Assessment year separateness and bona fide partner remuneration govern deductibility of working partners' salaries under income tax law.

An assessment finding for one year does not operate as res judicata in a later year because each assessment year is a separate unit, so the earlier allowance of partners' salaries could be reconsidered. Deductibility of remuneration paid to working partners depends on a factual enquiry into whether the partners acted in a genuine dual capacity as partners and employees and whether the payments were bona fide compensation for services rendered rather than a device to reduce taxable profits. The taxing authority must examine the surrounding facts, including the link between salary, profits and capital employed, before allowing the deduction.

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Issues: (i) Whether an assessment order in one year could operate as res judicata in a later assessment year on the question of deduction of partners' salaries. (ii) Whether salaries paid to working partners were allowable as legal expenses incurred for the purpose of earning profits under the Income-tax law.

Issue (i): Whether an assessment order in one year could operate as res judicata in a later assessment year on the question of deduction of partners' salaries.

Analysis: A decision made for a particular assessment year does not bind the successor assessing authority in a subsequent year. Each assessment year is a separate unit, and the earlier allowance of the deduction could not preclude reconsideration in a later year.

Conclusion: The plea of res judicata failed and was answered against the assessee.

Issue (ii): Whether salaries paid to working partners were allowable as legal expenses incurred for the purpose of earning profits under the Income-tax law.

Analysis: The allowance of such payments depends on whether the partners were in truth acting in a genuine dual capacity as partners and employees. If the remuneration was genuinely paid for services rendered independently of profit-sharing, it could be deductible; if it was merely a device to reduce taxable profits, it could not be allowed. The taxing authority was directed to examine the surrounding facts, including the relation of salary to profits and capital employed, to determine whether the arrangement was bona fide.

Conclusion: Salaries to working partners were not automatically deductible; deductibility depended on a factual finding that the payments were bona fide remuneration for real employment.

Final Conclusion: The earlier-year allowance did not govern the later assessment, and the deductibility of partners' salaries was left to be determined on the facts by the taxing authority applying the bona fides test.

Ratio Decidendi: An assessment order for one year does not create res judicata for a subsequent assessment year, and remuneration paid to a partner is deductible only where the partner is shown on the facts to be genuinely employed in a separate capacity and the payment is bona fide, not a device to evade tax.

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