# COMMISSIONER OF INCOME-TAX, MADRAS v. R. M. CHIDAMBARAM PILLAI ETC

- **Citation:** [1977] 2 S.C.R. 111
- **Court:** Supreme Court of India
- **Decided:** 1976-11-17
- **Bench:** H. R. Khanna, V. R. Krishna Iyer
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-madras-v-r-m-chidambaram-pillai-etc-7007
- **Pages:** 11

## Headnote

Income Tax Act, 1922-S. 16(1) (b)-lncome Tax Rules 1922-r. 24Scope ofAssessees partners in firms owning tea estates-Salary paid to partners-If
whole salary exigible to tax.
Rule 24 of the Income Tax Rules, 1922 states that income derived from the
sale of tea grown and manufactured by the seller shall be computed a~ if it were
income derived from business and 40 per cent of such income shall be deemed
to be income, profits and gains liable to tax.
The respondents were partners in firms which owned tea estates, the com~
posite income of which consisted largely of agricultural and partly of
nonagricultural income. In addition to their share in profits, the respondents were
entitled to salaries.
Rejecting the contention of the respondents that only 40%
of the salaries which fell within the non-agricultural income is exigible to tax
A
B
c
and not the whole income, the Income Tax Officer charged the whole of their
salaries to tax under s. 10 of the Income Tax Act, 1922. The Appellate Asstt.
D
Commissioner held in favour of the respondents; but on appeal the Appellate
Tribunal held in favour of the Revenue. The High Court allowed the respondents' appeal.
Dismissing the appeal to this, Court,
HELD : Only 40 per cent of the income from the tea sales is taxable; the
balance, namely, 60 per cent is agricultural and exempt.
60 per cent of the
salaries to partners comes out of this exempted gross sum and shares the benefit
E
and the Central Income-bax cannot break into its inviolability. [116 BJ
1. (a) The salary of a partner is but an alias for the return by way of profits,
for the human capital. The immediate reason for payment of salary was service
contract but the causa causans is partnership.
[121 Fl
(b) A partnership is only a collective of separate persons and not a legal
person in itself.
The salary stipulated to be paid to a partner from the firm
is in reality a mode of division of the firms profits.
(117 HJ
( c) In the income tax law a firm is a unit of assessment, by special provisions, but is not a full person. Since contract of employment requires two distinct persons, namely, the employer and the employee, there cannot be a contract of service. between a firm and one of ,its partners.
Any agreement for
remuneration of a partner for taking pa.rt in. the conduct of the business must
be regarded as portion o'f the profits being made over as a reward for the human
capital brought in.
(113 F-Gl
Lindley on Partnership referred to.
Duliclwnd, [19561 S.C.R. -154 and Narayanappa, A.LR. 1966 S.C. 1303. followed.
F
G
( d) Payment of salary to a partner represents a special share . of the profits
and is, threfore. part of the profits and taxable as such. Section 10(4) (b)
stipulates accordingly.
(114 Al
H
(2) Under s. 16(1)(b) in computi!Jg the total incomo of an assessee, when
the assessee is a partner of a firm, hIS share shall be ta~en to be. _anv sala~y
payable to' him by the firm increased or decreased respectively by his share 111
A
B
112
SUPREME COURT REPORTS
[1977] 2 S.C.R.
the balance of the profit or .loss of the firm after the deduction of any interest,
salary etc. payable to any partner. It is implicit that the share income of the
partner takes in his salary. [114 F & HJ
(3) The portion of profits from tea sales by a grower, which is agricultural,
is insulated from incidence and ex$Ction by r. 24, which means that b)· that
modus operandi 60 per cent of the total income is set aside as representing the
agricultural sector, and the salary to partners paid out of it, being only profits,
enjoys the same invulnerability to exigibility that r. 24 confers on the agrarian
ponion.
[115 B-C]
Karimtharuvi Tea Estates [1963] Supp. 1, SCR 823, Anglo-A111crica11 Direct
Tea Trading Co. [1968] 69 ITR 667, 671 and Tea Estate India [1976] 103 ITR
785, 795 applied.
Mathew Abraham (1964] 51 I.T.R. 467 overruled.
