TMI Blog1975 (7) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of business loss and dividend income the assessee stood to lose because the dividend income was treated as unearned income and a higher surcharge was payable. The assessee contested the computation made by the Income-tax Officer in the appeal preferred against the order of the Income-tax Officer before the Appellate Assistant Commissioner. It was submitted that as the assessee had received income as a share of profit from the partnership concern it should be treated as his income from business. The Appellate Assistant Commissioner, however, did not accept this contention of the assessee and was of the view that the Income-tax Officer had correctly treated the income as from other sources under the head "Dividend". The Appellate Assistant Commissioner, therefore, dismissed the assessee's appeal. Against the order of the Appellate Assistant Commissioner the assessee preferred a second appeal to the Tribunal. It was contended on behalf of the assessee that the Income-tax Officer should not have treated the sum of Rs. 61,150 and Rs. 31,971 as income from other sources and that the share income was a unit by itself coming under section 10 and that disintegration was unwarranted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the computation is also made on different sources of income, in assessing the share income of a partner the Income-tax Officer will take into account the different sources of the firm's income in the hands of the partner according to his share in the partnership though according to partnership law a partner is only to get his share of profit. It is his submission that the nature and character of the income of the firm do not change in the hands of the partner though that is of no moment under the partnership law. Counsel has further submitted that the expression "his share of its income, profits and gains" in section 23(5)(a) really means the partner's share in the firm's income under appropriate heads and not that the entire share of income is to be treated as business income of the partner and the proviso becomes applicable whenever facts warrant its application. According to counsel section 67(2) of the Income-tax Act, 1961, has not brought about any change in the law but it has really recognised the existing practice followed by the revenue prior to the enactment of the 1961 Act and in effect it has codified the prevailing law on the subject. Learned counsel further submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a change in the prevailing law. Before we proceed further, it would be convenient to deal with various cases cited at the Bar. In the case of P. M. Muthuraman Chettiar v. Commissioner of Income-tax [1957] 31 ITR 61 (Mad), the Madras High Court held that where a person was an ordinary resident in the taxable territories and was also a partner in a firm carrying on business outside the taxable territories, he was entitled to have the loss incurred by him as a partner of that firm deducted from his income under the head "business" in the taxable territories in computing his total income under the head "business" even though the firm was a non-resident and the income of the firm as such is not liable to be assessed to income-tax under the Indian Income-tax Act, 1922. It was further held that the share income of a partner of a firm falls under the head "profits and gains of business" referred to in section 10 of the Act and is not "income from other sources" falling under section 12, and a loss incurred by an assessee as a partner in a firm must, therefore, be deducted in computing his total income under the head "business" under section 10(2) of the Act. The court observed: " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to the real owner could not be regarded as dividend income of the latter within the meaning of section 16(2) of the Act and as such income was not liable to be processed in terms of sections 16(2) and 18(5) of the Act. It was also held that where the assessee, who was a partner in a firm, held share in a company, and the Income-tax Officer did not assess the assessee as a shareholder but distributed the dividend income among the partners on the ground that he was a nominee for 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 only be his share of profits in the firm. It was observed in that case that: "On the distribution of the dividend income so made, the amount deemed to have been received by the assessee in that income as partner of the firm could not be regarded as dividend income in his hands. In the hands of the firm it was evidently dividend income, but in the hands of the assessee it could only be his share of profits of the firm. Not being the dividend income in the hands of the assessee section 16(2) of the Income-tax Act bad no applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income-tax [1964] 51 ITR 467 (Mad), allowed the appeals observing that the partners had nothing to do with the agricultural operations, but drew the salaries for services rendered by them to the firms, and, therefore, rule 24 had no application to them. In that case it was held that the salary received by a partner of a firm for services rendered by him to it was only a mode of adjustment in his share of the firm's income and continued to bear, for purposes of charge at his hands, the same character as part of the total income of the firm which had to be shared between its partners. The consequences of applying rule 24 of the Income-tax Rules, 1922, to the total income of the firm computed in accordance with section 10(4) was necessarily that only 40 per cent. of the salary as referable to agricultural income could be taken as salary in computing the total income of a partner of a firm in terms of section 16(1)(b). A Full Bench of the Madras High Court observed that [1970] 77 ITR 494, 501, 502,504: "This character of the partner's salary has been well brought out by the Australian Income-tax Law and Practice by F.C. Bock and F.F. Mannix, 1968 edition, volume 3, at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manate from two different sources, but from one and the same, which is the source of income of the firm. We hold, therefore, that Mathew Abraham v. Commissioner of Income-tax [1964] 51 ITR 467 (Mad) was not correctly decided." In the case of Commissioner of Income-tax v. Ramniklal Kothari [1969] 74 ITR 57 (SC) the Supreme Court held that the respondent, who was a partner in four firms but did not carry on any independent business, was entitled to deduct from his share of the profits from the firms amounts paid as salary and bonus to staff, expenses for maintenance and depreciation of motor cars and travelling expenses expended by him in earning the income from the firms. In that case it was observed that business carried on by a firm is business carried on by the partners. Profits of the firm are profits earned by all the partners in carrying on the business. The share of the partner is business income in his hands for the purpose of section 10(1) of the Indian Income-tax Act, 1922, and, being business income, expenditure necessary for the purpose of earning that income and appropriate allowances are deductible therefrom in determining the taxable income of the partner. The Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed under section 12 as income from other sources. The High Court observed that: "In the Income-tax Act, 1961, section 67(2) has been introduced for the first time. This sub-section provides that the share of a partner in the income or loss of a firm should in making the assessment on the partner be apportioned in the various heads in the same manner in which the firm's income had been determined. The introduction of this provision, however, does not, to my mind, introduce any change in law so far as the aspect under consideration is concerned. Of course, even under the 1922 Act, if the income of a registered firm was assessed under the head 'business' that income would be assessable in the hands of the partners as business income. That would be so because common interest, mutual agency and division of profits are the essential conditions for the existence of a partnership and consequently the partners really carry on business in the name of the firm. If, on the other hand, the income of the firm consists of income from property it cannot be suggested that such income in the hands of the partners should be treated as business income." In the case of Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue in this reference. According to the Supreme Court the share in the profits of a partnership received by a partner is "profits and gains of business" carried on by him and is on that account liable to be computed under section 10 of the 1922 Act. In the view taken by the Supreme Court in that case stated above, profits of the firm distributed amongst its partners cannot be said to have retained the original character of the sources from which the partnership derived its income. If the share income of a partner retains the character of the different sources from which the partnership derived its income, then in cases where the partnership has different sources of income such income in the assessment of individual partners cannot be said to be the partner's income from profits and gains of business and liable to be taxed under section 10 of the Indian Income-tax Act, 1922, as observed by the Supreme Court. In our view, for the purpose of assessing the share income of the partners under various heads from which the partnership derived its income, section 67(2) of the Act has been introduced in the Income-tax Act, 1961. The fact that the share income of a partner is income from p ..... 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