1. This is an appeal by the revenue against the order of the Commissioner (Appeals), dated 18-10-1982, The only issue for our consideration in this appeal is whether the Commissioner (Appeals) has erred in law and on facts in holding that the assessee-partnership firm is a professional firm deriving income from profession and he further erred in directing that the firm should be taxed at the rates applicable to professional firms. The relevant facts are that the assessee-firm is working as analysts for Pharmaceuticals. This year total analysis fees are disclosed at Rs. 1,87,975. The assessee claimed that the assessee-firm should be treated as professional firm doing analytical and research work as pharmacist, as they are not doing any trading or manufacturing activities. They are technical persons rendering analytical services, which is a professional activity. On the basis of the claim of the assessee, the ITO made inquiries and found that two partners out of six partners are qualified for the job. Four partners are not qualified nor they are professional qua the nature of activities of the assessee. They simply contributed the capital of the firm. According to the ITO when majority of the partners are non-qualified, the assessee cannot claim itself as a professional firm.
Being aggrieved, the assessee went in appeal before the Commissioner (Appeals). The Commissioner (Appeals) allowed the claim of the assessee. Being aggrieved, the revenue came in appeal before us.
2. The submission of the learned departmental representative, Shri Malik, was that out of six partners, only two partners are qualified.
Seven employees who are carrying on the activities of the assessee are also qualified. Therefore, the income is earned mainly by the employees, who are qualified persons and not by the partners. There is a difference between the firm constituted by the professionals earning income and the firm constituted by non-qualified persons employing qualified persons to run the business. In this case, the facts are nearer to the latter one. Therefore, the ITO had rightly disallowed the claim of the assessee, holding that the income earned by the firm is business income. On the other hand, the submission of the learned counsel for the assessee, Shri K.C. Patel, was that the nature of business of the assessee is to work as analysts for Pharmaceuticals and the major income is in the form of analysis fees. When the nature of income derived is professional activity, the firm should be considered as professional firm and tax applicable to professional firm should be charged.
3. We have heard the rival submissions and considered the material on record. The fact that out of six partners only two partners are qualified and four partners have only contributed towards capital of the firm, is not disputed. Apart from this, seven employees are qualified persons who were working as analysts. Therefore, analysis work is done by seven plus two persons, i.e., seven employees and two partners. Therefore, this fact shows that four partners have nothing to do with the analysis work. They can be said at the most as organisers of business or who arranged business but the real analysis work or professional work is done by seven employees and two partners. Now the question remains as to when the employees having professional qualification earned income out of their skill, whether can it be taken as professional income in the hands of the partners who are not qualified. In the case of P. Stanwill & Co. v. CIT  22 ITR 316, the issue before their Lordships of the Allahabad High Court was whether income was from profession or not. The facts in short were that the assessee was a firm of auctioneers whose partners were brothers possessing long experience of auctioneering business and one of them was a qualified engineer. Their Lordships held that the income of the assessee depended mainly on the personal qualifications of the partners, as contemplated by Section 2(5) of the Excess Profits Tax Act, 1940, and held the issue in favour of the assessee. Therefore, the important fact to be seen is whether income is earned by the personal qualifications of the partners. In the case of Dr. P. Vadamalayan v.CIT  74 ITR 94, the facts before their Lordships of the Madras High Court were that the assessee, a doctor by profession, was maintaining and running a nursing home in which he installed certain medical equipment and claimed development rebate on the value thereof.
The department and the Tribunal negatived the claim on the ground that the assessee's running a nursing home was part of his profession and could not be classified as a business. Their Lordships held that carrying on of the nursing home by the assessee as part of his profession was of commercial nature and the combined activities of the assessee constituted business and the assessee was entitled to the development rebate. Further, similar issue was considered by the Gujarat High Court in the case of CIT v. Dr. K.K. Shah  135 ITR 146. The facts before their Lordships were that the husband and wife are members of the very same partnership firm carrying on business. The income of the two is to be clubbed together. Their Lordships considered the distinction between the business and profession. Their Lordships held as under: ...on the facts of the case, that the income of the spouses, who were both qualified medical practitioners, from the professional activities of their firm cannot be clubbed together but if the spouses are also engaged in any distinct business activity such as running a chemist's shop, their income, to that extent, can be clubbed together. Income from nursing home run by the doctors who themselves treat their own patients as an integral part of the profession must be treated as professional income. If the nursing home is one where patients of doctors other than the partners are admitted and treated, it is a business activity and the income from that activity is to be clubbed together.
