1975 (7) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Classification of share income from partnership firms as business income or income from other sources.
2. Applicability of section 67(2) of the Income-tax Act, 1961, to the assessment year 1958-59.
3. Interpretation of section 16(1)(b) and section 23(5)(a) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Classification of Share Income from Partnership Firms:
The primary issue was whether the sums of Rs. 61,150 and Rs. 31,971, being the dividend income earned and assessed in the hands of the respective firms under the head "other sources," should be treated as income from "business, profession or vocation" in the hands of the assessee-partner or as income from "other sources" for the assessment year 1958-59. The Tribunal, relying on the decision in Arvind N. Mafatlal v. Income-tax Officer [1957] 32 ITR 350 (Bom), held that the amounts dealt with as dividend income and assessed in the hands of the firm under the head "other sources" should have been treated as business income. The Tribunal concluded that the share income of a partner should be assessed under the head "Business, profession or vocation."

2. Applicability of Section 67(2) of the Income-tax Act, 1961:
The department argued that section 67(2) of the Income-tax Act, 1961, clarified the existing practice followed by the revenue prior to the enactment of the 1961 Act. The counsel for the revenue submitted that the nature of the firm's income does not change in the hands of the partner, and the Income-tax Officer should consider the different sources of the firm's income in the partner's assessment. The assessee's counsel contended that section 67(2) introduced a new provision and brought a change in the prevailing law. However, the court observed that the introduction of section 67(2) did not change the law but codified the prevailing practice.

3. Interpretation of Section 16(1)(b) and Section 23(5)(a) of the Indian Income-tax Act, 1922:
The court reviewed various judgments to interpret the relevant provisions of the Indian Income-tax Act, 1922. In P. M. Muthuraman Chettiar v. Commissioner of Income-tax [1957] 31 ITR 61 (Mad), it was held that the share income of a partner falls under the head "profits and gains of business" and is not "income from other sources." Similarly, in Commissioner of Income-tax v. Ramniklal Kothari [1969] 74 ITR 57 (SC), the Supreme Court held that the share in the profits of a partnership received by a partner is "profits and gains of business" carried on by him and should be computed under section 10 of the 1922 Act. The court concluded that the share income of a partner should be treated as income derived from "profits and gains of business," and accordingly, assessable under section 10 of the Act.

Conclusion:
The court upheld the Tribunal's decision, stating that the sums of Rs. 61,150 and Rs. 31,971 are income from business in the hands of the assessee. The question was answered in favor of the assessee, and no order as to costs was made.