Patna High Court
E. C. Danby vs Commissioner Of Income-Tax, Bihar And ... on 3 February, 1944
Equivalent citations: [1944]12ITR351(PATNA), AIR 1944 PATNA 287
JUDGMENT
(M. J. C. No. 68 of 1943).
FAZL ALI, C.J. - The question which has been referred to us is :-
"Whether in the circumstances of the case the sum of Rs. 5,805 paid as salary to the applicant for the purpose of supervision of the agricultural concern is exempt from taxation under Section 4 (3) (viii) of the Income-tax Act."
From the manner in which the question has been formulated one would have expected that "the circumstances of the case" would be fully set out in the order of reference, but strangely enough they are not, and were are not calling for a further and better statement of the case only because we find that this reference can be disposed of upon facts which were admitted in the course of the arguments of the parties.
It appears that the assessee, Mr. E. C. Danby, and his brother, Col. A. L. Danby, jointly own a partnership concern and the arrangement between them is that whoever will supervise the management of the concern will get remuneration. The assessee is said to have received in the course of the accounting year a sum of Rs. 5,805 as remuneration for managing the agricultural property owned by the concern and the question to be decided is whether this amount can be taxed as salary. The case of the assessee seems to have been that the remuneration is really in the nature of extra agricultural profits and upon this view the Tribunal was asked by him to state the following questions of law to the High Court :-
(a) What is the nature of the payment made by an agricultural concern to its partners for supervision of the business of the concern ? It is salary taxable within the meaning of Section 7 or appropriation of extra agricultural profit in its entirety ?
(b) Whether such entire salary or extra profit is exempt from income-tax as being agricultural income within the meaning of Section 4 (3) (viii) ?
The Tribunal, however, has formulated the question as stated above.
Now what seems to have been found as a fact is that the disputed payment is remuneration for extra work done by one of the partners and the assessee himself in his application under Section 66 (1) of the Income-tax Act does not seriously dispute that the payment in question is in the nature of salary or remuneration. Paragraph 3 of the petition refers to the following findings of fact among others arrived at by the Tribunal; (1) salary or remuneration received by the appellant as partner manager of an agricultural concern is taxable under Section 7 of the Income-tax Act; (2) such salary or remuneration is not allowed during the period when the appellant remains outside.
In the fourth paragraph of the petition it is pointed out that the finding of the Tribunal that "the applicant did not at all receive any such salary or extra profit during his absence is not correct, the fact being that the partners received such extra profits even during their absence from India, but only with this difference that during their absence from India they received half of their salary or extra profit allowed as supervision charge." In the same paragraph it is pointed out that "the proper test for appreciating the nature of such receipt will be to determine the entire income of the concern both agricultural and non-agricultural in accordance with the Income-tax Act; the entire salary paid to your petitioner or to the other partner would then be added to the profit of the firm and in determining the income of such partner such salary will be added as appropriation of profit according to Section 10 (4) (b), Income-tax Act."
Thus it is clear that the assessee did not object to the payment being designated as salary but one of his points was that it was in the nature of extra agricultural profit. The question, therefore, which has to be considered is - whether a remuneration received by a partner out of the proceeds of agricultural property for his management of that property and which is in the nature of a salary is exempt from income-tax on the ground that it is really agricultural income. The Tribunal has decided that such income is taxable under the Income-tax Act and in some doing relied upon Major Carnival v. Commissioner of Income-tax. In that case the facts were as follows :-
One Major Conville and his sister had a share in the lease of certain lands granted by the Government to his father. For the management of this estate the three lessees entered into an agreement among themselves by which the estate was placed under the management of the father and the son was entitled to reside on the estate and manage it under the directions of the father and the father had the right to fix his own as well as his sons allowance within certain limits. Upon these facts it was held by the Lahore High Court that the son was entitled to treat that part of the income as agricultural which he received as of right by virtue of the ownership of his share and that the surplus was to be treated as salary and therefore taxable as he received it for managing the fathers estate. It was further held that even a co-owner could employ another co-owner on the business of the joint ownership and similarly a partner could be employed by another partner on the business of the firm.
This decision, with which I entirely agree, seems to me to cover the present case. Here one of the two partners has received an extra remuneration for managing the estate which was in excess of that part of his income which he received as of right by virtue of the ownership of his share in the partnership. Such remuneration, even though the property managed was agricultural, was in the nature of "salary" as the term is used in Section 7 of the Income-tax Act. The mere fact that its ultimate source was agricultural property will not make it agricultural income because the payment was received not as part of his profit from the agricultural property, but as remuneration due to his for work done as manager of the property. This view is supported by the decision of the Judicial Committee of the Privy Council in Hon. Nawab B. Habibulla v. Commissioner of Income-tax, Bengal. In that case the appellant before the Privy Council received by the terms of a scheme of administration, a fixed monthly remuneration as mutawalli of a wakf estate the income of which was agricultural income as defined in the Indian Income-tax Act. It was held that the remuneration so received was not agricultural income and was therefore taxable under the Income-tax Act. Their Lordships in dealing with the case observed as follows :-
"The recovery of the rents depends on the rights of the wakf estate, and on the appellants performance of his duties of management as mutawalli, and the amount of his remuneration does not depend either on the nature of the properties or assets which constitute the wakf estate, or on the amount of the income derived therefrom by the wakf estate. If, as might possibly happen, the whole or a portion of the wakf property ceased to be represented by agricultural lands, it is clear that the remuneration fixed by article 15 of the scheme would not be affected."
Our attention has been drawn to the fact that the Privy Council have also observed that a different question might have arisen if the appellants remuneration had been by way of a fractional part of the income of the wakf estate or by a percentage commission. This observation does not help the assessee because in the present case it has not been shown to us that the remuneration received by him was by way of a percentage commission.
Therefore in my judgment the answer to the question referred to us must be that the sum in question is not exempt from taxation under Section 4(3) (vii) of the Income-tax Act.
The assessee will pay costs to the Income-tax Department; hearing fee being assessed at Rs. 100. The amount of fee already deposited will be paid by the Tribunal to the Commissioner.
I think I ought to observe that a good deal of our time might have been saved if there had been a clear and fuller statement of the facts of the case in the order of reference and we hope that in future the Tribunal while formulating the question of law will clearly and succinctly state all the facts on which the decision of that question depends.
MANOHAR LALL, J. - I agree.
(M.J.C. No. 69 of 1943).
FAZL ALI, C.J., and MANOHAR LALL, J. - The question of law which has been formulated in this case is the same as was formulated in Miscellaneous Judicial Case No. 68 of 1943 and arises on the same facts as are set out in that case. Therefore for the reasons given in our judgment in that case we answer the question in the negative.
It was pointed out to us that the question formulated in this case wrongly states that a sum of Rs. 5,805 was paid as salary to the assessee. It was conceded before us on behalf of the Department that this was the sum involved in Miscellaneous Judicial Case No. 68 of 1943 and the sum actually involved in this case in Rs. 6,627.
The assessee must pay costs to the Commissioner, hearing fee Rs. 100. The Tribunal will pay the amount of fee deposited to the Commissioner.
References answered in the negative.