SRINIVASAN J. - The assessee is a partner in General Swadeshis, a firm registered under the Income-tax Act. The previous year of the assessee ended on the 12th November, 1955. In his assessment for the assessment year 1956-57, he claimed as a permissible deduction a sum of Rs. 2,000 paid as salary to his nephew, V. P. Gupta, for services rendered in connection with the assessees interest in the affairs of the firm of General Swadeshis. It may be noticed that this remuneration of salary paid to Gupta was not salary paid by the firm. What was sought by the assessee was a deduction of this amount from his share income in that firm. The Income-tax Officer disallowed the claim for the reason that there was no evidence to show that this expenditure was incurred in order to earn the share income and further that when once the share income of the partner had been ascertained under the provisions of the Act, section 16(1)(b) of the Act prohibited any deduction therefrom. On appeal, the Appellate Assistant Commissioner also rejected the claim of the assessee, agreeing with the Income-tax Officer that as the assessees share of the income had been computed, no further deduction was permissible therefrom. The contentions of the assessee were pressed before the Tribunal in a further appeal. The Tribunal examined certain decisions purporting to bear upon the point and finally concluded that in so far as those decisions dealt with the matter, they dealt with only deductions permissible in respect of the firms assessment. The Tribunal observed that while interest paid upon capital borrowed by the assessee for investment in the firm was permissible, no other item of expenditure was allowable out of the share income.
On the application of the assessee, the following question stands referred to us :
'Whether the aforesaid sum of Rs. 2,000 constitutes a proper deduction from the assessees share income from Messrs. Swadeshis in the assessment year 1956-57 under any of the provisions of the Income-tax Act ?'
The assessee as a partner in the firm is entitled to a share in the profits thereof. The profits are earned by the firm and in so far as the business of the firm is concerned, there is no doubt that the firm would be eligible for such deductions as section 10(2) of the Act permits. Salary or commission paid to employees or interest on capital borrowed by the firm and such other items would naturally come within the scope of the deduction which the firm could claim in its assessment and which the department could not justifiably refuse. The question, however, is whether in earning the share of the income from the firm, the partner engaged himself in any kind of activity to which section 10 would again become applicable. When the firm has once earned the income in the business and the partner obtains his share of the income of that business, it is somewhat difficult to see on what parity of reasoning it can be said that a partner in his individual assessment is entitled to ask for deductions on the basis that he in his individual capacity had to incur certain items of expenditure for earning that share income. One would have thought that the share income had been earned already on behalf of the partner by the firm. Under those circumstances, it seems somewhat illogical that the partner could be heard to say that apart from the expenditure which the firm incurred for the purpose of earning the firms income, the partner in his turn had to incure certain items of expenditure in order to earn his share of that income. An expenditure of this kind may perhaps be available in a case where a partner borrows moneys for making a capital investment in a firm. Obviously, such a capital borrowed by the partner and invested in the firm is not capital borrowed by the firm itself and the firm in its capacity as an assessable entity cannot ask for and obtain any relief under section 10(2)(iii) of the Act. Interest which the partner pays upon the borrowing, which borrowing had been invested as a capital in that firms business, would undoubtedly be a proper deduction to make in the share of the income of the partner in order to arrive at his real income. Though it is doubtful whether it can be said that the partner engaged himself in a business - the business of earning his share income - apart from the firms business, the real income of the partner must necessarily take into account the interest he has to pay on the borrowed capital invested in the firm.
The department and the Tribunal purported to rely upon section 23(5)(a) and 16(1)(b) for the purpose of holding that when once the share income of the partner had been determined, there was no further scope for any deduction from that share income before including it in the total income of the assessee. Under section 23(5), it is true that in the case of a registered firm the income-tax payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of the assessment shall be determined. The provision requires that the share income of the partner shall be included in his total income, that is, along with the other income which the partner has from other sources, and such total income shall be brought to assessment. Section 16(1)(b) provides that in computing the total income of the assessee who is a partner in a firm, his share shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year, together with his share in the profit of the firm. Section 16(1)(b) does not bear the grant of any deduction which would be lawfully admissible in respect of the share income of the partner. It is only intended to take within the ambit of the total income of an assessee, who is a partner of a firm, such receipts which the assessee might have from the firm, in addition to his share of the profit, as salary, interest, commission or other remuneration. There is no warrant for the view that section 16(1)(b) prohibits the deduction of any allowance out of the share income of a partner after it has once been ascertained by the application of section 23(5)(a) of the Act.
