TMI Blog1954 (9) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm, and the other question that arises is whether, if it is so permissible to the assessee to claim those deductions, whether the deductions claimed in this case are permissible deductions. Now, in the year of account Samvat year 1997 the assessee paid interest amounting to ₹ 31,382. The loans on which this interest was paid amounted to ₹ 6,19,478. The Income-tax Officer allowed interest at 6 per cent. on ₹ 2,77,000. This interest came to ₹ 15,620. The balance of the claim with regard to interest which came to ₹ 14,762 was disallowed by the Income-tax Officer. It is in respect of this amount that this reference has been made. Now, this interest was paid on loans which may be divided into two categories. One was loans aggregating to ₹ 1,54,097 and the other loans aggregating to ₹ 1,88,361. With regard to the first category, these were loans taken by the assessee from his relations and the important fact with regard to these loans was that he had pledged his interest in the managing agency commission with his relations to secure these loans. With regard to the other category, those loans were taken by the assessee for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had director's fees, and so on. But to the extent that his source of income is the share of profits in the partnership firm that income is to be shown by him in his total income as already ascertained and computed by the Income-tax authorities. The importance of doing this lies in this fact that whereas the total profits of an unregistered firm are to be paid by the unregistered firm and the rate that would apply would be the rate applicable to the total profits, in the case of a registered firm the profits are divided between the various partners and the rate which would apply would depend upon the total income of each partner as consisting of his share in the profits and any other income that he might have. If his income is only the share of the profits, then as against the unregistered firm he would pay tax at the rate applicable to only the share of the profits and not the total profits. This special provision with regard to the registered firm and the partner of the registered firm is to be found in section 23(5) and the provision is to the following effect: Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, the partner of a registered firm in his own right. But it may be pointed out that the Income-tax Act makes a clear distinction between exemption and deductions. Whereas the question of exemption can only arise after the income of the assessee is ascertained, deductions are to be made before the income is ascertained and the deductions do not form part of the income at all. Therefore, even though we may agree with Mr. Palkhivala that the assessee who is the partner of a registered firm is entitled to certain exemptions in his own right, it does not necessarily follow that therefore he is also entitled to the deductions permissible under the Income-tax Act. The question of deductions must be approached from a different point of view. The deduction in this case is claimed under section 10(2) and the first question that we have to consider is whether section 10 has any application to the case of an assessee who is a partner of a registered firm. Mr. Joshi's contention is that section 10 has no application at all because section 10 deals with the profits of a business carried on by the assessee and according to Mr. Joshi the business in this case is not carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofession or vocation is carried on by the assessee or in the case of a firm, where the assessee is a partner actively engaged in the conduct of the business, profession or vocation. Therefore, in order to claim exemption in respect of earned income the assessee has got to satisfy the taxing authorities that his income is chargeable under the head of business and he himself is actively engaged in the conduct of business. It is further pointed out that the first proviso to section 23(5) permits the setting off of any loss sustained by a partner and also the carrying forward in accordance with the provisions of section 24, and when we turn to the provisions of section 24(2) it is clear that a carry forward would only be permissible provided the loss has been sustained in a business and it can be set off against the profits and gains of the same business in a year other than the year of assessment. In the case of the year of assessment it could be set off undoubtedly against any other head. Therefore this section clearly shows that the Legislature looked upon the income earned by the assessee by reason of his partnership as an income derived from business. Indeed it is difficul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derived by the assessee from his share in the business. In our opinion, it is unnecessary in this reference to decide the larger and perhaps the more important question as to whether a partner in a registered firm who is being assessed under section 10(1) in respect of a share of profits is entitled to claim any deduction under sub-section (2) of section 10. When we turn to section 24(5) the provision made in that sub-section by the Legislature is that the share of the income, profits and gains of the registered firm must be included in the total income of the partner who is being assessed to tax. It is well settled that the profits and gains contemplated by the Legislature under section 10 are the true profits and gains and ordinarily the true profits and gains must be ascertained from the point of view of commercial accounting. In a well known case the Privy Council in Income-tax Commissioner v. Chitnavis [1932] 59 I.A. 290 considered whether a bad debt was an admissible deduction at a time when there was no provision in section 10(2) with regard to bad debts, and the Privy Council stated that although the Act nowhere in terms authorises the deduction of bad debts of a busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure, the expenditure being incurred in order to enable him to earn the profits which were being subjected to tax. We must next proceed to apply this principle to the fact of this case. It would be for the assessee to satisfy us that both the sums of ₹ 1,54,097 and ₹ 1,88,381 were borrowed in order to enable the assessee to earn the profits in the firm of Narottam Morarji Co. There is a finding given by the Accountant Member in the following words: We understand that no part of the borrowings were utilised in the agency firm business and therefore the interest paid was not incurred for the purposes of the business. Mr. Palkhivala has rightly quarreled with the nature of this finding. With respect to the learned Accountant Member, it is difficult to understand how a judicial tribunal can record a finding in the language in which this so-called finding has been recorded. The duty of a fact finding tribunal is to find facts, and not to understand that certain facts may exist or may have been established. Therefore, as far as the assessee is concerned, we must discard that finding. But there are sufficient findings on record which clearly go to show tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ischarge the debts in order to safeguard Narottam Morarji's share in the managing agency firm. Now, in putting forward this argument Mr. Palkhivala overlooks the important fact that on the death of Narottam Morarji the original partnership was dissolved in law and Narottam Morarji's share no longer remained in the new partnership which then started doing the business of the managing agency. It may be that the creditors of Narottam Morarji might have got a decree for taking accounts of the partnership before its dissolution by the death of Narottam Morarji and for being paid out of the assets in the partnership coming to the share of Narottam Morarji. But we do not know whether at the death of Narottam Morarji there were any assets at all which would have gone to the share of Narottam Morarji, and even assuming that there were any assets, it is difficult to understand how it would affect the new partnership which had come into existence on the death of Narottam Morarji. There is nothing on the record to show that that new partnership could not have subsisted and could not have done the work of managing agents without the aid of the assets, if any, left by Narottam Morarji. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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