JUDGMENT 1. - Heard learned counsel for the parties. 2. These three references raise an identical issue, though relating to different assessment years commencing from 1975-76 to 1978-79. Reference No. 7 of 1984 relates to the assessment year 1977-78. Reference No. 32 of 1981 relates to the assessment year 1975-76 and Reference No. 58 of 1983 relates to the assessment years 1976-77 and 1978-79. In all the cases a common issue raised is : "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the salary of Rs. 18,000 and interest of Rs. 890 paid to the husband of the assessee by the firm in which she is a partner was not includible in her hands under Section 64(1)(i) of the Income-tax Act, 1961 ?" 3. The facts stated are that the assessee's husband, Shri N.K. Marfatia, resigned from the Defence Department and joined as an employee in the firm, New Majestic Talkies, in which the assessee, Smt. Gulnar, the respondent was a partner, on a salary of Rs. 1,000/-. Later on, the said N.K. Marfatia was inducted as a partner and the amount of salary was increased to Rs. 1,500/-. Salary was to be paid in addition to his share in the profit of the firm. During the assessment years in question, Smt. Gulnar N. Marfatia as well as her husband, Shri N.K. Marfatia, both were partners. The assessee received salary of Rs. 18,000/- from the firm, New Majestic Talkies. The income accruing to Shri N.K. Marfatia was clubbed by the Income-tax Officer with the income of the assessee-respondent, his wife, under the provisions of Section 64(1)(i) as the income arising to the spouse of the assessee from the membership of the firm in which the assessee was a partner. The entire share of Mr. N.K. Marfatia as determined in the firm's assessment as per Section 67 of the Income-tax Act was added to the income of the assessee. Her income apart from the share income was greater than the income of her husband. The share as income from the firm allocated to Mr. N.K. Marfatia included a sum of Rs. 18,000/- paid to him by the firm as salary during each of the relevant previous years as partner of firm. 4. The assessee has challenged the inclusion of Rs. The share as income from the firm allocated to Mr. N.K. Marfatia included a sum of Rs. 18,000/- paid to him by the firm as salary during each of the relevant previous years as partner of firm. 4. The assessee has challenged the inclusion of Rs. 18,000/- and interest in her income as income arising to her husband from the partnership of the firm, inter alia, on the ground that the salary was earned by Shri N.K. Marfatia on account of his own technical knowledge. Therefore, it cannot be said to be the income arising to him as income from the firm and could not have been so included in the income of the spouse. It was also the case of the assessee that as a matter of fact, her husband had resigned from the Defence Department and joined the firm, New Majestic Talkies, in which the assessee was a partner on the salary of Rs. 1,000/-. Later on, he became a partner of the said firm after the death of one of the partners on May 25, 1973, when a fresh partnership deed was executed with effect from May 25, 1973, and his salary was enhanced from Rs. 1,000/- to Rs. 1,500/- per month. This was in addition to the share of the profits of the firm. Since the husband was an employee of the firm before he became a partner in the firm, he continued to receive salary, though enhanced, which arose out of an individual agreement of engaging the services of her husband for his technical know-how and not as a result of his membership of the firm. The theory of existence of an individual contract of employment was not accepted by the learned Appellate Assistant Commissioner for the assessment year 1975-76. However, in appeal against that order, the Tribunal accepted the contentions of the assessee and deleted the addition made on account of salary paid to the husband of the assessee by the firm. Following this decision for subsequent years, the Appellate Assistant Commissioner accepted the appeals of the assessee on this issue. 5. The Tribunal in its first order referred to clause 4 of the deed which was reproduced in the order, reads as under : "It is specifically expressed that the first party is a working partner, and for his services he shall be paid a remuneration at Rs. 5. The Tribunal in its first order referred to clause 4 of the deed which was reproduced in the order, reads as under : "It is specifically expressed that the first party is a working partner, and for his services he shall be paid a remuneration at Rs. 1,500/- p.m. The second party who uptill now was getting a remuneration of Rs. 501 shall now onwards get the remuneration at Rs. 1,000/- p.m." 6. It was further noticed that the finding recorded by the Appellate Assistant Commissioner as under : "No good reasons have been given by the Appellate Assistant Commissioner to come to the conclusion as to why the payment of salary can be attributed to the membership of the firm. Before becoming the partner of the firm, Shri Marfatia was an employee of the firm and he had been receiving the salary. In these circumstances, it cannot be said that Shri Marfatia started receiving salary