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Issues: Whether salary paid by tea-estate firms to partner-assessees for services rendered formed income from a source distinct from their share in the firm's profits so as to be fully taxable, or whether, in the computation of the partners' income, only the non-agricultural portion after application of rule 24 of the Income-tax Rules, 1922, could be brought to tax.
Analysis: The salary of a partner paid by the firm was treated as part of the partner's share in the firm's total income and not as income springing from a separate source. Under the scheme of the Indian Income-tax Act, 1922, particularly section 10(4)(b) and section 16(1)(b), salary paid to a partner is not deductible in computing the firm's income and is included in the partner's share of profits. Since rule 24 applies to the composite income of the firm, including partner salary, the agricultural portion attributable to tea income has to be excluded and only 40 per cent of the salary referable to such income can be assessed in the partner's hands. The partnership law principle that a firm is not a separate legal person reinforced this conclusion.
Conclusion: The salary received by a partner from the firm did not have a source different from his share of the firm's income, and only the assessable portion attributable after application of rule 24 could be taxed in the partner's hands.
Ratio Decidendi: In computing a partner's income from a tea-manufacturing partnership, salary paid by the firm to the partner is part of the partnership income and must be apportioned with the firm's composite income under rule 24; it is not taxable as income from a separate source.
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