1. The assessee is an individual who is a partner in a renowned chartered accountant firm known as 'Price Water-house & Co.'. The assessee was receiving salary as well as share of profit. The firm was a registered firm. The assessee claimed standard deduction under Section 16(i) of the Income-tax Act, 1961 ('the Act') against the salary income. The ITO has not discussed on this issue.
2. The assessee came in appeal before the AAC and contended that he was entitled to a fixed salary over and above the share in the partnership firm and, therefore, the assessee should be allowed standard deduction under Section 16(i). It was also indicated that standard deduction was allowed during the assessment year 1981-82. The assessee relied on a decision of the Bombay Tribunal in Mohamad Ibrahim Shahdad v. ITO  4 Taxman 576. He also referred to the various clauses of the partnership deed before the AAC. The AAC did not accept the argument of the assessee and he gave the finding as hereunder: 4. I have carefully considered the submissions of the appellant and I find that a partner of a firm though entitled to a fixed amount of salary, which is not in keeping with his profit sharing ratio, is not definitely an employee of the said firm. According to the Indian Partnership Act, 1932, partners are collectively owners of the firm and any one of the partners can carry the business on behalf of others for the firm. Thus, a partner cannot be termed as an employee or a servant of the firm. A reference to the provisions of Section 40(b) and Section 67(b) would show that any interest, salary, commission or other remuneration paid to any partner in respect of the previous year as apportioned to the partner under Clause (a) of Section 67, is a profit and shall be treated as the partner's share in the income of the firm. Thus, whatsoever may be the nomenclature, the drawings by the partner either in the shape of salary, interest on capital, commission or other remuneration will be deemded to be the commercial profit of the firm and shall be assessed as such.
Thus, the salary income shown by the appellant which has been assessed as such is not entitled to the benefit of standard deduction under Section 16(i). Indeed, the salary income from the partnership firm is assessable as a part of assessee's income from the firm being business income. The ITO, is, therefore, directed to rectify the assessment by including the salary income under the head 'Profits and gains of business or profession'. The appellant's objection for allowing the benefit of the standard deduction is not entertained and held by me as not admissible.
3. Dr. Pal, the counsel of the assessee, filed a copy of the partnership deed dated 23-12-1980 of Price Waterhouse & Co. and the copy of the order of the Bombay Bench of the Tribunal in Mohamad Ibrahim Shahdad's case (supra). Dr. Pal referred to specifically the Clauses 7 to 12 of the partnership deed and indicated that the partners were getting fixed remuneration as indicated in clause 10, whereas, the profit sharing ratio was described in clause 7 of the deed. It was also pointed out by Dr. Pal that it was provided in clause 11 of the partnership deed that the salary drawn by the partners shall be debited to the establishment or working expenses of the partnership. Relying upon the clauses of the partnership deed and referring to Sections 40(b) and 67(a) and (b) of the Act, he urged that the salary earned by the assessee may be the income of the firm, but it is always in the nature of salary to the partner, and, therefore, the assessee was eligible for standard deduction. He, for this purpose, relied on the decision of the Bombay Bench of the Tribunal in Mohamad Ibrahim Shahdad's case (supra) and the decision of the Jaipur Bench in Chhitermal Goyal v. ITO  Tax. 75 (6A)-14. He also relied on E.C.Danby v. CIT  12 ITR 351 (Pat.) and Major Conville v. CIT  3 ITR 404 (Lahore) at p. 407.
4. Shri Lahiri, the departmental representative, did not dispute the fact. However, he stated that the salary received by the partner was a part of the profit of the firm to which the partner was entitled. He further referring to the various clauses of the partnership deed, on which the reliance was placed by Dr. Pal, stated that nothing turns on these clauses. Whether the partners were getting the fixed salary or they indicated that the salary received by them shall be debited to establishment will not change the character of the income which the partner was receiving. The partner was only entitled to profit of the firm. He may get in the shape of interest, commission, salary or profit itself. Shri Lahiri stated that this point had been concluded by the Supreme Court in CIT v. R.M. Chidambaram Pillai  106 ITR 292. He further placed reliance in Ram Prashad v. CIT  86 ITR 122 (SC), Giridharilal Ghasiram v. CIT  69 ITR 890 (Cal.) and CIT v.Veeriah Reddiar  73 ITR 162 (Ker.).