Therefore, from the above, it is clear that there is a difference between the firm constituted by professionals earning income by their personal qualifications and the firm constituted by non-professionals or partly professionals and partly non-professionals. In the latter case, it cannot be said that the income is earned by the professional firm. Therefore, considering the facts of this case and ratio laid down by the Gujarat High Court in the case cited supra, we reverse the view taken by the Commissioner (Appeals). 4. The appeal is allowed, The Commissioner (Appeals) has erred in law and on facts in holding that the assessee-partnership firm is a professional firm deriving income from profession. He further erred in directing that the firm should be taxed at the rates applicable to professional firms.
2. The Finance Act, 1976 prescribes the rates at which the income shall be charged. The First Schedule to the Finance Act prescribes rates of income-tax to be charged according to the status of the assessee.
Paragraph C prescribes the rates for the firms. Sub-paragraph I prescribes the rates in the case of every registered firm and sub-paragraph II prescribes rates in the case of every registered firm whose total income includes income derived from a profession carried on by it and the income so included is not less than 51 per cent of such total income.
3. The firms falling in sub-paragraph II attract lower rate of income-tax. So what is required is to see whether the income derived by the firm can be considered as income derived from profession. Nature of activity carried on should determine the status of the firm and not the qualification of the partners constituting the firm. There is no dispute regarding the fact that activity carried on by the firm fulfils all criteria of an activity of profession but the grievance of the revenue is that because all the partners are not professionally or technically qualified, the firm is not entitled to benefit of lower rate of tax. In my opinion, this view is not correct because the statute does not require that for being eligible for the lower rate of income-tax, the firm must have all the partners professionally qualified persons. Take, for instance, a partnership consisting of Mr.
A, an individual and 'B', a body corporate, registered under the Companies Act, 1956. Mr. A is professionally qualified as management consultant. The firm has started the profession of providing management consultancy services. Can it be said that income of this firm will not be entitled to lower rate of tax on registered firm on the basis of that income is earned by firm where only one partner is professionally qualified Take another instance of a firm of architects where one of the partners is a medical surgeon who because of his contacts has joined the firm. Other partners may be architects and engineers. Can it be said that all the partners are not professionally qualified In such cases, according to the stand of the revenue, the firm shall be entitled to benefit of lower rate in spite of the fact that there is no relevance of educational qualification of surgeon, in legal terminology, no nexus between the earning of income and the medical qualification.
4. Moreover, sub-paragraph II of the First Schedule of the Finance Act, 1976, itself comprehends a situation by stating that to be eligible for a lower rate of taxation, it is not necessary that 100 per cent income must come out from profession ; it is sufficient if such income forms part of total income to the extent of 51 per cent at least. This means that balance income can come out of activities not carrying all the ingredients of professional activity. In other words, a firm can have income from the profession as well as income from business and yet qualify for lower rate. This presupposes the fact that the emphasis is on nature of activity carried on by the firm and not on the nature of constitution of the partnership firm.
5. In my view, therefore, the decision taken by the Commissioner (Appeals) does not require any interference. I disagree with the decision taken by my learned brother.
REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 -Difference of opinion has arisen between the members, who constituted the Bench.
The following point of difference is referred to the Hon'ble President of the Tribunal under Section 255(4) of the Income-tax Act, 1961 ('the Act'): Whether, on the facts and in the circumstances of the case, the assessee partnership firm should be taxed at the rates applicable to the registered professional firms attracting lower rate of tax 1. On a difference of opinion between the learned members, who heard the appeal originally, the following point of difference was stated: Whether, on the facts and in the circumstances of the case, the assessee partnership firm should be taxed at the rates applicable to the registered professional firms attracting lower rate of tax The case having been assigned by the President to himself, it has come up for hearing before me in terms of Section 255(4).
2. The facts are in a narrow compass. The assessee, a registered firm, is working as analysts for Pharmaceuticals. It has six partners, two of whom have professional qualifications. Besides, there are seven employees having professional qualifications. All these persons are running the laboratory as analysts for Pharmaceuticals. There is no dispute that if the laboratory is run by the two professionally qualified partners in partnership by themselves or along with the seven professionally qualified employees in partnership, the income from the laboratory would have been income derived from a profession carried on by the partnership firm. Since, however, the laboratory is run by the firm constituted of six partners, four of whom do not have professional qualifications, the ITO has taken the view that the income from the laboratory cannot be treated as income derived from the profession carried on by the assessee-firm, 3. The controversy, it may be stated, has arisen as a result of the provisions contained in sub-paragraph II of paragraph C of Part I of the First Schedule to the Finance (No. 2) Act, 1977, which provide for a lower rate of taxation in the case of registered firm, whose total income includes income derived from a profession carried on by it, etc.
