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

Citation: [1977] 2 S.C.R. 111 · Decided: 17-11-1976 · Supreme Court of India · Bench: HANS RAJ KHANNA, V.R. KRISHNA IYER · Disposal: Dismissed

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Judgment (excerpt)

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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. 24-
Scope of-
Assessees 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 
non-
agricultural 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 respon-
dents' 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 provi-
sions, but is not a full person. Since contract of employment requires two dis-
tinct persons, namely, the employer and the employee, there cannot be a con-
tract 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. fol-
lowed. 
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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 
E 
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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 
KRISHN

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