The State of Madras vs Messrs. Moulvie Estate, Nagalur Post, Yercaud, Salem Dt.

Veeraswami, J.—The question is, whether the sum of Rs. 4200 paid out to the Managing partner of the firm is deductible as an expenditure under S. 5(e) of the Madras Agricultural income tax Act, 1955. The firm consists of nine partners and has been registered under the provisions of the Act. The Managing partner held during the assessment year 1936--64 a 2/9th share. In consideration of his services as Managing partner of the firm, he was paid a total remuneration of Rs. 4200 for the year. It was sought to be deducted as salary. The departmental officers took the view that a managing partner could in no sense be described as a servant of the firm, and disallowed the amount. The Tribunal was of a different opinion and directed the allowance of the amount as an expenditure wholly and exclusively laid out for the purpose of the land. We think the Tribunal''s view is correct. The question is not whether the managing partner was a servant. He may or may not be that; but the point is, whether he was not entitled to be remunerated for the services he rendered to the fires, which pursued agricultural operations in the case a coffee estate. Factually, there is no dispute that he did render such service, and it is not stated that be was bound to bestow it except for remuneration. But if he had supervised the agricultural operations of the firm, it would have been necessary to engage a third party for the purpose in which case salary would have to be paid The test for an allowance of the expenditure is always whether it had been incurred in the previous year and the expenditure was laid out or incurred wholly and exclusively for the purpose of the land. Literally these requisites are satisfied in this ease under S. 5(c), Commissioner of Income tax v. B.S. Mines and Co., 1 I.T.C. 176, on a close examination, does net appear to militate against the view we have taken. The head-note which says that the salaries paid to the partners of a firm are net admissible as deductions in the computation of the profits of the firm for, income tax purposes, does not appear to be precise. If we may say so with respect, the judgment itself is very cryptic and how it was formed it is not clear. But from the statement of the ease, it would seem that the revenue''s point of view was that having regard to the amounts paid out as salaries to the partners, they represent not salaries in the real sense of the term, but additional shares of profits of the partners as compared with the share of the sleeping partner. It is a problem to be answered in each case, whether what is sought to be claimed as an allowance is a real expenditure laid out for the purpose of the business, in the instant case for the purpose of the land. If the expenditure, in comparison with the total profits, is excessive or is a device to escape tax, it will obviously be disallowed and included in the chargeable profits. In Messrs jugal, Kishore Baldee Sahai v. Commissioner of income tax 1967 1 I.T.J. 131, the Supreme Court held that the salary or remuneration paid to a Karta of the family to manage the family business under a valid agreement was allowable as a business expenditure. The Court observed:--

......if a remuneration is paid to the karta of the family under a valid agreement which is bona fide and in the interest of, and expedient for, the business of the family and the payment is genuine and not excessive, such remuneration must be held to be an expenditure laid out wholly or exclusively for the purpose of the business of the family and Bust be allowed as an expenditure under S.10(2)(xvi of the Act. (income tax Act 1922)

In our opinion, though the principle was applied in that case to the Karta of a Hindu undivided family, it is with equal force applicable to a registered firm assessed to tax under the provisions of the Madras Agricultural income tax Act. The tax case is dismissed with costs. Counsel''s fee Rs. 100.