C
ClVIL APPELLATE JuRISDICTION :Civil Appe·als Nos. 17 to 21 of
1976.
D
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(From the Judgment and Order dated the 5th December, 1

## Text

i
111
COMMISSIONER OF INCOME-TAX, MADRAS
v.
R. M. CHIDAMBARAM PILLAI ETC.
November 17, 1976
[H. R. KHANNA AND V. R. KRISHNA IYER, JJ.]
Income Tax Act, 1922-S. 16(1) (b)-lncome Tax Rules 1922-r. 24Scope ofAssessees partners in firms owning tea estates-Salary paid to partners-If
whole salary exigible to tax.
Rule 24 of the Income Tax Rules, 1922 states that income derived from the
sale of tea grown and manufactured by the seller shall be computed a~ if it were
income derived from business and 40 per cent of such income shall be deemed
to be income, profits and gains liable to tax.
The respondents were partners in firms which owned tea estates, the com~
posite income of which consisted largely of agricultural and partly of
nonagricultural income. In addition to their share in profits, the respondents were
entitled to salaries.
Rejecting the contention of the respondents that only 40%
of the salaries which fell within the non-agricultural income is exigible to tax
A
B
c
and not the whole income, the Income Tax Officer charged the whole of their
salaries to tax under s. 10 of the Income Tax Act, 1922. The Appellate Asstt.
D
Commissioner held in favour of the respondents; but on appeal the Appellate
Tribunal held in favour of the Revenue. The High Court allowed the respondents' appeal.
Dismissing the appeal to this, Court,
HELD : Only 40 per cent of the income from the tea sales is taxable; the
balance, namely, 60 per cent is agricultural and exempt.
60 per cent of the
salaries to partners comes out of this exempted gross sum and shares the benefit
E
and the Central Income-bax cannot break into its inviolability. [116 BJ
1. (a) The salary of a partner is but an alias for the return by way of profits,
for the human capital. The immediate reason for payment of salary was service
contract but the causa causans is partnership.
[121 Fl
(b) A partnership is only a collective of separate persons and not a legal
person in itself.
The salary stipulated to be paid to a partner from the firm
is in reality a mode of division of the firms profits.
(117 HJ
( c) In the income tax law a firm is a unit of assessment, by special provisions, but is not a full person. Since contract of employment requires two distinct persons, namely, the employer and the employee, there cannot be a contract of service. between a firm and one of ,its partners.
Any agreement for
remuneration of a partner for taking pa.rt in. the conduct of the business must
be regarded as portion o'f the profits being made over as a reward for the human
capital brought in.
(113 F-Gl
Lindley on Partnership referred to.
Duliclwnd, [19561 S.C.R. -154 and Narayanappa, A.LR. 1966 S.C. 1303. followed.
F
G
( d) Payment of salary to a partner represents a special share . of the profits
and is, threfore. part of the profits and taxable as such. Section 10(4) (b)
stipulates accordingly.
(114 Al
H
(2) Under s. 16(1)(b) in computi!Jg the total incomo of an assessee, when
the assessee is a partner of a firm, hIS share shall be ta~en to be. _anv sala~y
payable to' him by the firm increased or decreased respectively by his share 111
A
B
112
SUPREME COURT REPORTS
[1977] 2 S.C.R.
the balance of the profit or .loss of the firm after the deduction of any interest,
salary etc. payable to any partner. It is implicit that the share income of the
partner takes in his salary. [114 F & HJ
(3) The portion of profits from tea sales by a grower, which is agricultural,
is insulated from incidence and ex$Ction by r. 24, which means that b)· that
modus operandi 60 per cent of the total income is set aside as representing the
agricultural sector, and the salary to partners paid out of it, being only profits,
enjoys the same invulnerability to exigibility that r. 24 confers on the agrarian
ponion.
[115 B-C]
Karimtharuvi Tea Estates [1963] Supp. 1, SCR 823, Anglo-A111crica11 Direct
Tea Trading Co. [1968] 69 ITR 667, 671 and Tea Estate India [1976] 103 ITR
785, 795 applied.
Mathew Abraham (1964] 51 I.T.R. 467 overruled.
C
ClVIL APPELLATE JuRISDICTION :Civil Appe·als Nos. 17 to 21 of
1976.
