1981 (10) TMI 1 - HC - Income Tax

Summary

Issues Involved:
1. Allocation of total income of a registered firm between partners and minors admitted to the benefits of the partnership.
2. Validity of the allocation of profits to minors in accordance with section 67(2) of the Income-tax Act, 1961.
3. Competence of the firm to question the allocation of share income in an appeal against its assessment.

Issue-wise Detailed Analysis:

1. Allocation of Total Income of a Registered Firm Between Partners and Minors Admitted to the Benefits of the Partnership:

The primary issue concerns the allocation of the components of the total income of a registered firm between the partners and the minors admitted to the benefits of the partnership for the assessment year 1966-67. The firm had income under the head "other sources" and "interest income" but sustained losses in business and speculation. The Income-tax Officer allocated the entire share of business and speculation losses to the two major partners, excluding the minors from these losses, as per the partnership deed which stipulated that minors are not liable for any part of the losses. The firm contended that the allocation should be done after setting off the business and speculation losses against the income from other sources, but this was rejected by the Income-tax Officer and upheld by the Tribunal.

2. Validity of the Allocation of Profits to Minors in Accordance with Section 67(2) of the Income-tax Act, 1961:

Section 67(2) of the Income-tax Act, 1961, mandates that the share of a partner in the income or loss of the firm must be apportioned under various heads of income in the same manner as the income or loss of the firm has been determined under each head. The court noted that the minors, admitted only to the benefits of the partnership, were not to be burdened with any share of the losses incurred by the firm. The apportionment made by the Income-tax Officer, excluding minors from the business and speculation losses, was in accordance with the partnership terms and the mandatory provisions of section 67(2). The firm's argument for a global apportionment of net income was rejected as it would improperly burden minors with losses, contrary to partnership law and section 67(2).

3. Competence of the Firm to Question the Allocation of Share Income in an Appeal Against Its Assessment:

The second question addressed whether the firm could challenge the allocation of share income in an appeal against its assessment. The Tribunal had held that the firm could not question the allocation, as it was a matter for individual partners. However, the court clarified that section 247 of the Income-tax Act, 1961, allows any partner to appeal against the firm's assessment and the apportionment of income between partners. The Tribunal's view was based on a misunderstanding of section 247, which explicitly permits the firm to challenge the allocation of income among partners in an appeal against the firm's assessment. The court rejected the Department's argument that allocation issues should be individually contested by partners, noting that such matters could affect all partners and should be addressed comprehensively in an appeal against the firm's assessment.

Conclusion:

The court affirmed the Tribunal's decision on the first issue, holding that the allocation of profits to minors was valid and in accordance with section 67(2) of the Income-tax Act, 1961. On the second issue, the court disagreed with the Tribunal, holding that the firm was competent to question the allocation of share income in an appeal against its assessment. The second question was answered in the negative and against the Department, with no order as to costs.