Partner’s remuneration – Nature and character – Part II

November 07,2015
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Anish Thacker (Partner, Ernst & Young LLP )


We embarked on the journey to examine the character of partner’s remuneration and whether the said remuneration retains the same character as the income of the firm that pays it to the partner, in the case of CIT Vs R.M. Chidambaram Pillai (1977) 106 ITR 292(SC). We saw that the respondent, Chidambaram’s  Counsel presented arguments on first principles, citing Section 13 of the Indian Partnership Act,1932 and section 10(4)(b) read with section 16(1)(b) of the Indian Income-tax Act,1922 (the 1922 Act). We will in this part, look at the contentions of the tax department and then, the final conclusion of the learned judges.


The tax department’s contentions have been called ‘a different street with plausible weights’ by theagricultural_income learned judges. The Counsel for the tax department contended that ordinarily, salary received for services to an employer is salary all the same and there is no agricultural salary as such. The mere fact that its ultimate source was agricultural would not make its current complexion, agricultural income, because the payment was received by the respondent, Chidambaram, not as part of his profit from agricultural property but as remuneration due to him for work done as an employee.

According to the Tax department’s Counsel, “The source does not leave an indelible stamp on the stream or its tributaries.” Parliament has power to provide for possible leakages and safeguard against loss of revenue. Often times, partners siphon off substantial profit in the guise of salaries and so arrange such distribution of income via salaries that tax evasion becomes legally protected.

Both sides did present various rulings for their respective positions leading the judges to observe ‘ The weaponry in forensic  battle is precedentry; also the profusion  is fraught with confusion for the laxity  in the law.


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