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PETITIONER: COMMISSIONER OF INCOME-TAX, BIHAR

       Vs.

RESPONDENT: RAMNIKLAL KOTHARI

DATE OF JUDGMENT: 07/03/1969

BENCH: SHAH, J.C. BENCH: SHAH, J.C. GROVER, A.N.

CITATION:  1969 AIR  862            1969 SCR  (3) 860  1969 SCC  (1) 757

ACT: Income-tax  Act (11 of 1922), ss. 10(1) & (2), 16(1)(b)  and 23(5)  (a)(ii)  Partnership carrying  on  business-Partner’s where  determined Partner if further entitled to  deductions under s. 10(2).

HEADNOTE: 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 s. 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  s.  10.   The receipt  being business income for the purpose of  s.  10(1) expenditure necessary for the purpose of earning that income and  allowances  appropriate under s. 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 s.  10,  or  that  s. 16(1)(b) requires that salary, interest, commission or other

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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 v. Commissioner of  Income-tax, Bombay  City, 27 I.T.R. 69, Jitmal Bhuramal v.  Commissioner of  Incometax, Bihar & Orissa, 37 I.T.R. 528  and  Basantlal Gupta v. Commissioner of lncome-tax, Madras, 50 I.T.R.  541, approved. M/s.  Iswardas Subhkaran v. Commissioner of Income-tax  West Bengal,  Income-tax Reference No. 38 of 1952 dated  June  2, 1953, of the Calcutta High Court, disapproved. 861

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil 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, S. 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 s. 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 S.  66(1) of the Indian Income-tax Act, 1922:

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"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 S. 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  s. 10,  and it is a matter of no moment that the total  profits of  the partnership were computed in the manner provided  by s.  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 s. 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 S.  10(1).   Being  income  from business,   allowances  appropriate  under  S.   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 S. 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  v.  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.

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In Basantlal Gupta v. 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 s. 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 s. 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  v.  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 s. 10(2) (xv) of  the Indian  Income-tax Act, 1922.  Jitmal Bhuramars case(4)  was brought  in  appeal to this Court : see Jitmal  Bhuramal  v. 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)  27 I.T.R. 69. (2)  50 I.T.R. 541. (3)  37 I.T.R. 528. (4)  44 I.T.R. 887. (sc.) 864 karan  v.  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.

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(1) Income Tax Reference No. 38 of 1952 decided on June,  2, 1953, 865