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Commissioner of Income Tax Vs. Sohan Lal Nayyar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome Tax Reference No. 59 of 1968
Judge
Reported inILR1974Delhi802; [1974]95ITR90(Delhi)
ActsIncome Tax Act, 1922 - Sections 10(2)(XV); Income Tax Act, 1961 - Sections 67
AppellantCommissioner of Income Tax
RespondentSohan Lal Nayyar
Advocates: S.K. Iyer,; G.C. Sharma and; V. Vasunderam, Advs
Cases ReferredBasantlal Gupta v. Commissioner of Income
Excerpt:
.....(ii) income tax act, (1961) - section 67--scope & extent of.; that section 67(section 23(5) of the income tax act, 1922) is not exhaustive of all the allowances to which a partner of a registered firm is entitled in computing his share of income. - - after examination of the evidence led before him, he was satisfied that services were in fact rendered by shri laxmi narain to the assessed, that remuneration was in fact paid by the assessed to shri laxmi narain in lieu of such services and that the agreement between the assessed and shri laxmi narain was a genuine agreement. according to this letter, shri gupta was in charge of the keys of the shop and the safe. the facts of the case before the madras high court arc clearly distinguishable from the facts of the case before us......in promoting the sales of the firm. the assessed entered into an agreement dated 1-4-1960 with one shri laxmi narain, who was an employee of the firm in charge of the sales section. under this agreement, the assessed agreed to pay i per cent out of his own commission to shri laxmi narain if the sales reached rs. 15 lakhs per year ; but no commission was payable to him if the above target of sales fellshort by more than 10%. during the previous year, relevant to the assessment year 1961-62, the assessed paid a sum of rs. 7,568.00 to laxmi narain under the agreement dated 1-4-1960 and the assessed claimed deduction of this amount in computing his own share of income from the firm. (2) the income-tax officer rejected the assessed's claim on the following grounds, namely,- (i)that the.....
Judgment:

M.R.A. Ansari, J.

(1) Shri S. L. Nayyar, who will be referred to as the assessed, was a partner of the firm of M/s Beli Ram and Sons. Under an arrangement with the other partners of the firm, the assessed was entitled to receive commission of 1% on the sales effected by the firm in addition to a salary of Rs. 1,000.00 per month. The payment of the salary and commission was in consideration of the services of the assessed in promoting the sales of the firm. The assessed entered into an agreement dated 1-4-1960 with one Shri Laxmi Narain, who was an employee of the firm in charge of the Sales Section. Under this agreement, the assessed agreed to pay i per cent out of his own commission to Shri Laxmi Narain if the sales reached Rs. 15 lakhs per year ; but no commission was payable to him if the above target of sales fellshort by more than 10%. During the previous year, relevant to the assessment year 1961-62, the assessed paid a sum of Rs. 7,568.00 to Laxmi Narain under the agreement dated 1-4-1960 and the assessed claimed deduction of this amount in computing his own share of income from the firm.

(2) The Income-tax Officer rejected the assessed's claim on the following grounds, namely,-

(I)that the agreement dated 1-4-1960 was not a genuine agreement; (ii) that Shri Laxmi Narain did not render any services to the assessed but rendered services only to the firm, as he was already an employee of the firm in charge of the Sales Section; and (iii) that the amount in question was in the nature of a disposition of income by the assessed after it had accrued to him.

(3) The assessed preferred an appeal to the Appellate Assistant Commissioner. The latter disagreed with the view of the Income-tax Officer that the agreement between the assessed and Shri Laxmi Narain was not a genuine agreement. After examination of the evidence led before him, he was satisfied that services were in fact rendered by Shri Laxmi Narain to the assessed, that remuneration was in fact paid by the assessed to Shri Laxmi Narain in lieu of such services and that the agreement between the assessed and Shri Laxmi Narain was a genuine agreement. He, thereforee, allowed the assessed's claim.

(4) Against this order of the Appellate Assistant Commissioner, the Revenue went in appeal before the Income-tax Appellate Tribunal, Delhi Bench, (hereinafter called as the Tribunal). But the Tribunal confirmed the finding of the Appellate Assistant Commissioner and allowed the assessed's claim and dismissed the appeal filed by the Revenue. At the instance of the Revenue, however, the Tribunal referred the following question to this Court under section 256(1) of the Intome-tax Act, 1961 (hereinafter called as the Act):-

'WHETHERon the facts and in the circumstances of the case, the sum of Rs. 7,568.00 constitutes a proper deduction from the assessed's share income from the firm of M/s. Beli Ram & Sons in which the assessed is a partner ?'

