1969 (3) TMI 1 - SC - Income Tax

Firm - share income - expenses incurred by the assessee (who was not carrying on any independent business of his own) in earning income from various firms in which he was a partner were allowable in law as deductions - Revenue appeal dismissed

Summary

Issues:
1. Allowability of expenses incurred by a partner in earning income from various firms.
2. Interpretation of provisions under section 10(2) of the Income-tax Act, 1922.
3. Application of legal principles regarding deductions for partners in registered firms.

Detailed Analysis:
The case involved the respondent, a partner in four different firms, who declared his share of profits and claimed various expenses as deductions for the assessment years 1955-56 and 1956-57. The Income-tax Officer disallowed most of the claimed expenses, stating that the respondent did not carry on any independent business and that the expenses should have been claimed in the firms' accounts. The Appellate Assistant Commissioner upheld this decision, but the Income-tax Appellate Tribunal remanded the cases for further examination of the nature of the expenses claimed by the respondent.

The Tribunal referred the question of whether expenses incurred by a partner in earning income from various firms are allowable as deductions to the High Court of Patna. The High Court ruled in favor of the respondent, leading to the Commissioner of Income-tax filing appeals in the Supreme Court. The Supreme Court, in its judgment, clarified that the share of profits received by a partner in a registered firm is considered business income and is liable to be computed under section 10 of the Income-tax Act, 1922. The Court emphasized that deductions under section 10(2) are admissible for partners to determine their taxable income.

The Court cited various legal precedents to support its decision. In cases like Shantikumar Narottam Morarji v. Commissioner of Income-tax and Basantlal Gupta v. Commissioner of Income-tax, the courts held that partners can claim deductions for necessary expenditures incurred to earn profits from partnership businesses. Additionally, the Court referred to Jitmal Bhuramal v. Commissioner of Income-tax, where a Hindu undivided family's claim for salary paid to its members for business purposes was allowed as a deduction under section 10(2)(xv).

The Court disagreed with the interpretation in Iswardas Subhkaran v. Commissioner of Income-tax, where salary paid to a munim was not considered a permissible deduction. The Court emphasized that expenses necessary for earning business income, including salaries and other remunerations, are deductible for partners in determining their taxable income. Ultimately, the Court dismissed the appeals filed by the Commissioner of Income-tax, upholding the High Court's decision in favor of the respondent and awarding costs against the Commissioner.