Orient Fast Colour Dye Works, Cuttack, is a partnership firm carrying on the business of dyeing cotton yarn. There were seventeen partners in the firm two of whom were Sri Nikunja Kishore Das and Sri Dhananjay Lenka. While assessing the said firm in respect of its income during the calendar year 1946 the Income-tax Officer included in the total profits a sum of Rs. 3249/- and Rs. 2437/- said to have been paid as remuneration to Sri Nikunja Kishore Das and Sri Dhananjay Lenka respectively. On appeal the Appellate Assistant Commissioner, Income-tax, maintained the assessment made by the Income-tax Officer and dismissed the plea taken by the petitioners to the effect that the said remuneration was paid to the said two partners not in their individual capacity but as partners of another firm known as the Friends United Agency. He therefore held that the remuneration could not be deducted from the profits in view of Clause (b) of Sub-section (4) of Section 10, Income-tax Act.
The Tribunal also maintained the order of the Appellate Assistant Commissioner of Income-tax and held (though, not in very clear terms) that the payment was made to Sri Nikunja Kishore Das and Sri Dhananjay Lenka in their individual capacity and not to the subsidiary firm, namely, the Friends United Agency of which they were also partners. This beinga finding of fact must be taken as concluded. Then the Tribunal had to consider the question as to whether the said sums were paid as remuneration to Sri N.K. Das and Sri D. Lenka for their services as partners of the firm or else for their services in a different capacity.
The finding was that the said two partners and one Sri Nabakishore Mohanti managed the firm for the year 1946 and the remuneration was given to them for such management. The Tribunal relied on -- 'R.A. Goodzer & Co. v. Commr. of Excess Profits Tax, Madras' AIR 1949 Mad 407 and held that there was no distinction in law between the remuneration of a partner qua-partner and his remuneration in any other capacity and that the remuneration given to him out of the profits of the firm, in whatever capacity he might have earned it, was not deductable in view of Clause (b) of Sub-section (4) of Section 10, Income-tax Act.
3. Mr. Mohanti, however, challenged the correctness of -- 'R.A. Goodzer v. Commr. of Excess Profits Tax, Madras' AIR 1949 Mad 407. Clause (b) of Sub-section (4) was inserted in Section 10 by the amending Act of 1939. Prior to the amendment a distinction was made between remuneration paid to a partner qua-partner and to a partner for doing business in his individual capacity. In the Madras decision referred to it was pointed out that by virtue of the amendment made in 1939 and the ambiguous terms of Clause (b) of Sub-section (4) of Section 10 such a distinction could not now be maintained. At this stage it is unnecessary for me to say how far the said Madras decision may be taken as correct. It is however sufficient to point out that as late as 1947 in Sampath Iyengar's book on the Income-tax Act 3rd Edn. at p. 384 the distinction between payment to a partner qua-partner and in his individual capacity was pointed out relying on some old decisions. The learned author does not appear to have noticed that the amendment of 1939 brought about any change in the view till then held regarding the dual capacity of a partner-cum-employee.
4. Mr. Mohanti invited our attention to a later Bombay decision -- 'Jesingbhai Ujamshi v. Commr. of Income-tax, Bombay' : 18ITR23(Bom) , where it was held dissenting from the previous view of the Bombay High Court in --'Vissonji Sons & Co. v. Commr, of I. T., Central' : 14ITR272(Bom) that there was nothing in law to preclude common partners constituting two separate firms in respect of different businesses carried on by them for the purposes of the Income-tax Act. Doubtless that case did not directly decide the question that fell for decision in the Madras case and cannot therefore be taken as an authority for doubting the correctness of the Madras decision.
But if for the purpose of income-tax it be held that there may be two separate firms though the partners in both the firms are identical, the next question that necessarily arises is whether the payment made by one of the firms by way of remuneration to the partners of the second firm (who are also partners of the former firm) would be a permissible deduction or else whether it would be hit by Clause (b) of Sub-section (4) of Section 10, Income-tax Act. At this stage it is not necessary to express any opinion one way or the other. But it is sufficient to note that there is some arguable case for the view that the Madras decision may not be correct and that the old distinction betweenthe remuneration of a partner qua-partner and in his individual capacity may still remain.