only due to his becoming a partner in the firm. Shri Marfatia was already an employee in the firm and continued to receive salary from the firm even after becoming a partner. In these circumstances, payment of salary cannot be attributed to the membership of the firm. There is no connection between the payment of the salary and Shri Marfatia being a member of the firm. It cannot be said that if Shri Marfatia was not the partner of the firm, then he would not have received the salary. Shri Marfatia would have continued to receive salary irrespective of the fact whether he was taken in as a partner in the firm or not." 7. On reaching this conclusion, the learned Tribunal refused to consider the reason given by the Appellate Assistant Commissioner that a partner cannot be an employee of the firm at the same time by saying that the question whether or not a partner can be a servant of the firm is not a relevant question for consideration in this case. The only point for consideration as to whether the assessee started taking salary and whether he continued to receive the salary on account of his being the partner in the firm. The only point for consideration as to whether the assessee started taking salary and whether he continued to receive the salary on account of his being the partner in the firm. The Tribunal further stated as under : "We can come to the conclusion that no salary was given to Shri Marfatia on account of his being a member in the firm as he had been receiving the salary from before under a separate agreement from the firm. The only change which was made on May 25, 1973, is that the salary was enhanced from Rs. 1,000/- to Rs. 1,500/-. Under these circumstances, no connection or nexus is established between the payment of salary and Shri Marfatia's admission to the membership of the firm." With these findings, the addition of the share income determined as income from the firm of the spouse was modified by deleting Rs. 18,000/- which was referable to salary of Rs. 18,000/- paid to her husband and also interest paid to said N.K. Marfatia. 8. Learned counsel for the Revenue has contended that since the spouse of the assessee was paid salary directly under the terms of partnership deed, the fact that he was also an employee of the firm prior to his becoming a partner was wholly irrelevant. The fact remains that after he became a partner the salary was not being paid to him under any separate contract as suggested by the respondent. The reason for paying salary to a partner in addition to share in the profits and losses of the business of the firm is hardly relevant. Providing salary per month may only indicate that whether there are profits or not, the person, who is a partner of the firm, shall receive minimum amount. In the alternative, it is contended that if the salary paid to the spouse of the assessee cannot be treated as income directly and indirectly arising to him on account of membership of the firm, he having been paid salary by the firm in which the assessee was a partner it was still liable to be added to the income of the spouse under Section 64(1)(ii) of the Income-tax Act. 9. Mr. Ranka, learned counsel for the assessee, has urged that an artificial mode of computation of a person's share from the partnership firm under Section 67, cannot be imported in inviting the application of Section 64(1)(i). 9. Mr. Ranka, learned counsel for the assessee, has urged that an artificial mode of computation of a person's share from the partnership firm under Section 67, cannot be imported in inviting the application of Section 64(1)(i). Any income which is earned by a person on account of an individual contract independent of the terms of the partnership whether by way of salary or whether by way of interest on any sum which has not been contributed to the firm as capital, is not to be considered as income directly or indirectly arising from the membership of the firm. In support of this contention, learned counsel for the assessee has placed reliance on a number of decisions such as CIT v. Prem Bhai Parekh [1970] 77 ITR 27 (SC) ; Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33 (SC) ; CIT v. Pmhladrai Agarwala [1989] 177 ITR 398 (SC) ; Smt. Nripendrakumari Bhandan v. CIT [1976] 105 ITR 158 (Mad) and S. Srinivasan v. CIT [1967] 63 ITR 273 (SC) . He also placed reliance on the commentary of Kanga and Palkhivala's the Law and Practice of Income Tax, particularly the comment on income from "membership" in firm that the income received from the firm by the spouse or minor child under any other contract with the firm or in any other capacity, e.g., as a lender or landlord, is not includible in the other spouses or parent's total income. 10. Having given our careful consideration, we are of the opinion that the Tribunal in arriving at its conclusion has erred in law in not considering that the term of partnership deed was the only agreement which was produced to show that the spouse of the assessee became a partner of the firm with effect from May 25, 1973, and he will be receiving a salary of Rs. 1,500/- p.m. This amount of Rs. 1,500/-, he was not receiving under any separate individual contract. Once Mr. N. K: Marfatia, the husband of the assessee decided to enter into a partnership, agreement with the assessee along with others or alone, the question of continued status as an employee of the firm would not arise unless otherwise proved particularly when under the deed of partnership it was envisaged that one of the partners would be paid salary in addition to the share in the business of the firm. 11. 