1977 (7) TMI 21 - HC - Income Tax

Act Of 1922 Act Of 1961 Business Income Earned Income Relief Income Tax Act Interest On Securities

Issues Involved:
1. Classification of interest received by a dealer in Government securities.
2. Legality of apportionment of firm's income under different heads for assessment purposes.
3. Classification of share income of an active partner from a firm dealing in Government securities and entitlement to earned income relief.

Detailed Analysis:

Issue 1: Classification of Interest Received by a Dealer in Government Securities
The first issue pertains to whether the interest received by a dealer in Government securities, held as stock-in-trade, should be classified as business income under Section 10 or interest income under Section 8 of the Indian Income Tax Act, 1922. The court concluded that the interest must be classified as interest income assessable under Section 8. This conclusion was based on the Supreme Court's decision in United Commercial Bank Ltd v. CIT, which established that income from "interest on securities" falls under Section 8 and not Section 10, even if the securities are part of the trading assets of a business.

Issue 2: Legality of Apportionment of Firm's Income Under Different Heads
The second issue concerns whether the apportionment of a firm's total income under different heads (business income and interest income) in the individual assessments of partners is legal and valid. The court noted that the Income Tax Officer (ITO) had apportioned the firm's income under two heads and denied earned income relief to the partners on the interest income, treating it as not business income. The court found that the ITO did not follow the correct procedure under Section 16(1)(b) of the Act, which requires the aggregate income to be considered as the partner's share from the firm, assessable under Section 10. The court emphasized that the ITO's method of apportionment was influenced by Section 67(2) of the 1961 Act, which was inapplicable to this case. Consequently, the court held that the apportionment done by the ITO was neither legal nor valid.

Issue 3: Classification of Share Income of an Active Partner and Entitlement to Earned Income Relief
The third issue involves whether the share income of an active partner from a firm dealing in Government securities should be classified as business income under Section 10, thereby entitling the partner to earned income relief under Section 15A. The court observed that the share income received by a partner from the firm should be regarded as business income assessable under Section 10. This conclusion was supported by precedents such as Arvind N. Mafatlal v. ITO and the Supreme Court's decision in Ramniklal Kothari's case, which held that share income from a firm is business income. The court rejected the revenue's contention that the principle of apportionment under different heads was implicit in the 1922 Act, noting that Section 67(2) of the 1961 Act could not be retrospectively applied. The court referred to the Madras High Court's decision in M. CT. Muthia v. CIT, which held that Section 67(2) was neither clarificatory nor declaratory and did not have retrospective effect. Therefore, the court concluded that the individual partners were entitled to earned income relief under Section 15A.

Conclusion:
- Question 1: The interest received by a dealer in Government securities is interest income assessable under Section 8.
- Question 2: The apportionment made by the ITO under different heads was neither legal nor valid.
- Question 3: The share income of an active partner from the firm is business income assessable under Section 10, entitling the partner to earned income relief under Section 15A.

The department was ordered to pay the costs of the reference.

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