T.P. Mukerjee, J. - (1.) THIS is a reference made by the Delhi Bench (B) of the Appellate Tribunal under Section 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as "the Act". The statement of the case submitted by the Tribunal relates to the assessment years 1955-56 and 1956-57. The relevant previous years ended on the 30th September, 1954, and 30th September, 1955.
(2.) THE assessee, who is the applicant in this case, is a firm manufacturing sugar. It owns its mills at Mohiuddinpur in the district of Meerut. For the relevant assessment years it was not accorded registration under Section 26A of the Act. THE firm was constituted by a deed of partnership dated the 21st of August, 1939. THEre were two sets of partners, namely, the partners of the first set represented by Lala Suraj Bhan, the karta of the joint family, styled as M/s. Dinanath Nanak Chand ; the second set consisted of four partners, namely, (1) Lala Devi Prasad, (2) Lala Jwala Prasad (3) Lala Sheo Prasad, (4) Lala Ganpat Prasad, and (5) Lala Matu Ram, Lala Mai Dhan and Lala Mai Dayal. THE two sets of partners were to share the profits and losses of the business in equal moieties. On account of certain internal dissensions between the two sets of partners the Government of India was compelled to take action under the Essential Supplies (Temporary) Powers Act, 1946 (XXIV of 1946); on the 6th January, 1953. By this order the Central Government took over the factory and authorised Lala Suraj Bhan and Lala Mai Dhan to work jointly as authorised controllers for the running of the sugar mills. THE Central Government determined the sums payable to the two authorised controllers by an order dated the 28th September, 1953. Under this order each of the two authorised controllers was to receive a remuneration of Rs. 2,000 per mensem plus a commission of 1/4 per cent. on the total value of the sugar produced. Subsequently, it appears that, in supersession of the earlier order, the Government of India constituted a board of management for the running of the said sugar mills. In this board there were four persons, namely, (1) Sri Suraj Bhan, (2) Sri Mai Dhan Gupta, (3) Sri Sheo Prasad, and (4) Sri Shri Nath. During the assessment year 1955-56 a total sum of Rs. 74,880 was paid in aggregate to the four members of the board and during the next following assessment year 1956-57 a sum of Rs. 64,700 represented the aggregate amount paid to the said members of the board. In the assessment of the assessee-firm for the assessment year 1955-56 deduction was claimed for an amount of Rs. 74,880 being the remuneration paid to the four members of the board of management during the relevant previous year and in the next following assessment the sum of Rs. 64,700 was claimed as deduction on the same ground, in the computation of the profits of the firm. The Income-tax Officer disallowed the claims of the assessee-firm for both the years and added the amounts in question to the total income for the relevant previous years. The assessee went up in appeal to the Appellate Assistant Commissioner against the assessments made by the Income-tax Officer but the latter turned down the appeal of the assessee and confirmed the assessment.
(3.) THE assessee then appealed to the Tribunal. Before the Tribunal the assessee contended that the payments in question were not made by the firm to the members of the board in terms of the deed of partnership nor in terms of any agreement between the partners inter se. THEse payments were directed to be made by the Central Government in exercise of the statutory powers conferred on it by the Essential Supplies (Temporary Powers) Act, 1946. It was also pointed out that in the case of at least one member of the board, viz., Sri Mai Dhan, the amount of remuneration paid by the firm had been assessed to tax in his hands as salary. It was, therefore, contended that the case was taken out of the purview of Section 10(4)(b) and the payments made to the members of the board should be allowed as a deduction under Section 10(2)(xv). On behalf of the department, it was contended that Section 10(4)(b) was a bar to the allowance of the remuneration in the assessments of the firm. THE department contended that it made no difference whether the payments were made by the Central Government in exercise of its statutory powers or by the partners of the business by an agreement between them inter se. The contention made on behalf of the assessee appears to have found favour with the Tribunal. The Tribunal first referred to the scheme of the Act in regard to the assessment of an unregistered firm. The Tribunal observed that tax is payable by an unregistered firm itself on the profits earned by it. The profits of the firm having been ascertained, the proportionate share thereof was included in the assessment of its partners only for the purpose of computation of the rate of income-tax payable by the partners concerned. The partners do not have to pay tax directly on the amount of the share income which they receive from the firm in view of the provisions of Section 14(2)(a) read with Section 16(1)(b) of the Act. The Tribunal observed that the intention of the legislature in framing Section 14(2)(a) and 16(1)(b) was obviously to avoid double taxation in such cases. In the present case, the Tribunal pointed out that Sri Mai Dhan was assessed to tax on the entire amount of the salary and remuneration received by him from the unregistered firm as one of the members of the board of management. That being so, in the opinion of the Tribunal, it was only fair and equitable that the firm itself should not be taxed on the amount of remuneration which it has paid out to the members of the board of management. The relevant observation of the Tribunal may be quoted here: "Comprehending the situation as a whole, the meaning of the section seems to be patent and obvious to us viz., that the assessment in a case of an unregistered firm and its partners should be so made as to avoid a double assessment of the same income. If a payment is disallowed in the case of a firm as being a payment to a partner, then, in the assessment of the partner, it should be only taken for rate purposes. This objective has been secured by the two judgments of the Tribunal--one already passed in the case of the recipient (I.T.As. Nos. 3798 and 3799 of 1960-61--assessment years 1954-55 and 1955-56) and the one we propose now to deliver. After carefully considering the matter, we are of opinion that the payments of salary should be allowed." ;