Partner’s remuneration – Nature and character – Part I

October 31,2015
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Anish Thacker (Partner, Ernst & Young LLP )

INTRODUCTION

The decision that I am going to discuss today, deals with (in the words of its author Justice V.R. Krishna Iyer) “a fine point of law which lends itself to subtle spinning of gossamer webs of argument”. The opening lines of the judgment further state “we're the policy of 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 to learned length...”

The decisions is CIT vs. V.R.M Chidambaram Pillai [(1977)106 ITR 292] /[TS-6-SC-1976] delivered on 17 November 1976 by Justice V.R. Krishna Iyer and Justice H. R. Khanna. The Assessment Years were 1959-60 and 1960-61 and this therefore qualified to be within the ‘Nostalgia’ criteria.

FACTS  

agreement_400_04The respondent, (Chidambaram for the sake of brevity) was a partner in two partnership firms that owned tea estates. The tea sold yielded income composite in character been largely agricultural and partly non-agricultural. The apportionment of income was done in accordance with the rules, between agricultural and non- agricultural in the same manner as prescribed currently (60:40).

The respondent partners were, in addition to their share in the profits of the firms, entitled to salaries for services rendered to firms. The sole issue (controversy) was whether the sums so drawn as salaries were wholly liable to income-tax or only to the extent of 40% thereof which fell within the non-agricultural sector. Until Assessment year 1958-59,only 40% of the salaries that the respondent earned were taxed in his hands, whereas for Assessment years 1959-60 and 1960-61, the entire salary was sought to be taxed following the decision of the Madras High Court in Mathew Abraham Vs.

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