The relevant provision read as under: In the case of every registered firm whose total income includes income derived from a profession carried on by it and the income so included is not less than fifty-one per cent of such total income.
According to the Commissioner (Appeals), the ITO was not justified in holding that all the partners of the firm have to be professionally qualified. He has been of the view that it is not at all necessary for carrying a profession that all the partners should be professionally qualified. The real test, according to him, is whether income earned is derived from a profession or not. It is immaterial whether all or any of the partners is/ are professionally qualified and are carrying on the profession themselves or whether the profession is carried on with the help of professionally qualified employees. For these and other reasons given in para 4 of his order, the Commissioner (Appeals) has directed the ITO to recompute the tax, treating the firm as a professional firm.
4. As stated earlier, there has been a difference of opinion between the learned members who heard the appeal originally. According to the learned Judicial Member, decisions of the Allahabad High Court in the case of P. Stanmll & Co. (supra), the Madras High Court in the case of Dr. P. Vadamalayan (supra) and the Gujarat High Court in the case of Dr. K.K. Shah (supra), indicate that in order to compute income from the profession carried on by an individual or a firm, the individual or all the partners of the firm, as the case may be, have to be professionally qualified. Accordingly, he has held that the Commissioner (Appeals) was not justified in directing the ITO to treat the income of the assessee-firm as being from a profession carried on by it. The Accountant Member has, on the other hand, agreed with the Commissioner (Appeals). According to him it is not necessary that all the partners of the firm should have professional qualifications. He has derived support from the fact that the provisions do not require that the total income of the firm in entirety should be from the profession. It is in order if only 51 per cent of the total income is from the profession.
5. Shri Bhattacharya has laid great emphasis on the expression 'from the profession carried on by it' used in the relevant provisions.
According to him this only means that income from the profession must be carried on by the firm which, in turn, means by all the partners of the firm. According to him, a firm constituted of partners, not having professional qualifications, cannot carry on a profession at all. A profession, it is contended, can be carried on by persons possessing professional qualifications only and not by persons who do not have professional qualifications. If non-professionals carry on professional activities, income from such activities will be considered as income from business in their hands. It is misnomer to say that the assessee's income is from the profession and the dispute has arisen only because the activities are carried on by a firm of which four out of six partners do not have professional qualifications. Such an income, according to the departmental representative, is to be taken as income from the business and not from the profession. In short, Shri Bhattacharya's submission is that there is no theoretical conception of profession as such. It is income from the profession only if the profession is carried on by the individual or all the partners of the firm themselves, as the case may be, and such an activity is dependent mainly on the personal qualifications of persons, who are supposed to carry on the profession. All the three decisions, referred to and relied upon by the learned Judicial Member, in support of his submissions, are strongly relied upon. It is stated that the Madras High Court has taken the same view in its subsequent decision in the case of CIT v. Dr. V.K. Ramachandran  128 ITR 727. The submission, thus, is that if a tailor carries on a tailoring profession, it is profession but if a person having no tailoring experience carries on tailoring business with the help of tailors as his employees, the income is from business and not from the profession.
6. Shri Patel, the learned counsel for the assessee, fairly admits that in order to fall within the provisions in question, 51 per cent of the assessee's total income has to be from profession carried on by it.
However, according to him, when two of the partners are qualified professionals, it means that it is from the profession carried on by the firm. In this context, Shri Patel invited our attention to Section 4 of the Indian Partnership Act, 1932, where partnership has been defined to be the relation between the persons who agreed to share the profits of a business carried on by all or any one of them acting for all. It is pointed out that the Allahabad High Court, in the case of P.Stanwill & Co. (supra) was concerned with Section 2(5) of the Excess Profits Tax Act, 1940, where the Legislature has specifically provided that such profits should be dependent wholly or mainly on the personal qualifications of the individual or the partners, as the case may be.
In the provisions, with which we are concerned in this appeal, Shri Patel submitted, there is no such requirement. It is stated that the decisions relied upon by the learned Judicial Member are not applicable at all.
