Appeals Nos 575 and 576 of 1966
Appeals by special leave from the judgment and order dated October 5 1963 of the Patna High Court in Misc
Judicial Cases Nos 1274 and 1275 of 1960
DNarasaraju section K Aiyar R N Sachthey and B D Sharma for the appellants in both the appeals
MC Chagla and U P Singh for the respondent in both the appeals
The Judgment of the Court was delivered by Shah J
The respondent Ramniklal Kothari carried on busi ness in diverse lines as a partner in four different firms
He received from time to time income from the different registered firms as his share of profits
For the assessment year 1955 56 the respondent declared his share of profits from the four firms at Rs 77027 and he claimed an allowance of Rs 13283 being payment of salary and bonus to staff expenses for maintenance and depreciation of motor car travelling expenses and interest
The Income tax Officer Hazaribagh allowed the claim for interest as a permissible deduction and disallowed the rest
In the view of the Income tax Officer since the respondent did not carry on any independent business the amount except interest were not claimable by the respondent on his own account if at all the amounts should have been claimed as business ex incurred in the accounts of the four firms
For the assessment year 1956 57 the respondent declared Rs 53540 as his share of the profits in the four firms and claimed an aggregate amount of Rs 19380 as admissible deduction on various grounds including Rs 1956 as interest paid by him
The Income tax Officer allowed the claim for interest and disallowed the rest of the claim
The Appellate Assistant Commissioner confirmed the orders of the Income tax Officer
But the Income tax Appellate Tribunal set aside the orders passed by the Income tax Officer and remanded the cases for examination of the nature of expenditure claimed to have been incurred by the respondent
In the view of the Tribunal share of the profits received by the respondent from the firms was taxable as business income and appropriate deductions admissible under section 102 of the Income tax Act 1922 were allowable in commuting the taxable income of the respondent 862 The Tribunal then referred the following question in the two cases to the High Court of Patna for opinion under section 661 of the Indian Income tax Act 1922 Whether the expenses incurred by the assessee who was not carrying on any independent business of his own in earning income from various firms in which he was a partner are allowable in law as deductions  The High Court of Patna answered the reference in favour of the respondent
With special leave granted by this Court these two appeals have been preferred by the Commissioner of Incometax
Where a person carries on business by himself or in partner ship with others profits and gains earned by him are income liable to be taxed under section 10 of the Indian Income tax Act 1922
Share in the profits of a partnership received by a partner is  profits and gains of business carried on by him and is on that account liable to be computed under section 10 and it is a matter of no moment that the total profits of the partnership were computed in the manner provided by section 1 0 of the Income tax Act and allowances admissible to the partnership in the computation of the profits and gains were taken into account
Income of the partnership carrying on business is computed as business income
The share of the partner in the taxable profits of the registered firms liable to be included under section 235aii in his total income is still received as income from business carried on by him
Counsel for the Commissioner accepted and in our judgment counsel was right in so doing that the share of the respondent from the profits of the firm was income from business carried on by the partner
Business carried on by a firm is business carried on by the partners
Profits of the firm are profits earned by all the partners in carrying on the business
In the individual assessment of the partner his share from the firm s business is liable to be taken into account under section 101
Being income from business allowances appropriate under section 102 are admissible before the taxable income is determined
Section 235aii provides that the share of the partner in the profits and gains of a registered firm shall be included in the total income of the partner and section 161b requires that salary interest commission or other remuneration payable by the firm beside the share in the balance of profits is to be taken into account in determining the total income
But it is not thereby implied that expenditure Properly allowable in earning the profits salary interest commission or other remuneration is not to be allowed in determining the taxable total income of the partner
The receipt by the partner is business income for the purpose of 863 s101 and being business income expenditure necessary for the purpose of earning that income and appropriate allowances are deductible therefrom in determining the taxable income of the partner
The legal principles which we have endeavoured to set out are well settled by several decisions
In Shantikumar Narottam Morarji vs Commissioner of Income tax Bombay City1 the High  Court of Bombay held that it is not correct as a general legal 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
It would be open to the partner to claim a deduction provided he satisfies the taxing authority that such deduction represents necessary expenditure the expenditure being incurred in order to enable him to earn the profits which are being subjected to tax
