1992 (12) TMI 79 - AT - Income Tax

A Partner, Business Income, Export Business, Interest Income, Partnership Firm, Share Income

Summary

Issues Involved:
1. Taxability of interest income received by partners from the partnership firm.
2. Applicability of section 80HHC exemption to partners' interest income.
3. Interpretation of the character of income received by partners from the firm.
4. Application of CBDT Circular and relevant case law.

Detailed Analysis:

1. Taxability of Interest Income Received by Partners from the Partnership Firm:

The primary issue was whether the interest income received by the assessees from the partnership firm should be taxed. The Assessing Officer noted that the assessees received interest on their capital invested in the firm but did not declare this interest income for tax purposes. The assessees contended that this interest income had the character of business income and was part of their share income from the firm, thus exempt from tax. However, this contention was initially rejected by the Income-tax authorities.

2. Applicability of Section 80HHC Exemption to Partners' Interest Income:

The Income-tax authorities held that since the partnership firm had already claimed a deduction under section 80HHC, the partners could not claim the same deduction on their interest income. The learned DC (A) upheld this view, leading to the present appeals by the assessees.

3. Interpretation of the Character of Income Received by Partners from the Firm:

The judgment extensively discussed the character of income received by partners from the firm. It referenced several Supreme Court cases, including R.M. Chidambaram Pillai and Ramniklal Kothari, which established that the income received by partners retains the same character as it had in the hands of the firm. The argument was that the interest income should be treated as business income, similar to the firm's income.

4. Application of CBDT Circular and Relevant Case Law:

The judgment cited a CBDT Circular clarifying that deductions allowed to a firm under various sections are also available to the partners in the computation of their total income. This circular was pivotal in deciding that the interest income received by the assessees from the firm should not be subjected to tax. The case law cited, including the Supreme Court decisions and High Court rulings, supported the view that the income retains its character when received by the partners.

Conclusion:
The judgment concluded that the interest income received by the assessees from the partnership firm should not be subjected to tax. It relied on the CBDT Circular and relevant case law to establish that the income retains its character as business income and is exempt under section 80HHC. The appeals were allowed, and the interest income was not to be included in the computation of the assessees' taxable income.