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C.V. Mulk Vs. Commissioner of Agricultural Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference Nos. 54 and 55 of 1976
Judge
Reported in[1979]120ITR670(Ker)
ActsKerala Agricultural Income tax Act, 1950; Income Tax Act, 1961 - Sections 40 and 67(2); Indian Partnership Act, 1932 - Sections 3, 11(1) and 13
AppellantC.V. Mulk
RespondentCommissioner of Agricultural Income-tax
Appellant Advocate K.V.R. Shenoi, Adv.
Respondent AdvocateGovernment Pleader
Cases ReferredMadras v. Moulvie Estate
Excerpt:
.....by partner of firm for services rendered by him to firm was mode of adjustment of share of firm's income - legal position of firm under act of 1932 flows from concept of firm not being person in eye of law - partner in partnership could not be employee of partnership - salary received by partner from firm cannot be regarded different from that of his share of profit of firm - receipt of salary by partner under section 10 (4) (b) and section 16 (1) (b) is mode of adjustment of share in firm's income - tribunals conclusion justified. - - on an examination of the decision of the supreme court and the decision of the full bench of the madras high court, which it affirmed, we find that the decisions were rested both on jurisprudential grounds as well as on the provisions of the..........of a firm for services rendered by him to the firm was a mode of adjustment of the share of the firm's income? ' 2. the decision relied upon by the tribunal in support of its conclusion is r.m. chidambaram pillai v. cit : [1970]77itr494(mad) , a full bench decision of the madras high court, rendered in relation to the indian i.t. act, 1922. two sections therein are material : one is section 10(4)(b), which corresponds to section 40(b) of the act of 1961 and the other is section 16(1)(b) corresponding to section 67(1) and (4) of the act of 1961. there was a prior decision of the madras high court in mathew abraham v. cit : [1964]51itr467(mad) . referring to the decision, the full bench said (p. 496) :' we are of the view that the salary received by a partner of a firm for services.....
Judgment:

Gopalan Nambiyar, C.J.

1. These references are under Section 60 of the Agrl. I.T. Act, made by the Kerala Agricultural Income-tax Appellate Tribunal, Additional Bench, Kozhikode, at the instance of the assessee. The assessment years are 1969-70 and 1970-71. For the earlier year the assessee filed a return of agricultural income declaring his share at Rs. 1,611 from Messrs. Koravampady Estate. For the year 1970-71 he declared his share of the loss from the same estate at Rs. 1,685 46. During both the years in question, he was the managing partner of the estate, entitled to draw a salary of Rs. 6,000 per annum for his services as the managing partner of the firm, besides his share of the income under agreements dated 26th July, 1966, and 10th February, 1970. Clause 6 of the earlier agreement and Clause 7 of the later one provided for the payment of remuneration to the managing partner. The returns were rejected by the Agrl. ITO. In assessing to tax, the assessing officer took into account the salary received by the assessee as the managing partner of the firm, as the assessee's agricultural income. On appeal by the assessee, the AAC, relying on the decision of this court in S.A. Ramaraj v. Commr. of Agrl. I.T. : [1969]71ITR108(Ker) and directed the Agrl. ITO to exclude the amount of salary received by the assessee as managing partner of the estate from his net agricultural income. From the orders of the appellate authority, the State preferred a further appeal, and the Tribunal allowed the appeal and held that the remuneration paid to the managing partner was not liable to be excluded in assessing the assessee's agricultural income. At the instance of the assessee the following questions of law have been formulated and referred to this court for our determination and opinion ;

'(a) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 6,000 being the salary received by the applicant, was to be calculated as agricultural income for his assessment under the Agricultural Income-tax Act during the years 1969-70 and 1970-71 ; and

(b) Whether there was any material for the Tribunal to come to the conclusion that the salary received by the partner of a firm for services rendered by him to the firm was a mode of adjustment of the share of the firm's income? '

2. The decision relied upon by the Tribunal in support of its conclusion is R.M. Chidambaram Pillai v. CIT : [1970]77ITR494(Mad) , a Full Bench decision of the Madras High Court, rendered in relation to the Indian I.T. Act, 1922. Two sections therein are material : one is Section 10(4)(b), which corresponds to Section 40(b) of the Act of 1961 and the other is Section 16(1)(b) corresponding to Section 67(1) and (4) of the Act of 1961. There was a prior decision of the Madras High Court in Mathew Abraham v. CIT : [1964]51ITR467(Mad) . Referring to the decision, the Full Bench said (p. 496) :

' We are of the view that the salary received by a partner of a firm for services rendered by him to it continues to bear, for purpose of charge at his hands the same character as part of the total income of the firm which has been shared between its partners and that the consequence of applying Rule 24 to the total income of the firm computed in accordance with Section 10(4)(b) is necessarily that only 40 per cent of the salary as referable to agricultural income can be taken as salary in computing the total income of a partner of a firm in terms of Section 16(1)(b). This view seems to us to be supported not only by the relative provisions of the Income-tax Act, but is in accord with the basic principles of the partnership law.'