D
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(From the Judgment and Order dated the 5th December, 1969 of
the Madras High Court in Tax Cases Nos. 114 & 115 of 1964-Ref.
Nos. 48 and 49 of 1964)
B. B. Ahuja and R. N. Sachthey for the Appellant.
S. Swaminathan and Mrs. Saroja Gopalakrishnan for Respondents.
The Judgment of the Court was delivered by
KRISHNA IYER, J. A fine point of law, which lends itself to subtle
spinning of gossamer webs of argument, falls for decision in these
appeals by certificate.
Were the policy of the law been plain, the
language should have been clearer and the labours of courts could
have been lesser.
The arguments have been exhaustive, the precedents,
in profusion, cited to the point of no return and the short issue expanded into learned length; but, at the end of the forensic journey, we
are hesitantly inclined to leave the judgment under appeal undisturbed
as the law set out therein has better appeal and theoretical soundness
than the rival view point well-presented by Sri Ahuja for the appellant
(Revenue). The planning and pruning of case law is perhaps necessary if time-consuming court proceedings are to be curbed.
'All our
life is crushed by the weight of words: the weight of deed', said Luingi
Pirandello.
Heavy case-law Blust not clog judicial navigati09..
Next to a breviate statement of the facts which project the legal
issue canvassed before us.
Two tea estates were owned by two firms
with several partners, two of whom were the respondents, in the two
sets of appeals, C. As. 1 7 to 19 and C. As. 20 & 21 of 1972.
The
tea sold yielded income composite in character, being largely agricultural and partly non-agricultural.
The complex situation of apportionment between the two heads for purposes of income-tax has
been taken care of by rule 24 of the Income-tax Rules, both the firms
having been registered under the Act.
The respondents-partners were, in addition to their share in profits, entitled to salaries for services under the firms.
The sole controversy turns on 1whether the sums so drawn as salaries were wholly
f
COMMR. OF I. T. v. R. M. CHIDAMBARAM (Krishna Iyer, J.)
113
liable to income-tax or only to the extent of 40% thereof which fell
within the non-agricultural sector.
Until the assessment year ending·
with March 31, 1959, the income-tax was so asisessed that the whole
of the agricultural income i.e., 60% of the total income, was out of
bounds for income-tax (which included 60% of the salaries of the
respondent partners).
But, for the years 1959/60 and 1960/61, the
two assessment years involved in these appeals, a different course
was followed.
The mechanics is simple but the bone of contention
between the Revenue and the assessees is as to whether any portion
of the salaries so drawn for services rendered are at all agricultural
income to be non-exigible to income-tax.
• Departing from the previous practice and in the prescient light
of the law later laid down in Mathew Abraham('), the whole salary
was subjected by the Income-tax Officer to income-tax as income from
other sources in terms of s. 10 [The Income-tax Officer had almost
anticipated Mathew Abraham(")].
This computation was contested
successfully before the Appellate Assistant Commissioner but that
decision suffered a reversal before the Appellate Tribunal s.ince, by
then, Mathew Abraham (supra) had been decided in favour of the
Revenue.
The case escalated to the High Court where a full Bench
upset the earlier view and upheld the exclusionary argument of the
assessecs.
The Revenue has arrived before us to assail the interpretation of s. 10 ( 4) (b), r. 24 and of other provisions the High Court
has adopted.
There is plausibility in both approaches but, after some
reflection on the scheme as expressed in the statutory text, we are! disposed to affirm the decision under appeal.
If the intendment of a
legislation misfires in court, competency being granted, the answer
is amendment, not more litigation.
First principles plus the bare text of the statute furnish the best
guidelight to understanding the message and meaning_ of the provisions
of law.
Thereafter, the sophisticated exercises in precedents and booklore. Here the first thing that we must grasp is that a firm is not a
legal per1son even though it has some attributes of personality.
Partnership is a certain relation between persons, the product of agreeA
B
c
D
E
ment to ;,hare the profits of a business.
'Firm' is a collective noun,
F
a compendious expression to designate an .entity, not a person.
