TMI Blog1977 (7) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... id ? (3) Whether, on the facts and in the circumstances of the case, the share income of an active partner from a firm which deals in Government securities and earns interest on them is business income assessable under s. 10 and consequently is the partner entitled to earned income relief in respect thereof under s. 15A of the Indian I.T. Act, 1922? " At the outset it may be stated that so far as question No. (1) is concerned, it was not disputed before us either by Mr. Joshi appearing for the revenue or by Mr. Munim appearing for the assessee that the answer thereto was self-evident and obvious and the question was really concluded by the decision of the Supreme Court in the case of United Commercial Bank Ltd v. CIT [1957] 32 ITR 688 and the answer to the question will be to the effect that the interest referred to in the question will have to be regarded as, interest income assessable under s. 8 of the 1922 Act. It may be stated that in that case the Supreme Court has expressed the view that the income of an assessee is one and ss. 7 to 12 of the Act direct the modes in which income-tax is to be levied, that none of these sections can be treated to be general or specific for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 1959-60 and 1961-62, the ITO apportioned the firm's income in their hands under both the above heads, and refused to allow earned income relief under s. 15A of the Act to the partners in respect of interest income on securities because in his opinion it was not business income. The firm as well as the individual partners filed appeals against those assessments to the AAC and in those appeals relying upon a decision of this court in CIT V. Ahmuty Co. Ltd. [1955] 27 ITR 63 (Bom),it was contended that the interest on securities received by the partners from the firm as their share income from the firm was business income and that the partners were entitled to the earned income relief thereon. The AAC distinguished the ruling in CIT v. Ahmuty Co. Ltd.[1955] 27 ITR 63 (Bom), on which reliance was placed on behalf of the partners and took the view that the ratio of the case in H. C. Kothari v. CIT [1951] 20 ITR 579 (Mad), was applicable. He, therefore, rejected the contention of the partners and upheld the ITO's action in refusing earned income relief to them on interest on securities. Aggrieved by the orders passed by the AAC, the firm as well as the individual partners prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bom), was relied upon in support of this view. At the instance of the CIT questions Nos. (2) and (3) set out at the commencement of this judgment have been referred to us for our determination. The material provisions with which we are learned in this case are the provisions which are to be found in s. 23(5) and (6) and s. 16(1)(b). s. 23(5) runs thus : " 23. (5) Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under sub-s. (1), sub-s. (3) or sub-s. (4), as the case may be,-- (a) in the case of a registered firm, (i) the income-tax payable by the firm itself shall be determined; and (ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined : Provided that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of section 24 ......" S. 23(6) runs thus : " (6) Whenever the ITO makes a determination in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the case of Arvind N. Mafatlal v. ITO [1957] 32 ITR 350 (Bom), certain shares were held by the assessee, but merely as a nominal holder, and in reality the shares belonged to the firm in which, the assessee was a partner, and the question that arose for consideration was whether when the assessee was merely a nominal holder of the shares, the grossing up in respect of the dividend income under s. 16(2) read with s. 18(5) of the Act could be done, and this court negatived the claim on the ground that the dividend received by a nominal holder of shares and paid to the real owner could not be regarded as dividend income of the latter within the meaning of s. 16(2) of the Act and such income was not liable to be processed in terms of ss. 16(2) and 18(5).This court also held that where the assessee, who was a partner in a firm, held shares in a company, and the ITO did not assess the assessee as a shareholder but distributed the dividend income among the partners on the ground that he was only a nominee of the firm, on such distribution the amount deemed to have been received by the assessee as a partner of the firm could not be regarded as dividend income in his hands, but could on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. v. G. S. Venkatesan, ITO[1969] 74 ITR 513. In particular, he relied upon the observations which appear at page 525 of the report. The Gujarat High Court posed a question in these terms : " Would the share of the income, profits and gains received by the partner be assessable as income, profits and gains of business under s. 10 irrespective of the heads of income under which the income, profits and gains of the firm fall, or would it be liable to be apportioned under the various heads of income according as the income, profits and gains of the firm are determined under each head of income? " and the court has then proceeded to observe as follows : " Now, it is no doubt true that unlike s. 67(2) of the new Act, there is no provision in the old Act which provides for apportionment of the partner's share of income, profits and gains of the firm under the different heads of income according to the determination made in respect of the income, profits and gains of the firm but when the share of the partner is sought to be assessed in his individual assessment, it is implicit in the very scheme of the Act that it must be determined under what head of income it falls. When the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position that share income received by a partner on apportionment of the firm's income has always been regarded as business income in his hands. The new clause will be clarificatory for future cases arising under the 1961 Act. Secondly, though it has been stated by the Gujarat High Court in P. M. Bharucha's case [1969] 74 ITR 513 that the principle of apportionment under different heads as now incorporated in s. 67 of the 1961 Act must, be regarded as being implicit in the scheme of the 1922 Act, in our view, there does not appear to be any warrant for the said view and in fact the provisions of s. 16(1)(b) and particularly the proviso thereto and the manner in which the said provision has received its interpretation at the hands of courts in several decided cases, suggests that apportionment under different heads cannot be regarded as implicit under the scheme of the 1922 Act. Thirdly, it may be pointed out that the observation on which Mr.Joshi has placed strong reliance will have to be regarded as obiter, for the real question that arose for determination before the Gujarat High Court was whether the corrective jurisdiction under s. 35 of the 1922 Act was attracted when the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is concerned his source of income is only from business coming under s. 10 and the partner's unabsorbed business losses of earlier years could be set off against his share income from the firm. Dealing with the contention of the revenue that even in the hands of the partner who receives the share income, the identity and character of the income earned by the firm are kept intact, the Madras High Court has observed at page 520 of the report as follows: " The contention of the revenue that even in the hands of the partner who receives the share income, the identity and character of the income earned by the firm are kept intact, which found acceptance before the Tribunal, cannot also be accepted. Even though the firm derived income from various sources, it cannot be said that the partner's share of income is also from those sources. In the assessment of the firm there is a pooling of income from all the sources and the total income is arrived at and the firm is assessed on such total income under s. 23(5)(a)(i). Thereafter, the total income is allocated among the partners and brought in for assessment in the hands of the partner. At that stage, his share income from the firm canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was not in a position to restrict the scope of that decision in the manner suggested by the learned counsel and that it did not appear from the facts set out in that decision that the firm derived income exclusively by carrying on business operations as such and that the decision was confined to the facts of that case. It may be mentioned that one of the reasons given by Chief Justice Chagla in Shantikumar Narottam's case [1955] 27 ITR 69 (Bom) for taking the view that the partner's income should be regarded as having been derived from business, was approved by the Madras High Court. Madras High Court observed as follows in that behalf at page 524 of the report : " The learned Chief Justice also gave another reason for treating the partner's income as having been derived from business. The first proviso to s. 23(5) permits the carrying forward of losses sustained by a partner in accordance with s. 24. Sub-s. (2) of s. 24 which alone deals with a carry forward permits the carry forward and set off only for losses sustained in a business. These provisions show that the legislature itself looked upon the income earned by the assessee by reason of his partnership income as derive ..... X X X X Extracts X X X X X X X X Extracts X X X X
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