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TMI Blog1992 (12) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... O that their interest incomes from the partnership firm of M/s. Maliram Puranmal Co. had the character of business income being part of their share income and as such was exempt from tax yet the ITO did not accept such contention. He was of the view that the benefit of exemption from tax under section 80HHC, which had once been extended to the partnership firm could not be available to the partners in the computation of their incomes. In appeals, the learned DC (A) endorsed the view of the Assessing Officer and held that since the firm of M/s. Maliram Puranmal Co. had already got a deduction under section 80HHC, any other person deriving interest income from the firm could not again be allowed deduction under section 80HHC of the Act. He accordingly dismissed assessees appeals giving thus thereby rise to the present appeals by them. 3. Shri N.M. Ranka, Advocate appearing for the assessee appellants vehemently urged that as per provisions contained in section 67(1)(a)(b) read with sections 158 and 247 and the newly amended provisions of section 28(5) the interest received by the assessee from the partnership firm had the character of business income and was part of the their s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction allowed to the firm under various sections would be available to the partners of the firm in the computation of their total incomes which would be inclusive of the share incomes from their firm. Following such instruction of the CBDT, the Assessing Officer in the case of Smt. Meera Katta had rectified his assessment order and had deleted the addition made in respect of the exempted share profits of the partners from their firm. The present appeals may thus conveniently be disposed of in favour of the assessees on the strength of the letter of the CBDT referred to above. 8. However, I find ample force in the arguments of Shri Ranka. It is the settled position of law that a firm is not a legal person even though it has some attributes of personality. In income-tax law a firm is a unit of assessment by special provision but, as has been held by the Supreme Court in the case of R.M. Chidambaram Pillai, it is not a full person. That being the legal position, there cannot be a contract of service, in contract law, between a firm and one or more of its partners. In fact payment of salary to a partner would represent a special share of profits. Thus the salary paid to a partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the firm, after deduction of any interest, salary, commission or other remuneration payable to another partner. Hence, while interest paid to the partner of a firm must be added to his share of profit in the computation of his total income by virtue of section 16(1)(b) of the 1922 Act, there is no provision in the Act for deduction of any interest paid by the partner to the firm in like manner. Even section 67(3) of the Income-tax Act, 1961, which gives statutory recognition to the principle judicially recognised that a partner is entitled to a deduction, in computing his share in the firm's profits, in respect of interest paid by him on the capital borrowed for the purpose of investment in the firm, relates only to interest paid on the capital borrowed for the purpose of investment in the firm and has no application to a case where a partner claims a deduction in respect of interest paid by him to the firm." In the above mentioned case the assessee firm had debited the interest to the accounts of the two partners and the interest so debited had been transferred to the interest account and the resultant sum had gone into the Profit and loss Account. The Tribunal had held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, commission or other remuneration paid to any partner in respect of the previous year, (and, where the firm is a registered firm or an unregistered firm assessed as a registered firm under clause (b) of section 183), the income-tax, if any, payable by it in respect of the total income of the firm and the balance ascertained and apportioned among the partners; (b) where the amount apportioned to the partner under clause (a) is a profit, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be added to that amount, and the result shall be treated as the partner's share in the income of the firm; (c) where the amount apportioned to the partner under clause (a) is a loss, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the partner's share in the income of the firm. (3) Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall, in computing his income chargeable under the head "Profits and gains of business or professi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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