2000 (1) TMI 21 - HC - Income Tax

Summary

Issues:
1. Whether rental income should be treated as the income of the firm or the partners in their individual capacity.

Analysis:
The judgment dealt with the issue of whether rental income from leased premises should be considered as the income of a partnership firm or the individual partners. The partnership firm had leased premises to NABARD, with rental income initially disclosed by the firm but later claimed to belong to the partners directly due to an amendment in the partnership deed. The Assessing Officer, appellate authority, and Tribunal all concluded that the change in the partnership deed was a subterfuge to reduce the firm's income, with NABARD not accepting the new arrangement. The authorities found that the rent was paid to the firm, and the income was subsequently diverted to the partners, leading to the conclusion that the change in the partnership deed did not alter the nature of the income received.

The appellant argued that beneficial ownership, not legal ownership, is crucial for tax purposes, citing relevant case law. However, the authorities found that the property distribution among partners was not due to retirement or dissolution of the firm but an appropriation of income. The Supreme Court's judgment in a similar case emphasized that the person receiving income in their own right is liable for tax, irrespective of legal ownership. The Court highlighted that the registered owner cannot evade tax liability if the income is actually received by another party. In the present case, NABARD continued as the lessee, not recognizing the partners as lessors, and the rental income was initially received by the partnership firm, justifying the rejection of the diversion of income claim.

Ultimately, the Court dismissed the appeal, emphasizing that the judgment in a previous case regarding ownership and tax liability did not apply to the current scenario. The decision reaffirmed that the rental income from the leased premises should be treated as the income of the partnership firm, not the individual partners, based on the facts and legal principles discussed in the judgment.