In
income-tax law a firm is a unit of as~essmcnt, by special provisions,
but is not a full person; which ·leads to the next step that since a contract of employment requires two distinct persons, viz .. the employer
and the employee, there cannot be a contract of service, in strict iaw.
between a firm and one of its partners.
So that any a~reement for
remuneration of a partner for taking part in the conduct-of the busiG
ness must be regarded as portion of the profits being made over as a
reward for the human capital brought in.
Section 13 of the Partnership Act brings into focus this basis of partnership business.
This legal ideology expre~ses itself in the Income-tax Act in s. 10
( 4) (b) and s. l 6 (1) (b).
A firm, partner and partnership, according to s. 2(6B) of the Act bear the same sense as in the Partnership
H
Act.
The t:ixablc income of a firm has to be its business profits. as
(il (196!1 51 LT.R. 467.
9 -l458SCT /76
A
B
c
D
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114
SUPREME COURT REPORTS
[1977] 2 S.C.R.
provided ins. 10(1), 10(2) and 10(4). What is the real nature of
the salary paid to a partner vis a vis the income of the firm?
On
principle, payment of salary to a partner represents a special share of
the profits and is therefore part of the profits and taxable a1s such.
Ands. 10(4) (b) stipulates accordingly. Maybe, we may usefully read
heres. 10(1) and 10(4) to the extent relevant:
"10 (1) The tax shall be payable by an assessee under
the head 'Profits and gains of business, profeission or vocation'
in respect of the profit or gains of any business, profession
or vocation carried on by him.
x
x
x
x
x
( 4) Nothing in clause (ix) or clause
(xv) of subsection (2) shall be deemed to authorise the allowance of
any sum paid on account of any cess, rate or tax levied on
the profits or gains of any business, profession or vocation
or assessed at a proportion of or otherwise on the basis of
any such profits or gains; and nothing in clause (xv) of subsection (2) shall be deemed to authorisex
x
x
x
x
(b) any allowance in respect of any payment by way
of interest, salary, commission or remuneration made by a
firm to any partner of the firm;
x
x
x
x
x
It is plain that salaries
p::iid to partners are regarded by the
Income-tax Act as retaining the character of profits and not excludible
from the tax net, whatever the reason behind it be.
The procedure
for computation of the total income of a partner, found in s. 16(1)
(b) also fits into this understanding of the law behind the law.
Section 16 (relevant part) reads thus :
"16(1) In computing the total income of an assesseex
x
x
x
x
(b) When the assessee is a partner of a firm, then,
whether the firm has made a profit or a loss, his share
(whether a net profit or a net loss) shall be taken to be any
salary, interest, commission or other remuneration payable
to him by the firm in respect of the previous year increased
or decreased respectively by his share in the balance of the
profit or loss of the firm after the deduction of any interest,
. salary, commission or other remuneration payable to any
partner in respect of the previous year :
Provided that of his share so computed is a loss, such loss
may be set off or carried forward and set off in accordance
with the provisions of section 24 ;"
The anatomy of the provision is obvious, even if the explanation
or motivation for it may be more than one. It is implicit that th&
share income of the partner takes in his salary.
The telling test is
that where a firm suffers loss the salaried partner's share in it goes
to depress his share of income. Surely, therefore, salary is a different
label for profits, in the context of a partner's remuneration.
1·
i
COMMR. OF I. T. v. R. M. CHIDAMBARAM (Krishna Iyer, J.)
115
The scheme of the Act, eyeing it with special reference to s. 10 ( 4)
(b) and 16(1) (b), designates employee's salary as profit, where the
servant is none other than a partner i.e., co-owner of the business.
If such be the rationale of the relevant provisions, the key to the
tmlution of the problem is within easy reach.
Salaries are profits known by a different name and must be treated
as such for; taxation purposes.
The portion of profits from tea sales,
by a grower, which is agricultural, is insulated from incidence and
exaction by the Constitution worked out through r. 24.
Which means
that by that modus operandi we set aside 60% of the total income
as representing the agricultural sector, and the salary to partners paid
out of it, being only profits, enjoys the same invulnerabilify to ~igi
bility that r. 24 admittedly confers on t!he agrarian portion.
Shri Ahuja has an attractive counter-theory which merits distmbing attention. It is a variant version of the ratio in Mathew Abraham
(supra). He took us along a different street with plausible insights.
