2006 (2) TMI 124 - HC - Income Tax

Previous year - (i) Whether Tribunal is right in law in holding that the share income of the assessee from the firm for the assessment years 1979-80 and 1980-81 should be taken as had arisen to the firm as on the previous year ended on March 31,1978, and March 31, 1979? and (ii) Whether Tribunal s direction to adopt the share of income firm for the assessment years 1979-80 and 1980-81 as derived by the firm on March 31,1978, and March 31, 1979, respectively is in consonance with the spirit of section 3 ? - Tribunal was not right in holding that notwithstanding the previous year with reference to which the firm was assessed being the financial year, the share income of the assessee as a partner in the firm was required to be assessed with reference to the calendar year as the previous year . - references are answered in favour of the Revenue and against the assessee.

Summary

Issues:
1. Interpretation of the Income-tax Act regarding the assessment of share income from a partnership firm.
2. Determining the relevant previous year for assessing the share income of a partner in a firm.

Analysis:
The judgment revolves around the interpretation of the Income-tax Act concerning the assessment of share income from a partnership firm. The court was presented with two questions of law regarding the assessment years 1979-80 and 1980-81. The primary issue was whether the share income of the assessee from the firm should be considered as arising in the previous year ended on March 31, 1978, and March 31, 1979. The second issue questioned the Appellate Tribunal's direction to adopt the share of income from the firm as derived on specific dates. The assessee, a private limited company owning rubber plantation, formed a partnership firm engaged in tea and coffee plantation. The discrepancy arose as the assessee's accounting year was the calendar year, while the firm's accounting year was the financial year.

The Income-tax Officer provisionally included the share income subject to rectification after the firm's assessment. The Commissioner of Income-tax (Appeals) upheld this action, leading to an appeal by the assessee. The Tribunal ruled that only income falling within the calendar year should be taxed, directing the Income-tax Officer to recompute the income accordingly. The Revenue challenged this decision, citing a previous judgment related to the assessee's case for other assessment years.

The court referred to a previous case where the interpretation of section 3(1)(f) of the Income-tax Act was discussed. It was established that the share income of a partner in a firm should be computed for the same period as the firm's income for tax assessment purposes. The court clarified that this provision only pertains to the partner's share income and not other sources of income. Therefore, the previous year followed by the firm should be used to assess the partner's share income. Applying this interpretation to the present case, the court held that the Tribunal erred in assessing the share income based on the calendar year instead of the financial year followed by the firm.

In conclusion, the court ruled in favor of the Revenue, stating that the share income of the assessee from the partnership firm should be assessed based on the firm's previous year. The judgment reaffirmed the principle that the previous year for assessing a partner's share income aligns with the firm's accounting year, not the individual partner's calendar year.