The judgment of the court was delivered by
P. CHANDRA REDDY C.J. - The two questions that call for decision in this reference under section 66(1) of the Indian Income-tax Act are framed in the following word :
'(1) Whether, on the facts and in the circumstances of the case, the disallowance of the salary of the salary of Rs. 6,000 paid to Sri Kathiresa Nadar in his individual capacity in the assessment of Messrs. A. S. K. Rathnaswamy Nadar Firm, in which the Hindu undivided family consisting of himself and his sons was a partner through him as the karta is legal and correc ?
(2) Whether in this case a direction under section 33(5) should have been given to the Income-tax Officer to eliminate the salary paid to Sri Kathiresa Nadar in working out the share of income of the Hindu undivided family of which he was the kart ?'
This reference relates to the assessment year 1959-60. The assessee is a registered firm composed of three partners, (1) A. S. K. Rathnaswamy Nadar, (2) R. Raja Sankaralingam and (3) A. S. K. R. Kathiresa Nadar, sharing the profits and losses equally. The first person is a partner in his individual capacity while the other two represent their respective joint Hindu families of which they were the managers. Before we proceed to deal further with this matter it is necessary to state that the first question is not correctly framed and has to be restated in these word :
'Whether, on the facts and in the circumstances of the case, the disallowance of the salary of Rs. 6,000 paid to Sri Kathiresa Nadar who, as the manager of his joint Hindu family was a partner of Messrs. A. S. K. Rathnaswamy Nadar Firm, justifiable under section 10(4)(b) of the Indian Income-tax Ac ?'
In computing the income of the partnership the assessee claimed the deduction of Rs. 6,000 paid as salary to one of its partners by name Kathiresa Nadar. This deduction was sought to be sustained on the terms of an agreement that was entered into between the partners, the preamble to which ran as follow :
'Whereas in view of the growing age of the senior partner and the inability of the other partner, Raja Sankaralingam, to devote considerable time in conducting the firms business as he has to look after all the firms purchasing operation in Kerala State, besides his other activities unconnected with the firm, it was considered necessary in the interest of the firm to employ some reliable person to devote his full time, for serving the firm.'
By and under the terms of this agreement Kathiresa Nadar was appointed the manager for a period of three years at a fixed salary of Rs. 6,000 per annum.
The Income-tax Officer considered that this claim offended against the provision of section 10(4)(b) of the Act since Kathiresa Nadar was a partner of the firm. On appeal by aggrieved assessee the Appellate Assistant Commissioner, taking the view that this remuneration was paid to Kathiresa Nadar not in his capacity as partner but as an employee of the partnership excluded it from the income of the partnership. On a further appeal the Appellate Tribunal reversed the decision of the Appellate Assistant Commissioner, the Tribunal being of the opinion that this case fell within the ambit of section 10(4)(b) of the Act. The Tribunal thought that so long as one of the contracting parties was a partner, section 10(4)(b) came into operation irrespective of the destination of the profit.
The second question was not answered by the Tribunal as it felt that it was not quite germane to the present enquiry. The Tribunal observe :
'It is up to the Hindu undivided family to agitate against the inclusion of the salary of Kathiresa Nadar and the question does not arise before us for consideration.'
The conclusion of the Tribunal on both the questions is now being impugned before us.
The argument presented by Mr. K. Srinivasan on behalf of the assessee is that section 10(4)(b) is inapplicable to this case as the remuneration was paid to Kathiresa Nadar not in his capacity as partner but as an employee of the partnership. It was urged by him that Kathiresa Nadar represented the joint family as the manager thereof in the partnership while he worked for the company for which remuneration was paid in his individual capacity. Before we enter on the merits of this contention it is useful to read section 10(4)(b) of the Act.
'10. (4) Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains; and nothing in clause (xv) of sub-section (2) shall be deemed to authorise -
(b) any allowance in respect of any payment by way of interest, salary, commission or remuneration made by a firm to any partner of the firm.'
