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SUPREME COURT OF INDIA
H.R. KHANNA AND V.R. KRISHNA IYER, JJ.
Commissioner of Income-tax, Madras, Appellant
Versus
R. M. Chidambaram Pillai etc., Respondent.
Civil Appeals Nos. 17 to 21 of 1972,
D/- 17-11-1976.
Advocates appeared
M/s. B.B. Ahuja and R. N. Sachthey, Advocates, for Appellant; Mr. S. Swaminathan, Sr. advocate, (Mrs. Saroja Gopalkrishnan, Advocate with him), for Respondents.
Partnership Act - Section 13 - Income-tax Act - Section 3 (42) - General Clauses Act 1897 - Section 3 (42) - Indian Partnership Act - Section 4 - Kerala Agricultural Income-tax Act - Section 5 - Income-tax Rules - Rule 24 – Employment and service - Salaries for services - Product of agreement to share profits of a business Firm - Whether firm has made a profit or a loss his share shall be taken to be any salary interest commission or other remuneration payable to him by firm in respect of previous year increased or decreased respectively by his share in balance of profit or loss of firm after deduction of any interest salary commission or other remuneration payable to any partner in respect of previous year - Whether sums so drawn as salaries were wholly liable to income-tax or only to extent thereof which fell within non-agricultural sector - Whether any portion of salaries so drawn for services rendered are at all agricultural income to be non-eligible to income-tax - Two tea estates were owned by two firms with several partners two of whom were the respondents, in the two sets of appeals - Tea sold yielded income composite in character being largely agricultural and partly non-agricultural - Complex situation of apportionment between two heads for purposes of income-tax has been taken care of by Rule 24 of Income-tax Rules both the firms having been registered under Act - Respondents-partners were, in addition to their share in profits entitled to salaries for services under the firms - Sole controversy turns on whether the sums so drawn as salaries were wholly liable to income-tax or only to extent of thereof which fell within non-agricultural sector - Until assessment year ending with March income-tax was so assessed that whole of agricultural income of total income was out of bounds for income-tax - But for years two assessment years involved in these appeals a different course was followed - Mechanics is simple but bone of contention between Revenue and assesses is as to whether any portion of the salaries so drawn for services rendered are at all agricultural income to be non-exigible to income-tax – Held, Partners in a firm are ultimately entitled to entire profits of firm according to their shares in business – Therefore entirety of such profits should be brought to charge and no portion be exempted by giving the same away to a partner as his salary bonus commission remuneration or interest - A partner is bound to find the necessary finances for partnership and hence any interest on capital supplied by the partner is not deductible - A partners rendering services to the firm stands on same footing as his providing capital only instead of in money in kind - Further no remuneration is permissible to a partner for his rendering services to the firm since carrying on of the business of partnership is a primary duty which all the partners or some of partners acting for all are required to do by law relating to partnership - Matter may be looked at another way too - In law a partner cannot be employed by his firm for a man cannot be his own employer - A contract can only be bilateral and the same person cannot be a party on both sides particularly in a contract of personal employment - A supposition that a partner is employed by the firm would involve that the employee must be looked upon as occupying the position of one of his own employers which is legally impossible - Consequently when an arrangement is made by which a partner works and receives sums as wages for services rendered agreement should in truth be regarded as a mode of adjusting amount that must be taken to have been contributed to partnerships assets by a partner who has made what is really a contribution in kind instead of contribution in money - Hence all aforesaid payments are non-deductible - Though for purposes of computation of income his share income of firm is clubbed along with allowance and commission it is obvious that character of the receipt of latter amounts though related to the business cannot be said to partake of same character of their receipt by firm - Assessed who is a managing partner was entitled to receive the amount not by virtue of relationship between him and the other members of firm as partners but by virtue of special agreement between partners by which his services to partnership were agreed to be remunerated - Court regard this conclusion as unsound source of the error being a failure to appreciate that the salary of a partner is but an alias for the return by way of profits for the human capital – sweat skill and toil are in our socialist republic productive investment - He has brought in for common benefit - Immediate reason for payment of salary was service contract but is partnership - Appeals dismissed
Judgment
KRISHNA IYER, J.:- A fine point of law, which lends itself to subtle spinning of gossamer webs of argument, falls for decision in these appeals by certificate. Were the policy of the law been plain, the language should have been clearer and the labours of courts could have been lesser. The arguments have been exhaustive, the precedents, in profusion, cited to the point of no return and the short issue expanded into learned length; but, at the end of the forensic journey, we are hesitantly inclined to leave the judgment under appeal undisturbed as the law set out therein has better appeal and theoretical soundness than the rival view point well-presented by Sri Ahuja for the appellant (Revenue) The planning and pruning of case law is perhaps necessary if time-consuming court proceedings are to be curbed. All our life is crushed by the weight of words: the weight of the dead, said Luigi Pirandello. Heavy case-law must not clog judicial navigation.
2. Next to a breviate statement of the facts which project the legal issue canvassed before us. Two tea estates were owned by two firms with several partners, two of whom were the respondents, in the two sets of appeals. C. As. 17 to 19 and C. As. 20 and 21 of 1972. The tea sold yielded income composite in character, being largely agricultural and partly non-agricultural. The complex situation of apportionment between the two heads for purposes of income-tax has been taken care of by Rule 24 of the Income-tax Rules, both the firms having been registered under the Act.
3. The respondents-partners were, in addition to their share in profits, entitled to salaries for services under the firms. The sole controversy turns on whether the sums so drawn as salaries were wholly liable to income-tax or only to the extent of 40% thereof which fell within the non-agricultural sector. Until the assessment year ending with March 31, 1959,the income-tax was so assessed that the whole of the agricultural income i.e., 60% of the total income, was out of bounds for income-tax (which included 60% of the salaries of the respondent-partners). But, for the years 1959/60 and 1960/61, the two assessment years involved in these appeals, a different course was followed. The mechanics is simple but the bone of contention between the Revenue and the assessees is as to whether any portion of the salaries so drawn for services rendered are at all agricultural income to be non-exigible to income-tax.
4. Departing from the previous practice and in the prescient light of the law later laid down in Mathew Abraham, (1964) 51 ITR 467 (Mad), the whole salary was subjected by the Income-tax Officer to income-tax as income from other sources in terms of Section 10 (The Income-tax Officer had almost anticipated Mathew Abraham). This computation was contested successfully before the Appellate Assistant Commissioner but that decision suffered a reversal before the Appellate Tribunal since, by then, Mathew Abraham had been decided in favour of the Revenue. The case escalated to the High Court where a Full Bench upset the earlier view and upheld the exclusionary argument of the assessees. The Revenue has arrived before us to assail the interpretation of Section 10 (4) (b), Rule 24 and of other provisions the High Court has adopted. There is plausibility in both approaches but, after some reflection on the scheme as expressed in the statutory text, we are disposed to affirm the decision under appeal. If the intendment of a legislation misfires in court, competency being granted, the answer is amendment, not more litigation.
5. First principles plus the bare text of the statute furnish the best guidelight to understanding the message and meaning of the provisions of law. Thereafter, the sophisticated exercises in precedents and booklore. 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 o
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