5. I would therefore direct the Tribunal to state the following case and refer it to this Court:
Whether on the facts and circumstances of this case the Tribunal was right in relying on the provisions of Clause (b) of sub-SECTION (4) of Section 10, Income-tax Act and refusing to deduct from the profits of the firm the sum of Rs. 5686/- paid to Sri Nikunja Kishore Das and Sri Dhananjay Lenka as remuneration for managing the business of the firm 'The Orient Fast Colour Dye Works' during the year 1946.
6. I agree with the order proposed by my learned brother. I fall in line with him as to his reasonings. I wish to add a few words inasmuch as I feel that I owe a duty to the learned Judges of the Madras High Court to explain why I did not implicitly follow the dictum laid down in the case of --'R.A. Goodzer & Co. v. Commr. of Excess Profits Tax, Madras' AIR 1949 Mad 407 by his Lordship Rajamannar C. J. In this connexion, I should go behind the statutory provision under interpretation (Section 10(4) (b), Income-tax. Act, 1922 (as amended)). As it appears from the Income-tax Enquiry Report, Chap, III, Section 2(b), there were prevalent various methods of calculations of the profits of a partnership business firm. The reference to the Committee was in the following language: 'Apart from this, there is, however, considerable controversy and lack of uniformity of practice in the method of computing the individual partner's shares of a firm' in profit or loss, particularly where interest and salaries are payable in excess of the assessable profits.
7. The Commissioners, in resolving the controversy referred, stated:
'x xxx We may observe thatthere is some diversity of treatment of salaries and interest payable to partners. Insome cases salary or interest has been treated as allowable deduction in computing theprofits of a firm and as a source of incomeseparately assessable on the partner. Thereis the further complication that in such acase interest is sometimes separately assessedon the basis of the amount actually paid andin others on the amount due and credited inthe firm's books. We recommend that 'in thecomputation', of the profits 'by a firm', whether registered or not, no deduction shouldbe made in respect of any sum whether described as salary, interest, commission or otherwise, which is payable 'to a partner', find thatany partner's assessable income from partnership business should be his actual shareof the profit or loss of the previous year calculated on the lines indicated above x x.'
8. It may be noted that the words 'salary, interest and commission', appearing in the section, are taken from this report; and for the words 'or otherwise', the Legislature has substituted the words 'or remuneration'.
9. In this context, there is room for argument that the pre-amendment decisions which have made a distinction between what was paid to a partner in lieu of his services to a partnership as an individual and what was paid to him as his share in the profits in the assumed name of either salary or commission, or otherwise, should no longer hold the groundafter the aforesaid amended provision was inserted in the Ac. but we take into consideration that in amending the Act, tae Legislature shall not be understood to have intended to introduce a change into the substantive law of partnership. Such an argument should turn out to be a fallacy.
10. In this connexion, the nature and incidents of a partnership and the mutual relation between the partners 'inter se' and between them and the firm have to be carefully looked into. 'Partnership' was first denned in the Contract Act as
'partnership is the relation which subsists between persons who have agreed to combine their property, labour or skill in some business, and to share the profits thereof between them.'
11. Persons who have entered into partnership with another are called collectively 'Firm'.
12. The definitions of 'partnership and firm' have been differently expressed, in supersession of the definition in the Contract Act, by Section 4, Partnership Act, 1932. The Section reads:
' 'Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm', and the name under which their business is carried on is called the 'firm name'.'
13. It is clear that where a partner shares the profits of the firm in lieu of his having 'acted for' all within the meaning of the aforesaid Section 4, or having put in labour, or skill in the business in pursuance of an agreement within the meaning of Section 239, Contract Act, he does so by virtue of the agreement he made with other partners in constituting the partnership firm. This share however distributed, and whatever name it assumes, whether salary, or commission, or interest, or remuneration, is an integral part of the profits of the firm and, as such, does not admit of any deduction.
But where the services are rendered outsidethe scope and ambit of the partnership agreement, he acts as an individual or natural person as distinguished from 'as a partner' inwhich he is clothed with a 'legal personality'.The Legislature has not used the words 'aspartner', but has instead used the words 'anypartner'. This indisputably means and includes a partner in his capacity and statusassigned to him in the partnership agreementwhich carries with it both rights and obligationsdue to and from every member of the partnership. In the circumstances, I would hold thatthe previous decisions in which the deductionswere permissible only when remuneration waspaid to a partner in his individual capacitywould still hold the ground. I would, therefore,join with my learned brother in issuing a writof mandamus calling upon the learned Tribunalto state a case in the manner indicated in hisjudgment.