Rajesh Balia, J. - (1.) HEARD learned counsel for the parties.
(2.) THESE three references raise an identical issue, though relating to different assessment years commencing from 1975-76 to 1978-79. Reference No. 7 of 1984 relates to the assessment year 1977-78. Reference No. 32 of 1981 relates to the assessment year 1975-76 and Reference No. 58 of 1983 relates to the assessment years 1976-77 and 1978-79. In all the cases a common issue raised is : "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the salary of Rs. 18,000 and interest of Rs. 890 paid to the husband of the assessee by the firm in which she is a partner was not includible in her hands under Section 64(1)(i) of the Income-tax Act, 1961 ?" The facts stated are that the assessee's husband, Shri N.K. Marfatia, resigned from the Defence Department and joined as an employee in the firm, New Majestic Talkies, in which the assessee, Smt. Gulnar, the respondent was a partner, on a salary of Rs. 1,000. Later on, the said N.K. Marfatia was inducted as a partner and the amount of salary was increased to Rs. 1,500. Salary was to be paid in addition to his share in the profit of the firm. During the assessment years in question, Smt. Gulnar N. Marfatia as well as her husband, Shri N.K. Marfatia, both were partners. The assessee received salary of Rs. 18,000 from the firm, New Majestic Talkies. The income accruing to Shri N.K. Marfatia was clubbed by the Income-tax Officer with the income of the assessee-respondent, his wife, under the provisions of Section 64(1)(i) as the income arising to the spouse of the assessee from the membership of the firm in which the assessee was a partner. The entire share of Mr. N.K. Marfatia as determined in the firm's assessment as per Section 67 of the Income-tax Act was added to the income of the assessee. Her income apart from the share income was greater than the income of her husband. The share as income from the firm allocated to Mr. N.K. Marfatia included a sum of Rs. 18,000 paid to him by the firm as salary during each of the relevant previous years as partner of firm. The assessee has challenged the inclusion of Rs. 18,000 and interest in her income as income arising to her husband from the partnership of the firm, inter alia, on the ground that the salary was earned by Shri N.K. Marfatia on account of his own technical knowledge. Therefore, it cannot be said to be the income arising to him as income from the firm and could not have been so included in the income of the spouse. It was also the case of the assessee that as a matter of fact, her husband had resigned from the Defence Department and joined the firm, New Majestic Talkies, in which the assessee was a partner on the salary of Rs. 1,000. Later on, he became a partner of the said firm after the death of one of the partners on May 25, 1973, when a fresh partnership deed was executed with effect from May 25, 1973, and his salary was enhanced from Rs. 1,000 to Rs. 1,500 per month. This was in addition to the share of the profits of the firm. Since the husband was an employee of the firm before he became a partner in the firm, he continued to receive salary, though enhanced, which arose out of an individual agreement of engaging the services of her husband for his technical know-how and not as a result of his membership of the firm. The theory of existence of an individual contract of employment was not accepted by the learned Appellate Assistant Commissioner for the assessment year 1975-76. However, in appeal against that order, the Tribunal accepted the contentions of the assessee and deleted the addition made on account of salary paid to the husband of the assessee by the firm. Following this decision for subsequent years, the Appellate Assistant Commissioner accepted the appeals of the assessee on this issue. The Tribunal in its first order referred to clause 4 of the deed which was reproduced in the order, reads as under : "It is specifically expressed that the first party is a working partner, and for his services he shall be paid a remuneration at Rs. 1,500 p.m. The second party who uptill now was getting a remuneration of Rs. 501 shall now onwards get the remuneration at Rs. 1,000 p.m." It was further noticed that the finding recorded by the Appellate Assistant Commissioner as under : "No good reasons have been given by the Appellate Assistant Commissioner to come to the conclusion as to why the payment of salary can be attributed to the membership of the firm. Before becoming the partner of the firm, Shri Marfatia was an employee of the firm and he had been receiving the salary. In these circumstances, it cannot be said that Shri Marfatia started receiving salary only due to his becoming a partner in the firm. Shri Marfatia was already an employee in the firm and continued to receive salary from the firm even after becoming a partner. In these circumstances, payment of salary cannot be attributed to the membership of the firm. There is no connection between the payment of the salary and Shri Marfatia being a member of the firm. It cannot be said that if Shri Marfatia was not the partner of the firm, then he would not have received the salary. Shri Marfatia would have continued to receive salary irrespective of the fact whether he was taken in as a partner in the firm or not."
(3.) ON reaching this conclusion, the learned Tribunal refused to consider the reason given by the Appellate Assistant Commissioner that a partner cannot be an employee of the firm at the same time by saying that the question whether or not a partner can be a servant of the firm is not a relevant question for consideration in this case. The only point for consideration as to whether the assessee started taking salary and whether he continued to receive the salary on account of his being the partner in the firm. The Tribunal further stated as under : "We can come to the conclusion that no salary was given to Shri Marfatia on account of his being a member in the firm as he had been receiving the salary from before under a separate agreement from the firm. The only change which was made on May 25, 1973, is that the salary was enhanced from Rs. 1,000 to Rs. 1,500. Under these circumstances, no connection or nexus is established between the payment of salary and Shri Marfatia's admission to the membership of the firm." With these findings, the addition of the share income determined as income from the firm of the spouse was modified by deleting Rs. 18,000 which was referable to salary of Rs. 18,000 paid to her husband and also interest paid to said N.K. Marfatia. Learned counsel for the Revenue has contended that since the spouse of the assessee was paid salary directly under the terms of partnership deed, the fact that he was also an employee of the firm prior to his becoming a partner was wholly irrelevant. The fact remains that after he became a partner the salary was not being paid to him under any separate contract as suggested by the respondent. The reason for paying salary to a partner in addition to share in the profits and losses of the business of the firm is hardly relevant. Providing salary per month may only indicate that whether there are profits or not, the person, who is a partner of the firm, shall receive minimum amount. In the alternative, it is contended that if the salary paid to the spouse of the assessee cannot be treated as income directly and indirectly arising to him on account of membership of the firm, he having been paid salary by the firm in which the assessee was a partner it was still liable to be added to the income of the spouse under Section 64(1)(ii) of the Income-tax Act. ;