11. It may be pertinent to notice from the terms of clause 4 of the deed of partnership referred to above that ho mention was made of an existing contract of employment with the husband of the assessee for enhancing the salary payable to the spouse of the assessee under the agreement. It may be relevant to notice that there were two partners who were paid salary. In the case of the spouse of the assessee, no such stipulation is betrayed as shown in respect of other partner envisaging that he was uptill now paid salary of Rs. 1,500/- and he shall now be paid salary of Rs. 1,000/-. This further establishes beyond any doubt that once the husband of the assessee was inducted as partner of the firm, any amount payable under the deed arose directly under the terms of partnership and not under any earlier agreement. No evidence of continued agreement of employment of separate agreement of employment between the firm and the husband of the assessee in any other capacity came into existence. 12. In these circumstances, dilating on other issues whether the payment of salary is under individual agreement and could not have been included in the income of the assessee as income directly or indirectly arising to her husband from the membership, is not necessary. 13. In this connection, it may be noticed that Section 67 provides how the income of an assessee from the partnership firm is to be computed. While Clause (a) of Section 67(1) envisages the determination of profits or losses of firm for the purposes of allocating share in the ratio of profit/loss sharing as spelt out in the partnership deed for the purpose of computing the income or loss, which were to form part of the computation of such partner-assessee's share from the firm ; in the first instance under Sub-section (1)(a) of Section 67 for computing the allocable share in a profit or loss from the total income of the firm any interest, salary commission or other remuneration paid to a partner shall be deducted and the balance so ascertained shall be apportioned among the partners. Under Clause (b) if the "allocated result" in Clause (a) is a profit, to that sum any interest, salary, commission or other remuneration paid to each partner, if any, shall be added to such apportioned balance under Clause (a). Under Clause (b) if the "allocated result" in Clause (a) is a profit, to that sum any interest, salary, commission or other remuneration paid to each partner, if any, shall be added to such apportioned balance under Clause (a). The aggregate of the allocated balance and addition made under Clauses (a) and (b) is to be treated as the partner's share in the income of the firm. Likewise, where the share apportioned under Clause (a) is loss, any salary, interest, commission or other remuneration paid to the partner is adjusted against the said allocated balance to find the partner's share in the income of the firm. Thus finding the partner's share in the income of the firm, such result is to be included in the total income of the partner under the same head or heads as such income is taxed in the hands of the firm. 14. Sub-section (2) of Section 67 envisages that the share of a partner in the income or loss of the firm as computed under Sub-section (1) shall, for the purposes of assessment, be appropriated under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income. 15. This makes it clear that addition to the share of a partner in the firm under Section 67(1)(a) on account of salary, interest paid to him is not treated as income from any source other than as share by way of income from the firm which arises to him. That is to say, salary added to the share of profit and treated as income from share in the firm in the hands of the partner in his own assessment and is to be assessed as his share in income of the firm under the same head under which the income of the firm has been assessed. Thus, salary and interest paid to a partner becomes an integral part of his share of income from firm and is to be so treated also for the purposes of Section 64(1)(i). 16. In these circumstances, we answer the question referred to us in favour of the Revenue and against the assessee and hold that the salary of Rs. Thus, salary and interest paid to a partner becomes an integral part of his share of income from firm and is to be so treated also for the purposes of Section 64(1)(i). 16. In these circumstances, we answer the question referred to us in favour of the Revenue and against the assessee and hold that the salary of Rs. 18,000/- paid to the husband of the assessee by the firm in which she is a partner was includible in her hands under Section 64(1)(i) of the Income-tax Act, 1961, and the Tribunal was not justified in holding otherwise. 17. There shall be no orders as to costs.Reference Answered. *******