1973 (2) TMI 43 - HC - Income Tax

Assessee derived income from property as also from other sources. Besides, he was one of the two partners in a firm - That firm carried on money-lending business and also derived income from its house properties - Whether the carried forward business loss of a partner can be set-off against share income from a firm - Whether, on the facts and in the circumstances of the case, the assessee s share income from property in the registered firm of S.Rm.M. Ct.M. was income from property or profits and gains of business - In any view of the matter, we are not inclined to hold that the share income derived by the assessee in this case is not a business income. The result is that the assessee s share income has to be assessed under the head profits and gains of business and the question is answered accordingly.

Summary

Issues Involved:
1. Classification of the assessee's share income from the firm's property.
2. Applicability of Section 67(2) of the Income-tax Act, 1961.
3. Nature of a partner's interest in the partnership property.
4. Classification of share income under the heads of income as per Section 6 of the Indian Income-tax Act, 1922.
5. Revenue's argument on the classification of share income under Section 23(5).

Issue-wise Detailed Analysis:

1. Classification of the Assessee's Share Income from the Firm's Property:
The primary issue was whether the assessee's share income from the property owned by the firm should be classified as "income from property" or "profits and gains of business." The Income-tax Officer and the Appellate Assistant Commissioner treated the income as property income, while the assessee contended it should be considered business income. The Tribunal upheld the revenue's view, stating that the income retains its character in the hands of the partner.

2. Applicability of Section 67(2) of the Income-tax Act, 1961:
The Tribunal's reliance on Section 67(2) was challenged. The court clarified that even if Section 67(2) is clarificatory, it cannot have retrospective operation. The court noted that Section 67(2) directs the apportionment of the partner's income under various heads as determined for the firm, but this provision cannot apply retrospectively to the assessment years in question.

3. Nature of a Partner's Interest in the Partnership Property:
The court referred to the Supreme Court's decision in Narayanappa v. Bhaskara Krishnappa, which established that a partner has no individual property in specific assets of the firm. The partner's right is to receive a share of the profits during the partnership's subsistence and a share in the net assets upon dissolution. Therefore, the partner cannot be considered a joint owner of the firm's property, and the income derived from the firm's property cannot be treated as the partner's property income under Section 9.

4. Classification of Share Income under the Heads of Income as per Section 6:
The court rejected the revenue's contention that the partner's share income retains the same character as the firm's income. The share income should be classified under one of the heads of income set out in Section 6 for computing the total income. The court referred to the Supreme Court's decision in Commissioner of Income-tax v. Ramniklal Kothari, which held that the share income of a partner is "profits and gains of business" and not income from other sources. The court also cited P.M. Muthuraman Chettiar v. Commissioner of Income-tax, which supported the view that the share income of a partner is business income.

5. Revenue's Argument on the Classification of Share Income under Section 23(5):
The revenue argued that the share income should be considered a head sui generis and not fall under any specific head of income. The court rejected this argument, stating that Section 23(5)(a)(ii) merely enables the inclusion of a partner's share income in his total income but does not create an independent head of income. The share income must be classified under the heads of income referred to in Section 6 for computation purposes. The court concluded that the share income of the partner should be treated as business income, considering the definition of "partnership" and the nature of the partner's association with the firm.

Conclusion:
The court held that the assessee's share income from the firm should be assessed under the head "profits and gains of business." The court answered the question in favor of the assessee and awarded costs to the assessee, with counsel's fee set at Rs. 250.