1985 (1) TMI 74 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee-partnership firm should be taxed at the rates applicable to professional firms.
2. Whether the income derived by the firm can be considered as income derived from a profession carried on by it.

Issue-wise Detailed Analysis:

1. Taxation Rates Applicable to Professional Firms:

The primary issue for consideration was whether the Commissioner (Appeals) erred in law and on facts in holding that the assessee-partnership firm is a professional firm deriving income from profession and should be taxed at the rates applicable to professional firms. The firm in question was working as analysts for pharmaceuticals, and the income was primarily from analysis fees. The Income Tax Officer (ITO) had disallowed the claim of the assessee, holding that the income earned by the firm is business income because only two out of six partners were professionally qualified, while the remaining partners merely contributed capital and were not involved in the professional activities.

The Commissioner (Appeals) allowed the claim of the assessee, considering the nature of the income derived as a professional activity. However, the revenue appealed against this decision.

2. Nature of Income Derived:

The learned departmental representative argued that the income was earned mainly by the qualified employees and not by the partners, thus distinguishing between a firm constituted by professionals and one constituted by non-qualified persons employing qualified persons to run the business. The ITO's view was that the income earned by the firm should be classified as business income.

In contrast, the assessee's counsel contended that the nature of the business was professional, and the income should be taxed accordingly. The argument was that the firm should be considered a professional firm based on the nature of its activities, regardless of the qualifications of all partners.

Tribunal's Findings:

The Tribunal considered the rival submissions and the material on record. It was undisputed that only two partners were qualified, and the remaining four partners contributed capital but did not participate in the professional work. The Tribunal examined whether the income earned by the firm could be considered professional income when the majority of the partners were not qualified.

Relevant Case Laws:

The Tribunal referred to several case laws to determine the nature of income:

- P. Stanwill & Co. v. CIT [1952] 22 ITR 316: The Allahabad High Court held that the income of a firm depended mainly on the personal qualifications of the partners.
- Dr. P. Vadamalayan v. CIT [1969] 74 ITR 94: The Madras High Court held that running a nursing home by a doctor was part of his profession and could not be classified as a business.
- CIT v. Dr. K.K. Shah [1982] 135 ITR 146: The Gujarat High Court distinguished between business and profession, holding that income from professional activities by qualified medical practitioners should not be clubbed with business income.

The Tribunal concluded that there is a difference between a firm constituted by professionals earning income by their qualifications and a firm constituted by non-professionals or partly professionals and partly non-professionals. In the latter case, it cannot be said that the income is earned by a professional firm.

Separate Judgments:

The Accountant Member disagreed with the Judicial Member's decision. The Accountant Member argued that the nature of the activity carried on should determine the status of the firm, not the qualifications of the partners. He pointed out that the statute does not require all partners to be professionally qualified for the firm to be eligible for a lower tax rate. He provided examples to support his view that a firm could have a mix of professional and non-professional partners and still qualify for a lower tax rate if the nature of the activity is professional.

Reference to Third Member:

Due to the difference of opinion between the members, the matter was referred to the President of the Tribunal under section 255(4) of the Income-tax Act, 1961. The President sided with the Accountant Member, holding that if even one partner has professional qualifications and carries on a professional activity for and on behalf of all the partners, the income should be considered derived from the profession carried on by the firm.

Conclusion:

The Tribunal ultimately held that the assessee-partnership firm should be taxed at the rates applicable to professional firms. The income derived by the firm was considered as income from a profession carried on by it, despite not all partners being professionally qualified. The emphasis was on the nature of the activity carried on by the firm rather than the qualifications of all partners.