Law: Income Tax Act, 1961

Section: 40,40(b),67(1)

[Indian Income Tax Act, 1961]........Sections 40 (b), 67 (1)-Firm-Tea Estate-Computation of income- Cultivating and selling tea-Salary and interest paid to partners-whether only 40 per cent includible in share income of partners-Held yes. The salaries paid to partners of a firm are regarded by the Income Tax Act as retaining the character of profits and not excludible from the tax net. The portion of the profits from sales of tea by a grower which is agricultural in character is excluded from taxation under the Act, recognising the constitutional provision excluding taxation by the Union of Agricultural income. Since only 40 per cent of the income from sales of tea is treated as taxable under the Act and the balance, namely, 60% is regarded as agricultural income and exempt from tax under the Act, 60% of the salaries paid to the partners which comes out of this exempted gross sum, also gets the benefit of the exemption under the Act. This principle applies equally to the interest paid to a partner since it is the return on the monetary contribution made by the partner which can be said to form part of the capital for the purposes of the business carried on by all the partners. Therefore, only 40% of the salary and interst should be allocated for the purposes of arriving at the share income to be assessed in the hands of the partners of a firm having income from cultivation, manufacture and sale of tea. Case followed: CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292 (SC) Cases referred to: Chidambaram Pillai (R.M.) v. CIT [1970] 77 ITR 494 (Mad) (FB) and Mathew Abraham V. CIT [1964] 51 ITR 467 (Mad). JUDGMENT (Income Tax Reference No. 1 of 1973) SADANANDASWAMY J. - Since the Division Bench which heard this matter in the first instance was of the opinion that it involves a point of law of considerable importance, it has been referred to this Bench. This is a reference under the Income Tax Act. The assessee is a registered firm having two partners, Shri M. L. Mahindri and Shri M. L. Mahindra. The firm was deriving income from sale, cultivation and manufacture of tea. The Income Tax Officer computed the income of the Firm for the assessment year 1962-63 at Rs.…

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