In Shanthikumar Narottam Morarji v. Commissioner of Income-tax, the Bombay High Court held that it is not correct to say as a general proposition that a partner in a registered firm is not entitled to claim any deduction against the share of the profits included in his total income, the share having been arrived at on the assessment of the firm with regard to its profits. Chagla C.J. observed in this regard :
'In our opinion, it is unnecessary in this reference to decide the larger and perhaps the more important question as to whether a partner in a registered firm, who is being assessed under section 10(1) in the respect of his share of profits, is entitled to claim any deduction under sub-section (2) of section 10. When we turn to section 23(5), the provision made in that sub-section by the legislature is that the share of the income, profits and gains of the registered firm must be included in the total income of the partner who is being assessed to tax. It is well-settled that the profits and gains contemplated by the legislature under section 10 are the true profits and gains and ordinarily the true profits and gains must be ascertained from the point of view of commercial accounting...... It is not the share as ascertained on the assessment of the firm that is liable to tax, but the share as representing the true profits of the partner. It is true profit of the partner. It is true that if there is a specific prohibition in the Act, the court will not permit an allowance in the face of that prohibition. it is equally true that if there is an allownace permissible under the Act and the allowance deals with the whole subject-matter, the court will not permit that subject-matter to be expanded. But where there is no prohibition and where no allowance deals with a particular subject-matter, it is open to the court to permit as allowance in order to arrive at the true profits and gains of an assessee, and therefore if an assessee claims a deduction against the share which is included in his total income, contending that without that deduction the share will not represent his true profits and gains, in our opinion, the assessee will be entitled to such a deduction. The deduction which would ordinarily be allowed to him would be a deduction which was necessary in order that the assessee was enabled to earn the income which represented the share in the profits. If it was incumbent upon the assessee to spend an amount in order that he should be in a position to remain a partner and to earn the profit, it may be argued that that was a permissible deduction, because without allowing that deduction, the share of the profits would not represent the true income of the assessee.'
In that particular case, however, it was found on the facts that certain amounts borrowed by the assessee, interest upon which he had to pay, were not borrowed in order to enable the assessee to earn the profits and that the interest deductions were not justifiable deductions.
In Moolchand v. Commissioner of Income-tax, the Hyderabad High Court held that interset paid by a partner of a firm on capital borrowed by him for investment in the partnership is an allowance deductible from his share of the income from the partnership. The learned judges had to consider the provisions of the Hyderabad Income-tax Act, which were in pari materia with the corresponding provisions of the Indian Income-tax Act.
Mr. swaminathan, learned counsel for the assessee, relied upon Commissioner of Income-tax v. New Digvijaysinhji Tin Factory, in support of his claim that the payment of Rs. 2,000 paid by the assessee in the present case is an allowable deduction from his share of the income from the firm. The facts of that decision were that the assessee firm was itself a partner in another partnership and H representing the assessee had a 20% share in the business of that partnership. It appeared that H did not find it possible to attend to the business of the partnership, and he employed two persons A and B to supervise the general management of that partnership and to attend to the correspondence of that partnership on his behalf. An agreement was executed whereunder these two persons were to be paid remuneration of certain percentages out of Hs share in the partnership. The question that arose was whether the remuneration so paid to A and B was a permissible deduction in computing the income of the assessee firm. It was found as a matter of fact that the partner was under a duty to attend to the management an affairs of the partnership business and with the permission of the other partners appointed some other person to discharge this duty. The remuneration paid to that person was held to be a legitimate deduction under section 10 of the Income-tax Act. This decision would no doubt appear to apply. In dealing with this aspect of the matter, the learned judges observed :
'The argument was that if it was his duty to attend personally to the management and affairs of the partnership firm, he had no right to appoint any representatives, and even if he did so and the other partners permitted him to do so, he could not claim, as legitimate expenses, what he paid them. The short question that we have to consider is whether in a case where it is incumbent on a partner to attend to the management and affairs of tnhe partnership business and he finds he is unable or disabled to do so, and if the other partners permit him to have some other person to discharge his duty by the firm, or so to say, deputize for him, can he or can he not say that the remuneration paid to that person is a legitimate expenditure Can it be said in such a case that the agreed payments he may bona fide make to such persons are no more than appropriation of profits We see no difficulty in reaching the conclusion that in such a case the payments that would be made would be legitimate deductions under section 10. .... The question here is not of writ drawn technicalities or any refind distinction, but what is the real income of the partner. The matter has to be approached bearing in mind the commercial aspects of the case. Therefore, in our opinion, the Tribunal was right in the conclusion reached by it that these two sums were legitimate deduction.'
