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Issues Involved:
1. Apportionment of income under Section 23(5)(a) of the Income-tax Act. 2. Computation of assessable income for the purposes of the Indo-Pakistan Agreement. 3. Legality of adding losses incurred in Pakistan to the assessee's income. Issue-wise Detailed Analysis: 1. Apportionment of income under Section 23(5)(a) of the Income-tax Act: The primary issue is whether the Income-tax authorities can compute the assessee's income from the flour mills business in Amritsar separately at Rs. 75,549 instead of the apportioned Rs. 56,985. The assessee was a partner in the registered firm Dhanpat Mal Jawala Dass, with a thirteen-anna share. The firm's total income was computed at Rs. 92,984, with an excess profits tax refund of Rs. 4,261 and a loss of Rs. 27,109 from business in Pakistan, resulting in a net income of Rs. 70,136. The Income-tax Officer apportioned this income under Section 23(5)(a), resulting in Rs. 56,985 for the assessee and Rs. 13,151 for the other partner. 2. Computation of assessable income for the purposes of the Indo-Pakistan Agreement: The Income-tax Officer added the share of the loss incurred in Pakistan (Rs. 18,564) to the assessee's income, resulting in a total of Rs. 75,549. The assessee contended that once the income is determined under Section 23(5)(a), no further additions are permissible. Section 23(5)(a) specifies that in the case of a registered firm, the total income of each partner, including their share of the income, profits, and gains, shall be assessed individually. The assessee argued that the Income-tax Officer's addition effectively increased the total income of the partnership, which is not allowed by law. 3. Legality of adding losses incurred in Pakistan to the assessee's income: The Tribunal upheld the Income-tax Officer's decision, but the assessee referred the matter to the High Court. The High Court referenced the Bombay High Court's decision in Commissioner of Income-tax v. Dwarkadas Vassanji, agreeing that once a registered firm's total income is assessed, it is not permissible to separately assess a partner on income not forming part of the firm's total income. The High Court also cited the Privy Council's decision in Seth Badridas Daga and Another v. Commissioner of Income-tax, which held that the liability to pay tax under Section 23(5)(a) is not limited by Section 4's exemptions. The High Court concluded that the Department cannot add to the income of the assessee anything that would increase the income of the partnership and, consequently, the assessable income of the partner. The Indo-Pakistan Agreement aimed to avoid double taxation and did not intend to amend Section 23(5)(a) or impose additional burdens on the assessee. The agreement was meant to provide relief, not increase the assessable income. Judgment: The High Court answered the question in favor of the assessee, stating that the income for taxation purposes should be Rs. 56,985 and not Rs. 75,549. The court emphasized that the Department's approach of adding Rs. 18,564 to the assessee's income was not permissible under the law.
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