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Allocation of profit in a partnership firm following a change in the constitution of the firm. Analysis: The case involved a partnership firm, M/s. N. S. Corporation, which had 8 partners initially but changed to 7 partners after one partner passed away. The issue was regarding the allocation of profits between the partners for two periods: before and after the change in the firm's constitution. The Income Tax Officer (ITO) computed the total income of the firm and allocated profits to the partners for the two periods based on the tax payable. The assessee, one of the partners, appealed to the Appellate Authority Commissioner (AAC) contending that the total tax payable by the firm should be deducted from the income for both periods. However, the AAC upheld the ITO's decision. The matter was further appealed to the Tribunal, where it was argued that the allocation made was incorrect. The Tribunal held that the tax payable by the firm should be deducted from the total income, and the remaining amount should be apportioned among the partners as per the law. The key legal provisions discussed in the judgment were Section 67(1)(a) and Section 187(1) of the Income Tax Act, 1961. Section 67(1)(a) outlines the computation of a partner's share of profit or loss in a firm, including the deduction of income tax payable by the firm from its total income. Section 187 deals with the assessment of a firm following a change in its constitution. The judgment emphasized that when there is a change in the firm's constitution, the assessment should be made based on the firm's composition at the time of assessment. The proviso to Section 187(1) specifies the apportionment of income among partners based on their entitlement during the previous year. The petitioner's counsel argued that the proviso to Section 187 would only apply if there was a change in the firm's constitution at the beginning of the accounting year, not in the middle of the year. However, the court disagreed, stating that the law mandates assessment based on the firm's composition at the time of assessment. The court held that partners, even if part of the previous year, are entitled to a share of income proportionate to their period of partnership. The correct method, as per the court, was to deduct the tax payable by the firm from its total income and then apportion the remaining amount among the entitled partners. The Tribunal's decision to uphold the allocation of profits by the ITO was deemed correct, as it aligned with the legal provisions and principles discussed. In conclusion, the court answered the question referred by the Income-tax Appellate Tribunal in the affirmative, stating that the allocation of profits in M/s. N. S. Corporation following the change in the firm's constitution was in accordance with the law. The judgment provided a detailed analysis of the legal provisions governing the allocation of profits in a partnership firm and emphasized the importance of following the prescribed methods for computing and apportioning income among partners in such cases.
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