M CT MUTHIAH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee derived income from property as also from other sources. Besides, he was one of the two partners in a firm called "S.Rm.M.Ct.M. Firm". That firm carried on money-lending business and also derived income from its house properties. In. respect of the years ending on April 12, 1958, April 12, 1960, and April 12, 1961, relevant for the asessment years 1958-59, 1960-61 and 1961-62, its income from various sources was determined thus by the Income-tax Officer 1958-59 1960-61 1961-62Income from property Rs. 29, 736 Rs. 31, 308 Rs. 31, 706Business Rs. 5, 455 Rs. 42, 315 Rs. 53, 163(loss) (profit) (profit)Foreign income Rs. 701 Rs. 18, 507 Rs. 21, 324Dividend ... ... Rs. 4, 640THEreafter, the Income-tax Officer allocated the income of the firm under each head as determined above among the two partners as follows1958-59 1960-61 1961-62Income from property Rs. 14, 868 Rs. 15, 519 Rs. 15, 853Business Rs. 2, 723 Rs. 21, 407 Rs. 26, 581(loss)Foreign income Rs. 350 Rs. 9, 254 Rs. 10, 662Dividend ... ... Rs. 2, 320THE Income-tax Officer treated the said sums of Rs. 14, 8 68, Rs. 15, 519 and Rs. 15, 853, being the assessee's share of the firm's property income as the property income of the assessee in the respective years. This the assessee objected to on the ground that the whole of his share income from the firm should be assessed as business income and not as property income, and that his unabsorbed business losses in the earlier years should be set off against his share income from the firm.

(2.) THIS objection was, however, rejected by the Income-tax OfficerThe assessee appealed to the Appellate Assistant Commissioner. The Appellate Commissioner also rejected the contention of the assessee that his share income from the firm is income f rom business. The view taken by the Appellate Assistant Commissioner was that income from property can never be classified as business income even in relation to a partner, as he was directly assessable in respect of his share in the firm's income. He also referred to section 67(2) of the Income-tax Act, 1961, and stated that the said section being clarificatory, the principle thereof can be applied to the assessments in questionThe assessee appealed to the Tribunal contending that in law, a partnership could be formed only for carrying on a business and as such whatever be the source of income for the firm, the share of a partner could only be business income. Reference was made by the assessee before the Tribunal to various decisions in which the "share income" of a partner has generally been treated as "business income"The Tribunal expressed the view that the decisions referred to by the assessee dealt with share income from partnerships whose income was exclusively from business, and that in none of them the character of the share income received by a partner from a partnership which had composite income, as in this case, came up for consideration. After having held that those decisions are not quite helpful in deciding the question as to whether the entire share income received by the assessee should be treated as business income, the Tribunal proceeded to say"Implicit in the concept of a partnership or a firm is the idea of carrying on a business. There cannot be a partnership merely in respect of owning house. properties and realising rents therefrom.

(3.) THE share of the partner in the taxable profits of the registered firms liable to be included under section 23(5)(a)(ii) in his total income is still received as income from business carried on by him." *As pointed out by Chagla C. J. in Shantikumar Narottam Morarji v. Commissioner of Income-tax"It is not the share as ascertained on the assessment of the firm that is liable to tax, but the share as representing the true profit of the partner. It is true that if there is a specific prohibition in the Act, the court will not permit an allowance in face of that prohibition. It is equally true that if there is an allowance permissible under the Act and the allowance deals with the whole subject-matter, the court will not permit that subject-matter to be expanded. But, where there is no prohibition and where no allowance deals with a particular subject-matter, it is open to the court to permit an allowance in order to arrive at the true profits or gains of an assessee, and therefore, if an assessee claims a deduction against the share which is included in his total income contending that without that deduction the share will not represent his true profits and gains, in our opinion the assessee will be entitled to such a deduction." *THE revenue is not, therefore, correct in saying that section 23(5)(a)(ii) creates as independent head of income apart from those set out in section 6 and that it does not contemplate any deduction against the share of the profits included in his income, the share having been arrived at on the assessment of the firm with regard to its profitsTHErefore, for purposes of computation, the share income of a partner has to be brought under any one of the heads of income referred to in section 6. Realising this position, the revenue contends that the share income of a partner will fall under the head "other sources" within the ambit of section 12 and not under the head "business". In Commissioner of Income-tax v. Ramniklal Kothari, the share income of the partner was treated as income from business coming under section 10. Mr. Balasubrahmanyan would, however, state that the said decision cannot be taken to lay down a general proposition that any share income received by a partner is a business income without reference to the souce from which the firm had received its income. But we are not in a position to restrict the scope of that decision in the manner suggested by the learned counsel. It does 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 is confined to the facts of that caseTHE same view has been taken in P.M. Muthuraman Chettiar v. Commissioner of Income-tax. In that case, the revenue contended that the share income of a partner of a firm was not "income from business" within the ambit of section 10, but was "profit from other sources" falling within section 12. THE court, however, rejected that contention and held that the share income of a partner is income from business within section 10. Even here, the general principle laid down is not with reference to the source from which the firm derived the income.