It is manifest that this sub-section enacts an absolute prohibition. It does not limit the operation of the Act to a remuneration paid to a partner as such. It takes within its scope remuneration or salary paid to a partner in any capacity. We are not here concerned with the distinction between his role as a manager or karta of the joint family and his role as an individual. The only test that is relevant under section 10(4)(b) of the Act is whether the payment is made to a partner or not. We do not think that we can accede to the proposition of the learned counsel for the assessee that when a payment is not made to a partner as partner but in respect of the services rendered by him to the partnership it falls outside the sweep and range of the sub-section.
It is pertinent to note that this clause prohibits the deduction of a salary or remuneration paid to a partner which could only be for certain services rendered by him. Remuneration or salary is paid to any person for performance of some services and not gratis. A partner is in the same position in this behalf. Notwithstanding this, the Act disallows the deduction from the gains and profits of the partnership. Therefore, the fact that a partner is remunerated for the services rendered by him would not take it out of this sub-section having regard to the specific language employed in the sub-section. This sub-section does not make any distinction between a salary paid to a partner as a partner and a salary paid to him as an employee. The distinction sought to be made in this behalf is not warranted by the language of sub-section (4)(b) of section 10. It is also pertinent to note that clause (b) does not use the expression 'to a partner of the firm as partner'. It prohibits a payment to a partner, whatever might be the capacity in which he might receive it. The moment the payment is made to a partner section 10(4)(b) springs into action. That being so, it is not an allowable deduction. That being so the assessee could not exclude it for the purpose of computing the profits and gains.
In this view of ours we are reinforced by a judgment of this court in Goodsir and Co. v. Commissioner of Excess Profits Tax. It was ruled by a Division Bench that section 10(4)(b) makes no distinction between payments by way of interest, commission, salary or remuneration made to a partner as a partner and made to him in a different character and consequently the payments made to two of the partners were not permissible deductions. Mr. Shrinivasan sought to distinguish this case on the ground that the two partners to whom the payments were made were proprietors of two independent concerns and not managers of joint Hindu families. We do not think that this is sustainable distinction. The judgment referred to applies with full vigour to the instant case. The following observations of the Patna High Court in Commissioner of Income-tax v. Jainarain Jagannath, referred to by the learned Chief Justice in Goodsir and Co. v. Commissioner of Excess Profits Tax are in consonance with this decisio :
'These decisions, in my opinion, lay down the general principle in correct terms though they are now more or less of an academic interest only in so far as partnerships governed by the Partnership Act are concerned inasmuch as a provision has been inserted in the present Act disallowing any allowance in respect of any payment by way of interest, salary, commission or remuneration made by a firm to any partner of the firm.... No distinct provision has yet been made about Hindu joint family trading firms to which the Partnership Act does not apply and in my judgment, the principles underlying the decisions to which I have referred are still applicable to them.'
In support of his contention that salary paid to a partner, who represents a joint Hindu family, for the services rendered by is beyond the pale of section 10(4)(b) of the Act, our attention has been drawn by Mr. Srinivasan to two decision of this court, Knightsdale Estate v. Commissioner of Income-tax and Mathew Abraham v. Commissioner of Income-tax. We do not think that these pronouncements tough the question we are called upon to determine in this enquiry. In both the cases the learned judges were concerned with the allocation of the salary as between the joint family and the individual who represented the family in the partnership. The learned judges were unconcerned with the applicability of section 10(4)(b) of the Act. We cannot, therefore, derive much assistance from these two decided cases. Gurunath v. Dhakappa v. Commissioner of Income-tax is of the same category and does not help us in finding a solution to the problem before us. On this discussion we are satisfied that the instant case is hit at by section 10(4)(b) and the Income-tax Officer was right in adding this sum of Rs. 6,000 paid to Kathiresa Nadar as salary to the gains and profits of the partnership. The first question is accordingly answered in favour of the department and against the assessee.
As regards the second question we feel that the Tribunal was not justified in its conclusion that the same need not be decided. It would have been a different matter if the allocation was not made by the Income-tax Officer as referred to in the statement of the case (page 4 of printed papers, lines 34, 35). When once an allocation is made it is not disputed that it has become final and cannot be revoked in subsequent proceedings. That being the position the Tribunal ought to have gone into this question and given its decision thereon. We are, therefore, obliged to send this back to the Tribunal for a consideration of the second question.
However, in view of the fact that the second question was not answered, and, therefore, it is being sent back for consideration, we fix in this case counsels fee at Rs. 150.