In Basantlal Gupta vs Commissioner of Income tax Madras2 the High Court of Madras held that in determining the income of an assessee who is a partner deduction under section 102 of the Income tax Act may be made from his share of income in the firm even after the share has been ascertained
An allowance under section 102 will be permissible in proper cases even after the share has been ascertained if the expenditure sought to be deducted was incurred by the partner solely and exclusively for the purpose of earning his share in the income of the firm
In a case decided by the High Court of Patna in Jitmal Bhu ramal vs Commissioner of Income tax Bihar  Orissa3 a Hindu undivided family which was a partner in a firm claimed that the salary paid to its members for attending to the business of the firm was incurred as a matter of commercial expediency and for the purpose of earning profits from the partnership business
The Court held that in the assessment of the Hindu undivided family the expenditure would be properly claimed as an allowance under section 102 xv of the Indian Income tax Act 1922
Jitmal Bhuramars case4 was brought in appeal to this Court  see Jitmal Bhuramal vs Commissioner of Income tax Bihar  Orissa4
It was observed by this Court that a Hindu undivided family will be allowed to deduct salary paid to members of the family if the payment is made as a matter of commercial or business expediency but the service rendered must be to the family in relation to the business of the family
Counsel for the Commissioner relied upon an unreported judgment of the High Court of Calcutta in Messrs Iswardas Subh 1 2 3 4 sc 864 karan vs Commissioner of Income tax West Bengal1
In that case a Hindu undivided family entered into a partnership agreement with third parties for the purpose of carrying on a rice mill business
It was not possible for any of the members of the family to attend personally to that business and therefore the family employed a Munim to look after its interest
Salary paid to the Munim was claimed as an allowance in determining the taxable income out of the share of the partnership income
Chakravartti CJ delivering the judgment of the Court was of the opinion that since the Munim did not look after the interest of the assessee in the firm s business but only as a servant of the assessee the amount paid to the Munim was not an allowance admissible in determining the taxable income
In any event observed the learned Chief Justice the profits which have come to the assessee from the partnership have come as net profits and after they have so come there cannot be any further deduction on account of expenditure incurred not by the partnership but by the partner who received the share or incurred on any account whatsoever
We are unable to agree with the view expressed by the learn ed Chief Justice
The case was apparently not fully argued and counsel for the assessee conceded that the amount paid to the Munim was not a permissible deduction in assessing the taxable income of the family out of the share of the profits received from the firm
The appeals fail and are dismissed with costs
One hearing fee
VPS Appeals dismissed


Summary:
The respondent was carrying on business in diverse lines as a partner in four different firms
For the assessment years 1955 56 and 1956 57 he declared his share of profits from the four firms and claimed deductions made up of salary and bonus to staff expenses for maintenance and depreciation of motor car travelling expenses and interest
The Incometax Officer and the Appellate Assistant Commissioner allowed only the claim for interest as a permissible deduction
The Tribunal set aside the orders and remanded the cases for the two years for an examination of the nature of expenditure claimed to have been incurred by the respondent as in its view deductions admissible under section 102 of the Incometax Act 1922 were allowable in computing the taxable income of the respondent
On the question whether expenses incurred by the respondent who was not carrying on any independent business of his own in earning income from the various firms in which he was a partner were allowable in law as deductions the High Court held in favour of the respondent
In appeal to this Court HELD  Section 23 5 a ii of the Income tax Act 1922 provides that the share of the partner in the profits and gains of a registered firm shall be included in the total income of the partner
The share so received by the partner is profits and gains of business  carried on by him and is on that account liable to be computed under section 10
The receipt being business income for the purpose of section 101 expenditure necessary for the purpose of earning that income and allowances appropriate under section 102 are deductible therefrom in determining the taxable income of the partner
The facts that in computing the total profits of the partnership allowances admissible to the partnership in the computation of its profits and gains were taken into account in the manner provided by section 10 or that section 161b requires that salary interest commission or other remuneration payable by the firm besides the share in the balance of profit is to be taken into account do not imply that in determining the taxable income of the partner expenditure incurred by the partner in earning the profits salary interest
commission or other remuneration is not to be allowed
862 CH Shantikumar Narottam Morarji vs Commissioner of Income tax Bombay City  Jitmal Bhuramal vs Commissioner of Incometax Bihar  Orissa and Basantlal Gupta vs Commissioner of lncome tax Madras  approved
Ms Iswardas Subhkaran vs Commissioner of Income tax West Bengal Income tax Reference No 38 of 1952 dated June 2 1953 of the Calcutta High Court disapproved