Ordinarily, salary for services to an employer is salary all the same and
there is no agricultural salary as such. Therefore, the item is taxable as
salary income under s. 10.
The mere fact that its ultimate source
was agricultural will not make its current complexion agricultural income, because the payment was received not as part of his profit from
agricultura1 property but as remuneration due to him for work done as
employee.
The source does not leave an indelible
stamp on the
stream or its tributaries.
The nature of the income being salary,
taxability is inevitable.
Section 10(4) (b) is a special provision;
so also s. 16(1) (b). The Parliament has power to provide for possible leakages and
safeguard against loss of revenue.
Ofte.1:1times,
partners siphon off substantial profits in the guise of salaries and so
arrange such distribution of income via salaries that tax evasion becomes legally protected.
To pre-empt such possibility the law has
gone out of its way to exclude manipulation by including salaries as
profits.
This special provision cannot alter the nature of salaries as
is obvious in commercial calculations, striking of balance sheets, in
suing for unpaid salaries and the like.
Moreover, Indian law does recognise a firm as a pernon for many purposes and the contrary tenor
of English law has no tenability in our country.
The very need for
s. 10 ( 4) (b) and 16 ( 1) (b) stresses that otherwise 'salary' will
retain its tf\!e character and not be regarded
as profits.
The other
categories in both these sections also bring home the purpose to be to
prevent evasion, not to inject jurisprudential changes.
Both sides are armed cap a pie with rulings for their respective
positions.
The weaponry in forensic battle is precedentry; also their
profusion is fraught with confusion for the laity in the law.
We will·
deal with citations presently but going by basics we feel that albeit
the forceful plea of Shri Ahuja, the Revenue is in the wrong.
The whole project of taxation of tea plantations is disclosed in
r. 24, Chida171baram Pillai( 1) explains it and we unfold it by reading
here a relevant portion :
"Income derived from the sale of tea grown and manufactured by the seller in the taxable territories shall be
(1) [1970] 77 I.T.R. 494, 503.
A
B
c
D
E
F
G
H
116
SUPREME COURT REPORTS
[1977] 2 S.C.R.
A
computed as if it were income derived from business, and
40 per cent of such income shall be deemed to be income,
profits and gains liable to tax."
Plainly, only 40% of the income from tea sales is treated as
taxable.
The balance viz., 60% is regarded
as
agricultural and
exempt.
60% of the salaries to partners comes out of his exempted
B
gross sum and shares the benefit. (Of course, this may be exigible,
by the same token, to agricultural income-tax, if there be any). The
core of the logic-and failure to grasp this has faulted the reasoning
in Mathew Abraham(')-is that the true character of the salary (i.e .•
the impugned 60%) is the same as that of the profits.
Both are
agricultural and thus it is clear that the amount does not escape tax
if the State has-and now it has-a levy on agricultural income but
C
the title of the State to tax this sum is valid, not of the Union.
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We may now embellish this brief judgment with some text-book
references and citation of rulings.
Is the firm a person or a mere shorthand name for a collection
of persons, commercially convenient but not legally
recognised?
Under s. 3 of the Partnership Act it is not a person, but a relationship among persons. Lindky, on Partnership. (") has this :
"The firm is not recognised by English lawyers as distinct from the members composing it.
In taking partnership accounts and
in
administering
partnership
assets,
courts have to some extent adopted the mercantile view,
and actions may now, speaking generally, be brought by or
against partners in the name of their firm; but, speaking
generally, the firm as such has no legal recognition.
The
law, ignoring the firm, looks to the partners composing
it; any change amongst them destroys the identity of the
firm; what is called the property of the firm is their property, and what are called the debts and liabilities of the
firm are their debts and their liabilities.
In point of law,
a partner may be the debtor or the creditor of his
copartners, but he cannot be either debtor or creditor of the
firm of which he is himself a member. nor can he be
employed by his firm, for a man cannot be
his
own
employer."
The Indian law of partnership is substantially the same and the
reference in counsel's submissions to the Scottish view
of
a
firm
being a legal entity is neither here nor there.
Primarily our study
must zero on the Indian Partnership Act and not borrow courage
from foreign systems.
