BANERJEE J. - This reference, under section 66(1) of the Indian Income-tax Act, 1922, has been made in circumstances hereinafter related.
The assessee, Messrs. Giridharilal Ghasiram, is a registered firm. The firm was constituted under an instrument of partnership, dated January 21, 1954. In terms of the partnership, on Prahladrai Mahwar became a partner in the firm in his representative capacity, as karta of Hindu undivided family known as Messrs. Prahladrai Mahwar. The share of Prahldrai Mahwar in the partnership admittedly was Re. 0-2-1 1/2 pies. Before Prahladrai became a partner of the assessee-firm, he had been rendering services to the Delhi Branch of the partnership and was earning a remuneration. After he became a partner in the assessee firm, he continued to render services to the firm and earn remuneration therefor.
For the assessment year 1957-58, the remuneration paid to Prahladrai amounted to Rs. 8,500 and for the assessment year 1958-59 the remuneration amounted to Rs. 9,000 per annum.
The assessee claimed the remuneration paid to Prahladrai as business expenditure. The Income-tax Officer found in favour of the claim and allowed the claim for deduction on the theory that the services were being rendered by Prahladrai not in his capacity as a partner of the firm but in his individual capacity. The remuneration thus constituted the personal income of Prahladrai and not the income of the joint family which he represented.
Some other reliefs, which the assessee had claimed, but which were not granted by the Income-tax Officer aggrieved the assessee and the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner differed from the Income-tax Officer on the relief granted to the assessee regarding the amount of remuneration paid to Prahladrai. The reasons which weighed with the Appellate Assistant Commissioner were :
'A Hindu undivided family cannot enter into a contract of partnership with another person and accordingly the Income-tax Officers observation that the Hindu undivided family styled as Prahladrai Mahwar is a partner in the firm, is entirely incorrect. The contract of partnership is between the individual Prahladrai Mahwar and certain other persons. It may be that Prahladrai Mahwar has entered into the partnership on behalf and for the benefit of his joint family. But from the point of view of the firm he alone is the partner, and not the Hindu undivided family of which he is the karta.'
In the view taken the Appellate Assistant Commissioner enhanced the assessment by inclusion of the amount of remuneration paid to Prahladrai.
Aggrieved by the order of the Appellate Assistant Commissioner the assessee appealed before the Appellate Tribunal. The point urged by the assessee before the Tribunal was that the salary paid to Prahladrai was paid to him in his personal capacity and should not be considered as salary paid to him as a partner. The Tribunal negatived the contention and the reasons which weighed with the Tribunal are set out below :
'Although the family fund may be utilised by Sri Prahladrai Mahwar as his capital and he might be a partner in his representative capacity as karta of the Hindu undivided family, the only effect thereof is that the income allocated to him in terms of section 23(5)(b), will be assessed in the hands of the family. In the partnership deed itself Sri Prahladrai Mahwar is shown as a partner. Accordingly, so far as the other partners or outsiders are concerned it Sri Prahladrai Mahwar who in his individual capacity is recognised as a partner irrespective of the fact that he might be representing a family. Accordingly, for all intents and purpose it is he alone who is to be considered as a partner. There can be no relationship as an employer and employee, between a firm and its partners. Under the provisions of section 10(4)(b) of the Income-tax Act, any salary paid to any partner has to be disallowed irrespective of whether he represents a family or any other entity. The income-tax authorities have to abide by this statutory provision and any salary paid to a partner has to be allocated as his income. We find support to this view......
Since the salary was earned with the aid of the joint family funds, all that Sri Prahladrai Mahwar can contend is that the whole amount allocated to him as his share of profit including the salary earned, should be assessed in the hands of the family and not as his personal income. There can, however, be no basis for the argument that the salary received by him as partner cannot be disallowed in terms of section 10(4)(b) of the Income-tax Act, 1922.'
The assessee disputed the correctness of the order made by the Tribunal and obtained a reference to this court on the following question :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the salaries paid to Sri Prahladrai Mahwar were rightly disallowed in terms of section 10(4)(b) of the Income-tax Act. 1922 ?'
Before we proceed further, it is convenient for us to set out at this stage provisions of section 10(4)(b) of the Income-tax Act :
'(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.'
Dr. Pal, learned counsel for the assessee, did not, in his fairness, dispute that, if the remuneration had been paid to Prahladrai in his capacity as a partner, the same was not allowable as deduction under the provisions of section 10(4)(b) of the Indian Income-tax Act. He, however, contended that Prahladrai was a partner in his capacity as the karta of a Hindu undivided family. In that capacity, however, he was not a remunerated servant of the partnership. In other words, Dr. Pal argued that Prahladrai was a partner in one capacity and a servant in another capacity and the remuneration received by him as servant was his personal income and not his income as a partner.
Dr. Pal further submitted that there was no bar under the Indian Income-tax Act for Prahladrai, a partner, to act as a remunerated servant of a firm in his personal capacity and the money so earned by the servant by way of salary or remuneration was deductible as business expenditure under section 10(2)(xv) of the Act.
In our opinion there is considerable misconception in the argument advanced by Dr. Pal.
It is now well-settled that a Hindu undivided family cannot, as such, enter into a contract of partnership with another person or persons. The karta of the Hindu undivided family, however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint family. But when he does so, the other members of the family does not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of partners. So far as outsiders are concerned, it is the karta, who alone is, and is in law recognised, as the partner. Whether in entering into partnership with outsiders the karta acted in his individual capacity and for his own benefit, or he did so as representing his joint family and for its benefit, is a question of a fact. In the instant case, there is no dispute that Prahladrai entered into the partnership representing his joint family and for the benefit of that family. But although that is so, the relationship between the partnership and Prahladrai was that of an individual appointed as a partner. The partnership was not in any way concerned with the fiduciary relationship in which Prahladrai stood with the family which he represented. Thus, the profit earned by Prahladrai as a partner of the assessee-firm may become the income of the family which he represented in the partnership but that would not entitle the partnership to claim remuneration paid to the partner for services rendered as business expenditure under section 10(2)(xv) of the Indian Income-tax Act. In the view that we take, we find considerable support from the observations of the Supreme Court in Commissioner of Income-tax v. Kalu Babu Lal Chand.
Since we are of the opinion that, in whichever capacity appointed as partner of the assessee-firm, the remuneration paid to Prahladrai could not be claimed as deduction, because he was serving the firm for remuneration in his capacity as partner, we answer the question referred to this court in the affirmative and in favour of the revenue.
Commissioner of Income-tax is entitled to costs of this reference.
BAGCHI J. - I agree.
Question answered in the affirmative.