High Court Of Rajasthan : Jaipur Bench
CIT vs. Smt. Gulnar N. Marfatia
Section 64(1)(i)
Asst. Year 1975-76, 1976-77, 1977-78, 1978-79
Rajesh Balia & Sunil Kumar Garg, JJ.
IT Ref. Nos. 32 of 1981, 58 of 1983 & 7 of 1984
20th April, 2001
Counsel Appeared
R.K. Agarwal, for the Applicant : J.K. Ranka & J.K. Singhi, for the Respondent
JUDGMENT
RAJESH BALIA, J. :
Heard learned counsel for the parties. These three references raise an identical issue, though relating to different assessment years commencing from 1975-76 to 1978-79. Reference No. 7/84 relates to the asst. yr. 1977-78. Reference No. 32/81 relates to the asst. yr. 1975-76 and Reference No. 58/83 relates to the asst. yrs. 1976-77 and 1978-79. In all the cases common issue raised is :
“Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the salary of Rs. 18,000 and interest of Rs. 890 paid to the husband of the assessee by the firm in which she is a partner was not includible in her hand under s. 64(1)(i) of the IT Act, 1961.”
2. The facts stated are that the assessee’s husband Shri N.K. Marfatia resigned from Defence Department and joined as an employee in the firm M/s New Majestic Talkies, in which the assessee Smt. Gulnar, respondent, was a partner, on a salary of Rs. 1,000. Later on, said N.K. Marfatia was inducted as a partner and amount of salary was increased to Rs. 1,500. Salary was to be paid in addition to his share in the profit of the firm. During the assessment years in question Smt. Gulnar N. Marfatia as well as her husband Shri N.K. Marfatia both were partners. The assessee received salary of Rs. 18,000 from the firm M/s New Majestic Talkies. The income accuring to Shri N.K. Marfatia was clubbed by the ITO with the income of the assessee-respondent, his wife, under the provisions of s. 64(1)(i) as the income arising to the spouse of the assessee from the membership of the firm in which the assessee was a partner. The entire share of Mr. N.K. Marfatia as determined in the firm’s assessment as per s. 67 of the IT Act was added to the income of the assessee. Her income apart from the share income was greater than the income of her husband. The share as income from the firm allocated to Mr. N.K. Marfatia included a sum of Rs. 18,000 paid to him by the firm as salary during each of the relevant previous years as partner of firm.
The assessee has challenged the inclusion of Rs. 18,000 and interest in her income as income arising to her husband from the partnership of the firm inter alia on the ground that the salary was earned by Shri N.K. Marfatia on account of his own technical knowledge. Therefore, it cannot be said to be the income arising to him as income from the firm and could not have been so included in the income of the spouse. It was also the case of the assessee that as a matter of fact, her husband had resigned from Defence Department and joined the firm M/s New Majestic Talkies in which the assessee was a partner on the salary of Rs. 1,000. Later on, he became partner of the said firm after death of one of the partners on 25th May, 1973, when a fresh partnership deed was executed w.e.f. 25th May, 1973, and his salary was enhanced from Rs. 1,000 to Rs. 1,500 per month. This was in addition to share of the profits of the firm. Since the husband was an employee of the firm before he became a partner in the firm, he continued to receive salary, though enhanced, which arose out of individual agreement of engaging the service of her husband for his technical know-how and not as a result of his membership from the firm. The theory of existence of individual contract of employment was not accepted by the learned AAC for the asst. yr. 1975-76. However, in appeal against that order, the Tribunal accepted the contentions of assessee and deleted the addition made on account of salary paid to the husband of assessee by the firm. Following this decision for subsequent years, the AAC accepted the appeal of assessee on this issue.
The Tribunal in its first order referred to cl. 4 of the deed which was reproduced in the order, reads as under : “It is specifically expressed that first partly is a working partner, and for his services he shall be paid a remuneration @ Rs. 15,000 p.m. Second party who uptill now was getting a remuneration of Rs. 501 shall now onwards get the remuneration @ Rs. 1,000 p.m.”