In Bhagwanji Morarji Gokuldas( 3) the Privy
Council ruled that the Indian Partnership Act went beyond the English
Partnership Act, 1890, the law in India attributing personality to a
partnership being more in accordance with the law of Scotland. Even
so, Sir John Beaumont, in that case, pointed out that the Indian Act
----
-
(1) (1964) 51 I.T.R. 467.
(2) 12th Edition p. 28; Sweet & Maxwell.
(3) A.LR. 1948 P.C. !00=(1948) JS'.Comp. Cas. 205, 2090
COMMR. OF I. T. v. R. M. CHIDAMBARAM (Krishna Iyer, J.)
117
did not make a firm a corporate body.
Moreover, we are not perA
suaded by that ruling of the Privy Council,
particularly since
a
pronouncement of this Court in Dulichand(I) strikes a contrary note.
We quote:
"In some systems of law this separate personality of a
firm apart from its members has received full and formal
recognition as, for instance, in Scotland.
That is,
howB
ever, not the English common law conception of a firm.
English lawyers do not recognise a firm as an entity distinct from the members composing it.
Our partnership
Jaw is based on English law and we have also adopted the
notions of English lawyers as regards a partnership firm."
The life of the Indian law of partnership depends on its own
terms although habitually courts, as a hangover of the past, have been
referring to the English law on the point.
The matter is concluded
by the further observations of this Court:
"It is clear from the foregoing discussion that the law,
English as well as Indian, has, for some specific purposes,
some of which are referred to above, relaxed its rigid notions
and extended a limited pcrson>ality to a firm.
Nevertheless,
the general concept of a partnership, firmly established in
both systems of law, still is that a firm is not an entity or
'person' in law but is merely an association of individuals
and a firm name is only •a collective name of those individuals who constitute the firm.
Jn other words, a firm name
is merely an expression,
only a
compendious mode of
designating the persons who have agreed to carry on business
in partnership.
According
to the principles of
English
jurisprudence,· which we have adopted, for the purposes of
determining legal rights 'there is no such thing as a firm
known to the law' as was said by James L.J., in Ex parte
Corbett: In re Shand (1880) 14 Ch. D. 122, 126). In
these circumstances· to import the definition of the word
'person' occurring in section 3(42) of the General Clauses
Act, 1897, into section 4 of the Indian Partnership Act
will, according to lawyers,
English
or fodian, be totally
repugnant to the subject of partnership law as they know
and understand it to be."
c
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F
In Narayanappa(2) the view taken by this Court accords with the
position above stated.
G
The necessary inference from the premise that a partnership is
only a collective of separate. persons and not a legal person in itself
lends to the further conclusion that the salary stipulated to be paid
to a partner from the firm is in reality •a mode of division of the
firm's profits, no person being his own servant in law since a contract
of service postulates two different persons.
H
(I) [1956] S.C.R. 154.
(2) A.T.R. 1966 S.C. 1300, 1303.
118
SUPREME COURT REPORTS
(1977] 2 S.C.R.
A
Counsel for the respondent cited the
'Australian Income
Tax
Law and Practice' by F. C. Bock and F. F. Mannix(!) in support
of the proposition that a partner's
soalary is but a portion of the
profits :
"It follows that where the partnership income consists
of income from property, the salary is
also income from
B
property."
c
D
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F
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H
In an early Madras case Commissioner of Income-tax v. B. S.
Mines(2) the Madras High Court had held, with reference to the
1918 Income-tax Act: "We have no hesitoation in answering that the
drawings of the partners, by whatever name they are described, are
part of the profits and therefore taxable", the question raised being
one with reference to the character of salaries paid to partners.
Other cases from other High Courts have been brought to
our
notice but strong reliance was placed on Ramniklal Kothari( 3 ) of
this Court for reaching the conclusion that the business of a firm was
business of the partners, that the profits of the firm were profits of
the partners and that the expenditure incurred by partners in earning
such share was admissible for deduction in arriving at the total income
under s. 10(1).
Contrary views are not wanting in some rulings, but a catalogue
of cases on the other side may be productive of confusion and not
resolution of conflict.
