1983 (9) TMI 139 - AT - Income Tax

Summary

Issues:
Assessment of interest income in the hands of the firm versus individual partners.

Analysis:
The appeal before the Appellate Tribunal ITAT Hyderabad-A concerned the assessment year 1981-82 of a registered firm with seven partners, each holding a 1/7th share. The Income Tax Officer (ITO) included interest income of Rs. 7,197 in the firm's assessment, originating from fixed deposits of Rs. 1,50,000. The firm argued that the deposits were the property of all partners, and the interest should be taxed proportionately to each partner. The ITO contended that since the deposits were made from firm funds, the interest belonged to the firm.

Upon appeal, the Commissioner of Income Tax (Appeals) upheld the assessment, rejecting the firm's argument that individual partners had declared their share of interest in their tax returns. The firm then presented its case before the Tribunal, highlighting that two fixed deposits were involved, with receipts in the names of the partners, not the firm. The partners' capital account balances covered their respective shares in the deposits, and interest was declared in their tax returns for the relevant years.

The Departmental Representative argued that the deposits were purchased from firm funds and were reflected in the firm's balance sheets before being transferred to individual partners. The Tribunal examined Section 14 of the Indian Partnership Act, which presumes property acquired with firm money belongs to the firm unless a contrary intention is proven. Despite the deposits initially appearing in the firm's balance sheets, the partners had sufficient funds and declared their shares in their tax returns, indicating an intention that the deposits were their individual property. The Tribunal concluded that the interest income should be excluded from the firm's assessment, considering the partners' actions and intentions.

In light of the evidence and legal principles, the Tribunal allowed the appeal, ruling in favor of the firm and directing the exclusion of the interest income from the firm's assessment for the relevant year.