3. In the light of this principle the Full Bench examined the principles of partnership set out in Lindley on Partnership. The legal position of a firm under the Indian Partnership Act flows from the concept of a firm not being a person in the eye of the law. It was pointed out that a partner in a partnership could not be an employee of the partnership and that this has been recognised in judicial decisions. The conclusion was stated thus (p. 504):

' As we said, the salary received by a partner from the firm cannot be regarded in anywise having a source different from that of his share of the profit of the firm he receives. Having regard to the legal position of a firm vis-a-vis its partners and Section 10(4)(b) and Section 16(1)(b) of the Income-tax Act, 1922, receipt of salary by a partner, if we may reiterate, is but a mode of adjustment in his share of the firm's income. The salary of a partner and his share of the income do not emanate from two different sources, but from one and the same, which is the source of income of the firm. We hold, therefore, that Mathew Abraham v. Commissioner of Income-tax : [1964]51ITR467(Mad) was not correctly decided.'

4. The decision was affirmed by the Supreme Court in CIT v. R.M. Chidambaram Pillai : [1977]10ITR292(SC) . The Supreme Court again dealt with the matter on 'first principles plus the bare text of the statute' and reinforced its conclusion from 'precedents and booklore'. At page 295 the court observed :

'Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. ' Firm ' is a collective noun, a compendious expression to designate an entity, not a person. In income-tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that 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. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in. Section 13 of the Partnership Act brings into focus this basis of partnership business.'

5. At pages 297 & 298 the court examined the position that a firm is not a person in law. This was stressed with reference to Section 3 of the Partnership Act and the statement of principle in Lindley on Partnership, and again, on examination of the provisions of the Indian law of partnership. In the light of the above, the conclusion was stated thus (p. 299) :

' The necessary inference from the premise that a partnership is only a collection of separate persons and not a legal person in itself leads to the further conclusion that the salary stipulated to be paid to a partner from the firm is in reality a mode of division of the firm's profits, no person being his own servant in law since a contract of service postulates two different persons.'

6. It appears to us that this decision of the Supreme Court is conclusive and categorical and decidedly against the assessee.

7. Counsel for the assessee further contended that the decision was rendered with respect to the provisions of the Indian I.T. Act, 1922, and the provisions of Section 40(b) prohibiting the payment of remuneration to a partner of a firm and Section 67(2) ordaining that the nature of the income derived from an agricultural estate shall be of the same character as the estate itself in the 1961 Act, would make a difference. On an examination of the decision of the Supreme Court and the decision of the Full Bench of the Madras High Court, which it affirmed, we find that the decisions were rested both on jurisprudential grounds as well as on the provisions of the Partnership Act and the general principles of partnership law. We do not think that we would be justified in accepting the assessee's contention based on the two provisions of the I.T. Act on which he relies. We may note that there was no provision in the 1922 Act corresponding to Section 67(2) of the 1961 Act.

8. Counsel for the assessee next contended that as per the provisions of Section 13 of the Partnership Act it is open and permissible to a partner to receive remuneration subject to a contract between the partners. It was argued that such a contract was present in this case in Clauses (6) and (7) of the two agreements we have referred to earlier. While Section 13 is subject to a contract between partners, Section 11(1) is clear and specific that any contract between partners determining their mutual rights and duties shall be only subject to the provisions of the Act. Apart from this, having regard to the comprehensiveness of the discussion and the basis on which the Supreme Court decision has been rested, we are unable to deny it its full effect and operation.

9. Counsel for the assessee cited to us the decision of a Division Bench of this court in Commr. of Agrl. I.T. v. K.S. Narayanan Tratan Namboo-diripad : [1967]64ITR57(Ker) holding that janmikaaran is not income under the Agrl. I.T. Act. Neither the decision nor the principle has direct application here. Counsel also placed reliance on the ruling of a Division Bench of this court in S.A. Ramaraj v. Cowmr. of Agrl. I.T. : [1969]71ITR108(Ker) and on the decision of the Madras High Court in State o] Madras v. Moulvie Estate : [1968]70ITR138(Mad) . In the light of the categorical pronouncement of the Supreme Court in CIT v. R.M. Chidambamm Pillai : [1977]10ITR292(SC) , we are unable to derive any assistance from these decisions.

10. In the result, we answer the questions referred in the affirmative, thatis, in favour of the revenue and against the assessee. There will be noorder as to costs.

11. A copy of this judgment under the seal of the court and the signature of the Registrar will be communicated to the Tribunal, as required by law.


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