Partner remuneration from tea partnership income retains agricultural character, limiting taxability to the non-exempt portion under rule 8.

In computing the taxable income of a tea-growing partnership and the partners' share income, only 40% of a partner's salary and interest paid by the firm was assessable, because the remaining 60% was attributable to agricultural income exempt under rule 8 of the Income-tax Rules, 1962. A partner's remuneration was treated as a mode of distribution of partnership profits rather than an independent source of income, and the firm's tea income retained its mixed character for tax purposes. Applying the Supreme Court's approach, the exempt agricultural element could not be severed from the partner's receipts, so the departmental challenge failed.

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Issues: Whether, in computing the taxable income of a tea-growing partnership and the share income of its partners, only 40% of the salary and interest paid to a partner was assessable to tax, the remaining 60% being attributable to agricultural income exempt under rule 8 of the Income-tax Rules, 1962.

Analysis: The governing principle applied was that a firm is not a separate legal person from its partners for this purpose, and a partner's salary and interest received from the firm are not independent items of income divorced from the partnership business. Where the firm's tea income is statutorily treated as partly agricultural, the same character attaches to the partner's remuneration paid out of that income. The Court followed the Supreme Court's view that a partner's salary is, in substance, a mode of distribution of profits and cannot be severed from the agricultural portion of the tea income for tax computation.

Conclusion: The salary and interest paid to the partner were liable to be brought to tax only to the extent of 40%, and the departmental challenge failed.

Ratio Decidendi: A partner's salary and interest paid by a tea-growing firm are part of the distributable profits of the partnership and, to the extent they are derived from agricultural income exempt under rule 8, they retain that exempt character for assessment purposes.

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