It was further noticed that finding recorded by the AAC as under : “No good reasons have been given by the AAC to come to the conclusion as to why the payment of salary can be attributed to the membership of the firm. Before becoming the partner of the firm, Shri Marfatia was an employee of the firm and he had been receiving the salary. In these circumstances, it cannot be said that Shri Marfatia started receiving salary only due to his becoming a partner in the firm. Shri Marfatia was already an employee in the firm and continued to receive salary from the firm even after becoming a partner. In these circumstances, payment of salary cannot be attributed to the membership of the firm. There is no connection between the payment of the salary and Shri Marfatia being member of the firm. It cannot be said that if Shri Marfatia was not the partner of the firm, then he would not have received the salary. Shri Marfatia would have continued to receive salary irrespective of the fact whether he was taken in as a partner in the firm or not.”
On reaching this conclusion, the learned Tribunal refused to considered the reason given by the AAC that a partner cannot be an employee of the firm at the same time by saying that the question whether or not a partner can be a servant of the firm is not a relevant question for consideration in this case. The only point for consideration as to whether the assessee started taking salary and whether he continued to receive the salary on account of his being the partner in the firm. The Tribunal further stated as under : “We can come to the conclusion that no salary was given to Shri Marfatia on account of his being a member in the firm as he had been receiving the salary from before under a separate agreement from the firm. The only change which was made on 20th May, 1973, is that the salary was enhanced from Rs. 1,000 to Rs. 1,500. Under these circumstances, no connection or nexus is established between the payment of salary and Shri Marfatia’s admission to the membership of the firm.” With these findings, the addition of the share income determined as income from the firm of spouse was modified by deleting Rs. 18,000 which was referable to salary of Rs. 18,000 paid to her husband and also interest paid to said N.K. Marfatia.
Learned counsel for the Revenue has contended that since the spouse of the assessee was paid salary directly under the terms of partnership deed, the fact that he was also an employee of the firm prior to he became a partner was wholly irrelevant. The fact remains that after he became a partner the salary was not being paid to him under any separate contract as suggested by respondent. Reason for paying salary to a partner in addition to share in the profits and losses of the business of the firm is hardly relevant. Providing salary per month may only indicate that whether there are profits or not, the person, who is a partner of firm, shall receive minimum amount. In the alternative, it is contended that if the salary paid to the spouse of assessee cannot be treated as income directly and indirectly arising to him on account of membership of the firm, he having been paid salary by the firm in which the assessee was a partner was still liable to be added to the income of the spouse under s. 64(1)(i) of the IT Act.
Mr. Ranka, learned counsel for the assessee, has urged that artificial mode of computation of a person’s share from the partnership firm under s. 67, cannot be imported in inviting the application of s. 64(1)(i). Any income which is earned by a person on account of individual contract independent of the terms of the partnership whether by way of salary or whether by way of interest on any sum which has not been contributed to the firm as capital, is not to be considered as income directly or indirectly arising from the membership of the firm. In support of this contention, the learned counsel for the assessee has placed reliance on number of decisions such as CIT vs. Prem Bhai Parekh & Ors. (1970) 77 ITR 27 (SC) : TC 42R.680, Raj Kumar Singh Hukam Chandji vs. CIT (1970) 78 ITR 33 (SC) : TC 37R.548, CIT vs. Prahladrai Agrawal (1989) 77 CTR (SC) 67 : (1989) 177 ITR 398 (SC) : TC 42R.807, Smt. Nripendra Kumari Bhandari vs. CIT (1975) 105 ITR 158 (Mad) : TC 42R.384 and S. Srinivasan vs. CIT (1967) 63 ITR 273 (SC) : TC 42R.317. He also placed reliance on commentary of “Kanga & Palkhiwala’s Law and Practice of Income Tax”, particularly to comment on income from ‘membership’ in firm that the income received from the firm by the spouse or minor child under any other contract with the firm or in any other capacity e.g., as a lender or landlord, is not includible in the other spouses or parent’s total income.