Shri S. K. Iyer, learned counsel for the Revenue, has advanced three contentions before us, namely,-

(I)that Shri Laxmi Narain had rendered services to the firm and not to the assessed ; (ii) that the only deductions that arc allowable in computing the partner's share income from the firm are those mentioned in section 67 of the Act and the assessed's claim does not come within the scope of section 67; and (iii) that the amount in' question represents the application of the profits by the assessed after they had accrued to him.

(5) In support of his first contention, the learned counsel has referred to the decision of the Madras High Court in Basantlal Gupta v. Commissioner of Income-tax : [1963]50ITR541(Mad) . In that case, the assessed was a partner of a registered firm. In the assessment year 1956-57, he claimed as a permissible deduction a sum of Rs. 2,000.00 paid as salary to his nephew, V. P. Gupta, for services rendered in connection with the assessed's interest in the affairs of the firms. According to the assessed, he 'had to attend to other businesses and he was not able to look after the proper conduct of the business of the firm and for that reason, he engaged and deputed Shri Gupta to be at General Swadeshis as a whole-time worker for and on his behalf. The High Court observed that apart from the circumstance that the assessed was a partner and as a partner had a right to concern himself with the management of the firm, no material was placed before the department or the Tribunal to establish that the terms and conditions of the partnership enjoined upon the assessed to perform any duties in relation to the business of the firm. The partnership agreement was not placed before the department and what was stated by the assessed before the department and the Tribunal and even urged before the High Court was that the assessed had to have a man of his own to look after his interests. The High Court understood this to mean that the assessed did not have any confidence in the partner who was actually in management and had need to see that things were not done which would react to his disadvantage and for that purpose, he claimed to have employed his nephew. The High Court also took note of the fact that Shri Gupta made a statement in the letter addressed to the Income-tax Officer to the effect that he was working at General Swadeshis as a representative of the assessed and that he was not paid any salary or remuneration by the firm. According to this letter, Shri Gupta was in charge of the keys of the shop and the safe. He was employed in making purchases for the shop in the wholesale market, in checking the incoming goods and supervising the work of the salesman and other workers of the shop and checking the credit facilities granted to customers. He was also in charge of the cash of the firm. In view or the nature of the services rendered by Shri Gupta, the High Court was of the view that he was employed to render services to the firm rather than to the individual partner. The High Court, thereforee. disallowed the assessed's claim. The facts of the case before the Madras High Court arc clearly distinguishable from the facts of the case before us. In this case, there is a clear finding of fact by the Tribunal that Shri Laxmi Narain had rendered services to the assessed which were distinct from the services rendered by him to the firm. The assessed was entitled to receive commission of 1% on the total sales in addition to his salary and share income. thereforee, it was in the interest of the assessed to promote the sales and to increase them to the extent possible. This he could do either by devoting his entire time and attention to promotion of the sales or if he was usable to do so, by employing the services of another person who was competent to do so. He, thereforee, employed Shri Laxmi Narain to assist him in the work of the promotion of sales. The payment made by' the. assessed to Shri Laxmi Narain was, thereforee, an expenditure which was necessary for the assessed to earn his commission. The business of the firm was the assessed's business also in his capacity as a partner and the amount paid to Shri Laxmi Narain was an expenditure which was laid out wholly and exclusively for the purposes of his business.

(6) That such an expenditure is a permissible deduction under section 10(2)(xv) of the Act has been held by the Supreme Court in Commissioner of Income-tax v. Ramniklal Kothari (1966) 74 I.T.R. 57. The assessed in that case, Ramniklal Kothari, carried on business in diverse lines as a partner in four different firms. In computing his share income from these firms, he claimed deduction of the amounts paid as salary and bonus to staff, expenses for maintenance and depreciation of motor car, and traveling expenses expended by him in earning the income from the firms. The assessed's claim was allowed by the Supreme Court on the basis of the following principles: -