We abstain from that enterprise and confine
ourselves to the statement of the law that although, for purposes of
the Income-t'ax Act, a firm has certain attributes simulative of personality, we have to take it that a partnership is not a person but a
plurality of persons.
Coming to basics over again, this Court, in Karimtharuvi Tea
Estates( 4 ) and in Anglo-American Direct Tea Trading Co.( 5 ) has set
out the nature of and manner of assessment of composite income-tax
derived by the sale of tea :
"In Karimtharuvi Tea Estates Ltd., v. State of Kera/a this
Court held that Explanation 2 to section 5 of the Kerala Agricultural Income-tax Act added in 1961
disallowing certain
deductions in the computation of agricultural income did not
apply to computation of agricultural income derived from tea
plantations.
The reasons for this conclusion may be summarised thus : The definition of agricultural income in the
Constitution and the Indian Income-tax Act. 1922, is bound
up with rule 24 of the Income Tax Rules, 1922. Income
derived from the sale of tea grown and manufactured by the
seller is to be computed under rule 24 as if it were income
derived from business in accordance with the provisions of
section 10 of the Indian Income-tax Act. The Explanation to
(1) 1968 Edn. Vol. 3, p. 3092.
(2) (1922) 1 l.T.C. 176, 177 (F.B.).
(3) (1969) 74 I.T.R- 57 (S.C.).
(4) [1963] Supp. I, S.C.R. 823.
(5) (1968) 69 I.T.R. 667, 671.
-
COMMR. OF I. T. v. R. M. CHIDAMBARAM (Krishna Iyer, J.)
119
section 2(a) (2) of the Kerala Act adopts this rule of computation. Of the income so computed, 40 per cent, is to be
treated as income liable to income-tax and the other 60 per
cent only is deemed to be agricultural income within the
meaning of that expression in the Income-tax Act. The power
of the State legislature to make a law in respect of taxes on
agricultural income arising from tea plantations is Jimi ted to
legislating with respect to agricultural income so determined.
The legislature cannot add to the amount of the agricultural
income so determined by disallowing any item of deductions
allowable under rule 24 read with section 10(2) (xv) of the
Indian Income-tax Act.
Explanation 2 to section 5 of the
Kerala Act if applied to income from tea plantations would
create an agricultural income which is not contemplated by
the Income-tax Act and the Constitution and would be void,
and it should therefore be construed not to apply to the computation of income from tea plantations."
In Tea Estate India(!) this Court summarised the scope and implications of r. 24 :
"Income which is realised by sale of tea by a tea company
which grows tea on its land and thereafter subjects it to manufacturing process in its factory is an integrated income. Such
income consists of two elements or components. One element
or component consists of the agricultural income which is
yielded in the form of green leaves purely by the land over
which tea plants are grown. The second element or component consists of non-agricultural income which is the result
of subjecting green leaves which are plucked from the tea
plants grown on the land to a particular manufacturing process in the factory of the tea company. Rule 24 prescribes
the tormula which should be adopted for apportioning the income realised as a result of the sale of tea after it is grown
and subjected to the manufacturing process in the factory.
Sixty per cent is taken to be agricultural income and the same
consists of the first element or component, while 40 per cent
represents non-agricultural income and the same comprises
the second element or component.
We are fortified in the above conclusion by two decisions
of this Court in the cases of Karimtharuvi Tea Estate Ltd. v.
A
c
D
E
F
State of Kera/a (supra) and Anglo-American Direct
Tea
G
Trading Co. Ltd. v. Commissioner of Agricultural Incometax (supra). In the case of Karimtharuvi Tea Estates Ltd.
(supra) it was observed while dealing with the income derived from the sale of tea grown and manufactured by the
seller in the context of rule 24 :
"Of the income so computed, 40 per cent is, under rule
H
24, to be treated as income liable to income-tax and it would
(1) 1976) 103 I.T.R. 785, 795.
A
B
c
D
E
F
G
H
120
SUPREME COURT REPORTS
[1977] 2 s.c.R.
follow that the other 60 per cent only will be deerned to be
'agricultural income' within the meaning of that expression
in the Income-tax Act."
ln the case of Anglo-American Direct Tea Trading Co. Ltd.
(supra) the Constitution Bench of this court held that income
from the sale of tea grown and manufactured by the assessee
is derived partly from business and partly from agriculture.
