Case: Commissioner Of Income-Tax, Bihar Vs. Ramniklal Kothari

of the registered firms liable to be included under Section 23 (5) (a) (ii) 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 firms 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 firms business is liable to be taken into account under Section 10 (1). Being income from business, allowances appropriate under Section 10 (2) are admissible before the taxable income is determined. 7. Section 23 (5) (a) (ii) 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 16 (1) (b) requires that salary, interest, commission or other remuneration payable by the firm beside the share in the balance of profit 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 Section 10 (1) 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. 8. The legal principles which we have endeavoured to set out are well settled by several decisions. In Shantikumar Narottam Morarji v. Commissioner of Income-tax, Bombay City, 27 ITR 69 = (AIR 1955 Bom 234 ) 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. 9. In Basantlal Gupta v. Commissioner of Income-tax, Madras, (1963) 50 ITR 541 (Mad) the High Court of Madras held that in determining the income of an assessee who is a partner, deduction under Section 10 (2) of the Income-tax Act may be trade from his share of income in the firm even after the share has been ascertained. An allowance under Section 10 (2) 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. 10. In a case decided by the High Court of Patna in Jitmal Bhuramal v. Commissioner of Income-tax, Bihar and Orissa, 37 ITR 528 = (AIR 1959 Pat 395 ) 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 10 (2) (xv) of the Indian Income-tax Act, 1922. Jitmal Bhuramals case, 37 ITR 528 = (AIR 1959 Pat 395 ) was brought in appeal to this Court; see Jitmal Bhuramal v. Commissioner of Income-tax, Bihar and Orissa, (1962) 44 ITR 887 (SC). It was observe 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. 11. Counsel for the Commissioner relied upon an unreported judgment of the High Court of Calcutta in Messrs. Iswardas Subhkaran v. Commissioner of Income-tax, West Bengal I. T. Ref. No. 38 of 1952, D/- 2-6-1953 (Cal). 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, C. J. 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 firms 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. 12. We are unable to agree with the view expressed by the learned 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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]12. We are unable to agree with the view expressed by the learned 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 firm8. The legal principles which we have endeavoured to set out are well settled by several decisions. In Shantikumar Narottam Morarji v. Commissioner of Income-tax, Bombay City, 27 ITR 69   = (AIR 1955 Bom 234  ) 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 taxIn 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, C. J. 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 firms 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 whatsoever9. In Basantlal Gupta v. Commissioner of Income-tax, Madras, (1963) 50 ITR 541 (Mad)   the High Court of Madras held that in determining the income of an assessee who is a partner, deduction under Section 10 (2) of the Income-tax Act may be trade from his share of income in the firm even after the share has been ascertained. An allowance under Section 10 (2) 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 firm10. In a case decided by the High Court of Patna in Jitmal Bhuramal v. Commissioner of Income-tax, Bihar and Orissa, 37 ITR 528   = (AIR 1959 Pat 395  ) 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 10 (2) (xv) of the Indian Income-tax Act, 1922. Jitmal Bhuramals case, 37 ITR 528   = (AIR 1959 Pat 395  ) was brought in appeal to this Court; see Jitmal Bhuramal v. Commissioner of Income-tax, Bihar and Orissa, (1962) 44 ITR 887 (SC). It was observe 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.