'WHEREa person carried on business by himself or in partnership with others, profits and gains earned by him are income liable to be taxed under section 10 of the Indian Income-tax Act, 1922. Share in the profits of a partnership received by a partner is 'profits and gains of business' carried on by him and is on that account liable to be computed under section 10, and it is a matter of no moment that the total profits of the partenership were computed in the manner provided by section 10 of the Income-tax Act and allowances admissible to the partnership in the computation of the profits and gain's were taken into account. Income of the partnership carrying on business is computed as business income. The share of the partner in the taxable profits of the registered firms liable to be included under section 23(5)(a)(ii) in his total income is still received as income from business carried on by him. Counsel for the Commissioner accepted, and in our judgment counsel was right in so doing, that the share of the respondent from the profits of the firms was income from business carried on by the partner. In carrying on the business. Business carried on by a firm are profits earned by all the partners in carrying on the business. In the individual assessment of the partner, his share from the firm's business is liable to be taken into account under section 10(1). Being income from business, allowances appropriate under section 10(2) are admissible before the taxable income is determined. Section 23(5)(a)(ii) provides that the share of the partner in the profits and gains of a registered firm shall be included in the total income of the partner and section 16(1)(b) requires that salary, interest, commission or other remuneration payable by the firm besides the share in the balance of profit is to be taken into account in determining the total income. But it is not thereby implied that expenditure properly allowable in earning the profits, salary, interest, commission or other remuneration is not to be allowed in determining the taxable total income of the partner. The receipt by the partner is business income for the purpose of section 10(1), and being business income, expenditure necessary for the purpose of earning that income and appropriate allowances are deductible there from in determining the taxable income of the partner'.

(7) We cannot, thereforee, accept the contention of the learned counsel for the Revenue that the assessed's claim is liable to be rejected on the ground that Shri Laxmi Narain was an employee of the firm of which the assessed was a partner and that the amount paid by the assessed to him was in respect of services rendered by him to the firm. On the basis of the finding of the Tribunal that Shri Laxmi Narain actually rendered services to the assessed which were distinct from his services to the firm and that the amount. paid by the assessed to Shri Laxmi Narain for such services was necessary for the assessed to earn his commission in the income, such amount was a permissible deduction in computing the share income of the assessed.

(8) The contention of the learned counsel for the Revenue based upon section 67 of the Act is equally untenable in view of the decision of the Supreme Court in the case of Ramniklal Kothari. That was a case under section 23(5) of the Indian Income-tax Act, 1922 which corresponds to section 67 of the Act. The passage from the judgment of the Supreme Court which we have reproduced above makes it clear that section 23(5) is not exhaustive of all the allowances to which a partner of a registered firm is entitled in computing his share income. Following the decision of the Supreme Court in the case of Ramnikial Kothari, our own High Court has held in Commissioner of Income-tax v. Ganpat Rai Jaggi and Co. (1972) 86 I.T.R. 363 that there was nothing in section 67(3) to indicate that that provision was exhaustive and that deductions other than those mentioned therein could not be allowed to a partner and that if a deduction was admissible in respect of a partner's share in the income of the firm under section 37 of the Act, it would have to be allowed even though it may not fall within the ambit of .section 67(3) of the Act.

(9) We are now left with the last contention of the learned counsel that the expenditure in question amounts to an application of the assessed's profits after they had accrued to him. In support of this contention, the learned counsel has referred to a decision of the Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas : [1961]41ITR367(SC) . In that case, there was a decree of a Court under which the assessed was under a legal obligation to pay certain amounts to his wife and children by way of maintenance and marriage expenses and the assessed claimed deduction of the amount paid by him under the said decree in computing his business income. The assessed's claim was rejected and it was held that this was a case in which the wife and children of the assessed received a portion of the assessed's income after he had received it as his own and was, thereforee, one of application of the portion of the income to discharge an obligation and not one in which by an overriding charge the assessed became only a collector of another's income and that, thereforee, the assessed was not entitled to the deduction claimed by him. In that case, the payment made by the assessed to his wife and children had absolutely nothing to do with the business of the assessed or with the earning of the income from such business. It had no connection with his business. In the present case, the assessed is not claiming deduction of the amount paid to Shri Laxmi Narain only on the 'basis of the legal obligation cast on him by the agreement dated 1-4-1960. The assessed has claimed allowance of this amount as an expenditure laid out wholly and exclusively for the purpose of his business. The principle laid down by the Supreme Court in the case of Sitaldas Tirathdas cannot in any way be applicable to the facts of the present case. In the case of Ganpat Rai Jaggi and Company, referred to above, the assessed was a partner in the. firm which carried on the business of exhibiting cinema films. He was also in charge of the management of the business. As the assessed himself was not very familiar with the business of exhibition cinema films, he employed another person to act as the manager and look after the assessed's interest and agreed to pay certain commission to him. The assessed claimed deduction of the commission paid to the said person. This Court in allowing the assessed's claim observed that such an expenditure was not an application of the assessed's income but a permissible deduction under section 37 of the Act.

(10) We, thereforee, hold that the sum of Rs. 7,568.00 constituted a proper deduction from the assessed's share income from the firm of M/s. Beli Ram & Sons. We answer the question referred to us in the affirmative i.e., in favor of the assessed and against the Revenue. We also hold that the assessed is entitled to the cost of the present proceedings. We fix the counsel fee at Rs. 250.00.


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