7. I have carefully considered the rival contentions. I agree with Shri Patel that the provisions of Section 2(5) of the Excess Profits Tax Act, and the provisions of sub-paragraph II of paragraph C of Part I of the First Schedule of the Finance (No. 2) Act, 1977 are materially different inasmuch as the provisions with which we are concerned herein, unlike Section 2(5) of the Excess Profits Tax Act, do not contain a further requirement that the profits of the profession should depend, wholly or mainly, on the personal qualifications of individual or the partners. In the circumstances, it would be sufficient, for the purpose of this appeal, to examine and decide whether 51 per cent of the assessee's income can be said to be derived from a profession carried on by it. I also agree with Shri Patel that the decisions of the Madras High Court in the cases of Dr. P. Vadamalayan (supra) and Dr. V.K. Ramachandran (supra), the Allahabad High Court in the case of P. Stanwill & Co. (supra) and the Gujarat High Court in the case of Dr.
K. K. Shah (supra), have no direct bearing on the issue before me.
The Allahabad High Court was concerned with the provisions of Section 2(5) of the Excess Profits Tax Act, which are materially different from the provisions herein.
What has been decided in Dr. P. Vadamalayan's case (supra), is that, a doctor by profession can carry on profession. He can also contemporaneously carry on a trade which is annexed to the exercise of such a profession and that a nursing home run by the doctor, in given circumstances, can constitute business. A similar view has been taken by the Madras High Court in Dr. V.K. Ramachandran's case (supra). In that case the assessee, a medical practitioner, purchased an X-Ray machine. The way in which he was carrying on the X-Ray activity, it was found that it was in no way different from a non-qualified person carrying on a radiological institute. It was held that mere fact that a professional man had, as an adjunct to his professional activities, such an institute, did not disable him from running it as a commercial venture and earning income therefrom. The question involved in Dr. K.K.Shah's case (supra), before the Gujarat High Court, was whether the income of the husband and wife, who were both doctors, should be clubbed under Section 64(1) of the Act. Here again, what was held is that, whether they were carrying on profession or not, would depend upon the nature of the activities, i.e., if they were running a nursing home for the purpose of treating their own patients, the income would be professional income but not otherwise. I fail to understand, how these decisions have any bearing on the facts of this case.
8. I find some useful discussion about the issue before me, in the case of CIR v. Peter Me Intyre Ltd. 12 TC 1006. The company in that case was carrying on a profession as auctioneers. The company would be entitled to exemption from excess profit duty in terms of Section 39(1) of the Finance (No. 2) Act, 1915, if the income was held to be from a profession, the profits of which are dependent mainly on the personal qualifications of the persons by whom the profession is carried on.
Thus, there again the provisions were similar to those of Section 2(5) of the Excess Profits Tax Act which were subject-matter of consideration before the Allahabad High Court in P. Stanwill & Co.'s case (supra). It is pertinent to mention that the Allahabad High Court has not noticed this decision, although it has noticed five other English decisions including the one in the case of William Esplen, Son & Swainston Ltd. v. IRC  2 KB 731, which was considered and followed in this case. It was unanimously held that because of the specific requirement in the provisions, it is necessary that the income depends on the personal qualifications of the persons by whom the profession is carried on and since the company as a juristic person cannot have personal qualifications, the income of the company as auctioneers cannot be treated as being from the profession carried on by the company. From the above discussion, two things emerge, viz., (i) the requirement of the provisions with which we are concerned in this appeal is that the 51 per cent of the income should be derived from the profession carried on by it and that is all, and (ii) a company unlike a firm is not a juristic person and, therefore, the analogy that a company cannot carry on profession under the English Act will not apply to the case of a firm.
9. Having then regard to the provisions of Section 4 of the Indian Partnership Act, which provide for the carrying on of a business which includes profession and which can be carried on by all or by any one of them acting for all, I am inclined to hold that if even one partner has professional qualifications and carries on a professional activity for and on behalf of all the partners of the firm, it has to be held that income so earned is derived from the profession carried on by the firm.
This is subject to the fact that what is carried on as an activity by a firm is profession. In other words, if say five professionally qualified persons enter into partnership for the purpose of carrying on business and not a profession, the income will not be from the profession. In this view of the matter, I agree with the learned Accountant Member.
10. The order will now go to the regular Bench for decision according to majority.