The only material point to note is that in that case it was found as a matter of fact that the partner was under a duty to manage the affairs of the firm personally and with the permission of the other partners of the firm employed two others to discharge those duties. It was found to be a bona fide transaction. This point would have some relevance when we deal with the facts of the case herein.
The question of payment of interest on money borrowed by a partner for investment in a firm as capital was considered by the Andhra Pradesh High Court in Commissioner of Income-tax v. Chandrasekhara Rao. It was held that there is nothing in the provisions of section 23(5) which precluds such deduction. Even the larger question whether section 10 of the Indian Income-tax Act applies to the share income a partner received from a registered firm was answered in the affirmative.
The Supreme Court had, in Jitmal Bhuramal v. Commissioner of Income-tax, to deal with a case where a Hindu undivided family which carried on business and which through its karta was also a partner in a firm carrying on business employed two junior members of the family and paid certain monthly salaries to them for services to be rendered to the family in relation to the business of the family. The other members were also paid likewise for looking after the interests of the Hindu undivided family in the partnership. Their Lordships made a distinction between the two sets of employees, if they may be so called, and held that while the amounts paid as salary to the two persons who rendered services to the family business was allowable in the assessment of the Hindu undivided family, the salary paid to the two others who were employed in connection with the affairs of the firm in which the family was a partner could not be allowed as valid deductions in the assessment of the partner of the Hindu undivided family. The principal ground for making the distinction was that in the latter case the two persons were employed in serving an entity which was separate and distinct from the Hindu undivided family which was the partner.
It is seen from the above decisions that the general proposition that no deduction is at all permissible when once the share income of a partner in a firm has been determined is not supported by authority. The decision of the Supreme Court would clearly appear to indicate to the contrary. If the principle advanced by learned counsel for the department that when once the share income of a partner in a firm was computed under section 23(5) of the Act, no deduction was allowable therefrom is correct, their Lordships could have disposed of the matter on that ground alone and it would have been unnecessary for them to consider the circumstance that the particular expenditure in that case was incurred in rendering service to the firm and not to the partner. It follows that an allowance under section 10(2) would, in proper cases, be permissible even after the share income is determined. But it has nevertheless to be found whether in the present case expenditure was incurred by the assessee wholly and exclusively for the purpose of earning his share income.
The assessees claim was that as he had to attend to other businesses, he was not able to look after the proper conduct of Messrs. General Swadeshis in which he is a partner and for that reason he 'engaged and deputed Sri Vedaprakash Gupta to be at General Swadeshis as a whole-time worker for and on his behalf'. That was what he stated in his grounds of appeal before the Appellate Assistant Commissioner. He further stated 'that the petitioner could not earn the amount of share from the firm of General Swadeshis unless he employed his own confidential man to look after his interests at all times of the day'. Apart from the circumstance that the assessee is a partner and as a partner has the 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 assessee to perform any duties in relation to the business of General Swadeshis. The partnership agreement was not placed before the department and the case cannot possibly fall within the principle laid down in Commissioner of Income-tax v. New Digvijaysinhji Tin Factory. What was stated by the assessee before the department and the Tribunal and even urged before us was that the assessee had to have a man of his own to look after his interests. We could only understand this argument to mean that the assessee 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 claims to have employed his nephew, Vedaprakash Gupta. This person made a statement in a letter addressed to the Income-tax Officer to the effect that he was working at General Swadeshis as a representative of the assessee and that he was not paid any salary or remuneration by the firm. What duties were being performed by him were set out further in the letter and an examination of this letter, which is printed as an annexure to the statement of the case, shows that he was in fact employed in connection with the affairs of the firm itself. He 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. A perusal of this letter clearly indicates that this person was employed to render services to the firm rather than to the individual partner. In fact, the principle on the basis of which their Lordships of the Supreme Court negatived the payments of salaries by the Hindu undivided family which was a partner of a firm to two junior members of the family employed in connection with the firm would fully apply to the facts of the present case.
We have no hesitation in holding that the payment of Rs. 2,000 was not in the circumstances of the case an allowable deduction from the share income of the assessee. The question is answered accordingly. The assessee will pay the costs of the department. Counsels fee Rs. 150.