Rastogi, J. - (1.) THE Income-tax Appellate Tribunal, Allahabad Bench, Allahabad (hereafter "the Appellate Tribunal"), has referred the following question of law for the opinion of this court : " Whether, on the facts and in the circumstances of the case, was the salary received by Laxman Das from the firm, M/s. Rama Textiles, in which he was a partner as karta of his HUF includible in the assessment of the HUF of which Sri Laxman Das was the karta ? "
(2.) THE assessee is Sri Laxman Das, HUF, and the assessment years involved are 1972-73 and 1973-74, for which the accounting periods respectively were Samvat 2028 and Samvat 2029. THE assessee was a partner in a partnership firm, M/s. Ramji Laxman Das through its karta, Laxman Das. Sri Laxman Das, for services rendered to the firm, had received a sum of Rs. 12,000 in each of the aforesaid years from the aforesaid firm and the question was whether this amount could be included in the assessment of the assessee-HUF. THE assessee had claimed that this income had been earned by Sri Laxman Das, the karta of the HUF, in his individual capacity for services rendered by him to the partnership firm and hence it could be not treated as the income of the assessee-HUF. THE ITO was not impressed with this contention and he treated these payments as the assessee's income and added the same in its total income for each of the aforesaid two years. Aggrieved, the assessee filed appeals before the AAC and urged that the payments of Rs. 12,000 in each of the aforesaid assessment years by the partnership firm to Sri Laxman Das were in his individual capacity for services rendered by him to the firm and the same could not be treated as the income of the assessee-HUF. In support of this contention reliance was placed on two decisions of the Supreme Court, viz., CIT v. Gurunath V. Dhakappa [1969] 72 ITR 192 (SC) and Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33 (SC). It was also urged that no detriment had been caused to the HUF firm by payment of this salary by the firm to the karta, Sri Laxman Das. These contentions found favour with the AAC and he held that the ITO had failed to make out any case for treating these salary payments made to the individual as income of the assessee-HUF and as such he deleted the additions in respect of the same. The department thereafter took up the matter in appeal before the Appellate Tribunal. The Appellate Tribunal took view that "since the payment is part of the partnership agreement and is by virtue of being the karta of the assessee-HUF", there was no justification on the part of the assessee-HUF to question the action of the ITO in treating these payments as its own income and it placed reliance on the decision of the Supreme Court in CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292, wherein it has been held that a firm is not a legal person even though it has some attributes of personality. It has also been held that under the income-tax law the firm is a unit of assessment by special provisions but is not a full person. Since a contract of employment requires two distinct persons, viz., employer and employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. A payment of salary to a partner represents a special share of the profits. Salary paid to a partner retains the same character as the income of the firm. On this view the Appellate Tribunal held that the AAC was not justified in taking a contrary view. Further, the Appellate Tribunal distinguished the decisions on which the AAC had placed reliance by observing that in Chidambaram Pillai's case [1979] 106 ITR 292 (SC), " the court dealt with the matter in a wider perspective wherein they have noted that the salary paid to a partner is nothing but the payment to self and it is another form of sharing profit of the firm. " Accordingly, the additions made by the ITO were restored.
(3.) NOW, at the instance of the assessee, the question mentioned above has been referred for the opinion of this court. It was urged before us on behalf of the assessee-HUF by its learned counsel, Sri R. K. Gulati, that the payment of salary by the partnership firm to Sri Laxman Das, karta of the assessee-HUF, was for services rendered by him to the firm and this payment was not to the detriment of the HUF funds. The sales of the firm which, in the previous year relevant to the assessment year 1971-72, stood at Rs. 10,27,422 had risen to Rs. 18,50,177 and Rs. 21,13,227 in the two years under consideration and that was due to the services and efforts of Sri Laxman Das only and on a consideration of these facts the AAC recorded a finding of fact that the payment of salary by the firm to Sri Laxman Das was for services rendered by him and no detriment had been caused to the assessee-HUF by the payment of such salary. The learned counsel urged that these findings have not been upset by the Appellate Tribunal. We find that it is indeed so. The Appellate Tribunal was swayed by the fact that the payment of salary to Sri Laxman Das was part of the partnership agreement. In our opinion, this consideration is not very relevant. Clause 6 of the partnership agreement dated 26th of July, 1970, a copy of which is annexed to the statement of the case, reads as under : " That Sri Laxman Das has special aptitude for carrying on and managing the business in Banarasi goods which is carried on by the firm. He shall be paid monthly Rs. 1,000 (Rupees one thousand) individually by way of salary for managing the affairs of the partnership and rendering services to the firm which shall be taken to be establishment expenses of the firm." ;