5. Dr. Pal, in reply to the argument of the departmental representative, urged that all the cases relied on by the departmental representative are not applicable on the facts of the case. Dr. Pal again referred to the decision in Major Conville's case (supra) and read a sentence at p. 407 and urged that the assessee was eligible for standard deduction.
6. The short point for consideration is whether a partner who is receiving salary from the partnership firm is eligible for standard deduction under Section 16(i). The question of allowability of standard deduction arises only because of the nomenclature under which he is getting the remuneration from the firm. It has been described in the partnership deed that the partners shall be receiving salary as indicated in clause 10 of the partnership deed. The real question is what is the nature of amount receivable by a partner from the partnership firm either by way of salary or commission or interest. The partnership is the collective name of the partners and the partners are the real persons who are doing business in the name of the partnership firm. Therefore, whatever the partners are getting, they are getting by way of profit, whether the same is adjustable against salary, commission or interest, etc. This view is well recognised by the principle of accountancy.
7. The learned author in Spicer & Pegler's Book-keeping and Accounts, 17th edition, at page 131 had described as follows: Where the agreement provides for the payment of salaries to partners, it must be realized that such payments, although designated salaries, etc., like interest on capital, are merely in the nature of preferential shares of the divisible profit.
The learned author J.R. Batliboi in Advance Accounting, 22nd edition, at page 203, described the partners' salary as under: Partners' salary--It frequently happens that one of the partners may be devoting his entire time to the business whereas the others may not, and under such a circumstance, it is usual to allow the former an agreed salary before the ascertainment of net profit. The practice of allowing salary usually obtains in a firm where there are junior partners with hardly any capital contribution who take a very small share of the profits and yet who devote the whole of their time and energy to the business. When such salaries are drawn out in cash from month to month, they should be charged to Partners' Salaries Account. Where, however, lump sums are withdrawn at irregular intervals on account of salaries, these would be debited to the Drawings Account of the partner concerned and an adjustment would have to be made at the end of each financial period, debiting Partners' Salaries Account and crediting the Capital Account of the Partner with the annual amount of salary due to him.
The learned author William Pickles on Accountancy, 4th edition, at page 2211, had described as follows: Circumstances frequently arise in partnership affairs necessitating the allowance to a partner of an extra share in the profits of the firm because of extraordinary circumstances.
The learned author Hrishikesh Chakraborty on Advance Accountancy, at page 273, had described as follows: Appropriation means division of profit, profit may be divided as such, or it may be divided partly as interest on capital, partnership salary, interest on loan etc. and partly as balance profit.
8. Therefore, if the said accountancy principles are taken into consideration, it is evident that the salary received by the partner was only a part of the profit of the partnership firm and, hence, the assessee could not be allowed standard deduction under Section 16(i).
The counsel of the assessee has put much stress on the clauses of the partnership deed and the provisions of Sections 40(b) and 67. Even if the clauses of the partnership deed and the said provisions are taken into consideration, it is clear that the income by way of salary was received by the assessee from the firm from which he was only entitled to profit. The firm was having income from business. The salary income received by the assessee cannot be characterised as income from any other source rather than the income from business. This view is well supported by the observation of the Supreme Court in R.M. Chidambaram Pillai's case (supra). The Hon'ble Supreme Court has observed as follows: A firm is not a legal person even though it has some attributes of personality. In Income-tax law a firm is a unit of assessment, by special provisions, but is not a full person. Since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. Payment of salary to a partner represents a special share of the profits. Salary paid to a partner retains the same character of the income of the firm. (p.
292) 9. Dr. Pal in course of the hearing has placed reliance in two Tribunal decisions (supra) and urged that his argument is supported by the conclusion of the said orders of the Tribunal. Firstly, according to the accountancy principle, it has been decided that the salary received by the partner was only a part of the profit from the firm. This aspect of the matter had not been considered by the Tribunal. Further, the observation of the Supreme Court above has been quoted where the Supreme Court has indicated that the salary receivable by a partner represents a special share of profit. On these grounds, the decisions of the Tribunal are not applicable in the case of the present assessee.
Under the above circumstances, after considering the arguments, the case laws relied on by the respective parties and the accountancy principle, it is decided that the salary received by the assessee was a special share of profit and the assessee was not entitled for standard deduction under Section 16(i).