Having giving our careful consideration, we are of the opinion that the Tribunal in arriving at its conclusion has erred in law in not considering that the term of partnership deed was the only agreement which was produced to show that the spouse of assessee became partner of the firm w.e.f. 25th Aug., 1973, and he will be receiving a salary of Rs. 1,500 p.m. This amount of Rs. 1,500, he was not receiving under any separate individual contract. Once Mr. N.K. Marfatia, husband of the assessee, decided to enter into partnership agreement with the assessee along with others or alone, question of continued status as an employee of the firm would not arise unless otherwise proved particularly when under the deed of partnership it was envisaged that one of the partners would be paid salary in addition to the share in the business of the firm. It may be pertinent to notice from the terms of cl. 4 of the deed of the partnership referred to above that no mention was made of existing contract of the employment with husband of the assessee for enhancing the salary payable to spouse of assessee under the agreement. It may be relevant to notice that there were two partners who were paid salary. In the case of the spouse of the assessee, no such stipulation is betrayed (sic) as shown in respect of other partner envisaging that he was uptill now was paid salary of Rs. 1,500 and he shall now be paid salary of Rs. 1,000. This further establishes beyond any doubt that once husband of the assessee was inducted as partner of the firm, any amount payable under the deed arose directly under the terms of partnership and not under any earlier agreement. No evidence of continued agreement of employment or separate agreement of employment between the firm and the husband of assessee in any other capacity came into existence.
In these circumstances, dilating on other issues whether the payment of salary is under individual agreement and could not have been included in the income of the assessee as income directly or indirectly arising to her husband from the membership, is not necessary.
8. In this connection, it may be noticed that s. 67 provides how the income of an assessee from the partnership firm is to be computed. While cl. (a) of s. 67(1) envisages the determination of profits or losses of firm for the purposes of allocating share in the ratio of profit/loss sharing as spelt out in the partnership deed for the purpose of computing the income or loss, which were to form part of the computation of such partner-assessee’s share from the firm; in the first instance under sub-s. (1)(a) of s. 67 for computing the allocable share in profit or loss from the total income of the firm any interest, salary commission or other remuneration paid to a partner shall be deducted and balance so ascertained shall be apportioned among the partners. Under cl. (b) if the ‘allocated result’ in cl. (a) is a profit, to that sum any interest, salary commission or other remuneration paid to each partner, if any, shall be added to such apportioned balance under sub-cl. (a). The aggregate of allocated balance and addition made under cl. (a) and (b) is to be treated as partner’s share in the income of the firm. Likewise, where share apportioned under cl. (a) is loss, any salary, interest, commission or other remuneration paid to the partner is adjusted against said allocated balance to find partner’s share in the income of the firm. Thus, finding the partner’s share in the income of the firm, such result is to be included in the total income of the partner under the same head or heads as such income is taxed in the heads of the firm.
9. Sub-s. (2) of s. 67 envisages that the share of a partner in the income or loss of the firm as computed under sub- s. (1) shall, for the purpose of assessment be appropriated under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income. This makes it clear that addition to share of partner in the firm under s. 67(1)(a) on account of salary, interest paid to him is not treated as income from any source other than as share by way of income from firm which arises to him. That is to say salary added to share of profit and treated as income from share in the firm in the hands of the partner in his own assessment and is to be assessed as his share in income of firm under the same head under which the income of the firm has been assessed. Thus, salary and interest paid to a partner becomes integral part of his share of income from firm and is to be so treated also for the purposes of s. 64(1)(i).
In these circumstances, we answer the question referred to us in favour of the Revenue and against the assessee and hold that the salary of Rs. 18,000 paid to the husband of the assessee by the firm in which she is a partner was includible in her hands under s. 64(1)(i) of the IT Act, 1961 and the Tribunal was not justified in holding otherwise.
There shall be no orders as to costs.
[Citation : 254 ITR 677]