1981 (1) TMI 133 - AT - Income Tax

Summary

Issues Involved:

1. Legality of the CIT's order under Section 263 of the IT Act, 1961.
2. Applicability of Section 64(1)(i) of the IT Act, 1961.
3. Nature of the activities carried out by the firm - whether they constitute a profession or a business.

Issue-wise Detailed Analysis:

1. Legality of the CIT's Order under Section 263 of the IT Act, 1961:

The primary contention of the assessee was that the CIT's order was "illegal and ab initio void" because it did not record that the CIT was satisfied that the ITO's orders were erroneous and prejudicial to the revenue. The CIT must bring necessary facts on record and provide a judicial finding that the ITO's orders were erroneous and prejudicial to the revenue to invoke Section 263. The assessee argued that this requirement was not met, rendering the CIT's order invalid.

2. Applicability of Section 64(1)(i) of the IT Act, 1961:

The CIT's notice under Section 263 suggested that the share of profit earned by Dr. K.S. Gill from the partnership should have been included in Dr. Mrs. D.K. Gill's income under Section 64(1)(i). The assessee contended that Section 64(1)(i) applies to income from a business, not a profession. The assessee argued that both partners were qualified doctors carrying on a profession, not a business. The definition of "business" under Section 2(13) and "profession" under Section 2(36) of the IT Act were distinct, and the income from a profession should not be clubbed under Section 64(1)(i). The assessee supported this with references to legal texts and previous judgments.

3. Nature of the Activities Carried Out by the Firm - Profession or Business:

The CIT argued that the activities of M/s. Gills Clinic extended to business activities and relied on the Madras High Court judgment in P. Vadamalayan vs. CIT and the Supreme Court judgment in Hospital Mazdoor Sabha. The assessee countered that the partnership was formed to provide better medical assistance and was purely professional. The partnership deed described the activities as "business," but the assessee argued that "business" in the context of the Partnership Act includes "profession." The assessee's counsel cited various judgments to support the argument that the activities carried out were professional, not business. The assessee also pointed out that the ITO had consistently assessed the firm's income as professional income in previous years.

Conclusion:

The Tribunal concluded that the CIT's order could not stand. The CIT did not clearly show that Dr. Mrs. D.K. Gill's income, excluding the share income, was greater than Dr. K.S. Gill's income. Additionally, the CIT did not disturb the ITO's finding in the firm's assessment that the firm was carrying on a profession. The Tribunal noted that the partnership deed's reference to "business" should be interpreted in light of the Partnership Act, where "business" includes "profession." The Tribunal found that the activities carried out by the firm were professional, not business, and the provisions of Section 64(1)(i) were not applicable. The Tribunal allowed the appeals and canceled the CIT's order.