This income has to be computed as if it were income from
business under the Central Income-tax Act and the Rules
made thereunder. Forty per cent of the income so computed
is deemed to be income derived from business and assessable
to non-agricultural income-tax. The balance of 60 per cent
of the income so computed is agricultural income within the
meaning of the Central Income-tax Act."
It follows that by statutory dichotomy, 60% of the tea income is
agricultural in character and central income-tax cannot break into its
inviolability. This conceded, the flexible arrangement among partners
regarding distribution of this sum may take many forms
but the
essential agricultural character and consequential legislative immunity
cannot be lost because of tags and labels :
'That which we call a
rose, By any other name would smell as sweet'.
Needless to say,
the position is different if the situation is of a stranger-not a partner-drawing a salary.
With ideological clarity, this legal position has been set forth by
a learned author whom we refer(') to (by no means, rely on) compendious as his summary is :
"Any in'.erest, salary, bonus, commission or remuneration paid by a firm to any
of its partners cannot be
deducted by the firm as an expenditure in its profit-computation.
The reason is this :
The partners in a firm are
ultimately entitled to the entire profits of the firm, according
to their shares in the business.
Therefore, the entirety of
such profits should be brought to charge and no portion
be exempted by giving the same away to a partner as his
salary, bonus, commission, remuneration or
interest.
A
partner is bound to find the necessary finances for the partnership and hence any interest on capital supplied by the
partner is not deductible.
A partner's rendering services
to the firm stands on the same footing as his providing
capital; only instead of in money, in kind.
Further, no
remuneration is permissible to a partner for his rendering
services to the firm, since the carrying on of the business
of the partnership is a primary duty which all the partners,
or some of the partners acting for all, are required to do
by the law relating to partnership.
The matter may be looked at another way too.
In law,
a partner cannot be employed by his firm, for a man can-
(I) Law of Income-tax by A.C. Sampath Iyengar, 6th Edn., 1973-pp. 106110 64 (V GI. II) .
-COMMR. OF I. T. v. R. M. CH!DAMBARAM (Krishna Iyer, J.)
not be his own employer.
A contract can only be bilateral
and the same person cannot be a party on both sides, particularly in a contract of personal employment. A supposition
that a partner is employed by the firm would involve that
the employee must be looked upon as occupying the posi121
tion of one of his
own
employers,
which
is
legally
impossible.
Consequently, when an arrangement is made
by which a partner works and receives sums as wages for
1lervices rendered, the agreement should in truth be regarded
as a mode of adjusting the amount that must be taken to
have been contributed to the partnership's
assets
by
a
partner who has made what is really a contribution in kind,
instead of contribution in money.
Hence, all the aforesaid
payments are non-deductible."
The contrary view favoured by Mathew
(supra)
proceeds on
the following reasoning :
"Though for purposes of computation of income his
share income of the firm is clubbed along with the allowance and commission. it is obvious that .the character of the
A
B
c
receipt of the latter , amounts, though related to the busiD
nei;s, cannot be said to partake of the same character of
their receipt by the firm. · The assessee who is a managing
partner was entitled to receive 1!he amount not by virtue
of the relationship between him and the other members of
the firm as partners but by virtue of the special agreement
between the partners by which his services to the partnership were agreed to be remunerated."
E
(p. 471)
We regard this conclusion as unsound, the source of the error
being a failure to appreciate that the salary of a partner is but an
alias for the return, by way of profits, for the human capital-sweat,
>:kill and toH are, in our socialist republic, productive investment-he
has brought in for common benefit.
The immediate reason for payment of salary was service contract but the causa causans is partnership.
We dismiss the appeals. When this Court, as the apex adjudicator
declaring the law for the country and invested with constitutional
credentials under Art. · 141, clarifies a confused juridical situation,
F
its substantial role is of legal mentor of the nation.
Such is the
G
spirit of the ruling in Trustees of Port, Bombay('). If parties have
been fair, the costs of the litigation must come out of the national
exchequer, not out of as party's purse.
We direct both sides to bear
their costs throughout.
P.B.R.
Appeals dismissed.
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(l) [1974] 4 s.c.c 710.