Case ID: 2596

Judgment:
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. D.Narasaraju	 section K. Aiyar	 R. N. Sachthey and B. D. Sharma	 for the appellants (in both the appeals). M.C. 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. 77	027/ and he claimed an allowance of Rs. 13	283/ 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. 53	540 as his share of the profits 'in the four firms and claimed an aggregate amount of Rs. 19	380 as admissible deduction on various grounds including Rs. 1	956 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 10(2) 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 66(1) 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 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 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 10(1). Being income from business	 allowances appropriate under section 10(2) are admissible before the taxable income is determined. 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 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 s.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. 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 City(1) 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	 Madras(2) 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 made 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. In a case decided by the High Court of Patna in Jitmal Bhu ramal vs Commissioner of Income tax	 Bihar & Orissa(3) 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 Bhuramars case(4) was brought in appeal to this Court : see Jitmal Bhuramal vs Commissioner of Income tax	 Bihar & Orissa(4). 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 Bengal(1). 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 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. V.P.S. 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 10(2) 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 10(1) expenditure necessary for the purpose of earning that income and allowances appropriate under section 10(2) 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 16(1)(b) 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 C.H] 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. M/s. 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.