ADDITIONAL COMMISSIONER OF INCOME TAX Vs. VAIDYANATHAN N

JUDGEMENT

(1.) THIS is a reference under the. Income -tax Act, 1961. The assessee in this case is a practising chartered accountant exercising his profession both individually and in partnership with another. The assessee owns a house. One -half of the house is used by the assessee's auditing firm for its office The assessee had income under the head "Property" assessable on the basis of the annual value of his house. He had also Income under the head "Business" assessable in respect of his share of the auditing firm's professional earnings. The one -half portion of the assessee's house under the firm's occupation, however, raised two problems in the assessment. One was whether the assessee was entitled to exclude from assessment one -half of the annual value of his house property which appertains to the portion in the firm's occupation. This involved the application of the saving provision in section 22 of the Income -tax Act. The Tribunal, when the matter came before them in appeal, took the view that one -half of the annual value must be excluded in reckoning the assessee's income under the head "Property". The Tribunal differed from the Assessing Officer's determination in this regard. The question for our consideration is whether the assessee is entitled to relief from taxation in respect of one -half of the annual value of his house.

(2.) THE charge to income -tax under the head "House property", as laid by section 22, attaches to the annual value of any property owned by the assessee,

(3.) THE issue for decision, as we earlier mentioned, is not whether a partnership firm is or is not a legal person, but whether a partner can be said to carry on his profession or business, when it is his partnership firm which carries it on ? The answer is to be found in the basic idea behind section 5 of the Indian Partnership Act, 1932, and section 67(2) of the Income -tax Act. Section 4 of the Partnership Act defines a partnership as the relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all. The idea is that person enters into a partnership with another or others for the very purpose of carrying on business, such that when the partnership, after coming into being, carries on business, it only reflects the constituent partner's way of carrying on their business according to their joint resolve. This principle is reflected in section 67(2) of the Income -tax Act. Under the income -tax scheme, a firm's total income would be assessed under its various component heads of income, and a partner would be assessed, inter alia, on his share income from the firm. In this context, section 67(2) of the Income -tax Act lays down that the assessable share of a partner in the income of the firm shall, for purposes of his assessment, be apportioned under the appropriate head of income under which the firm's income itself has been assessed. Thus, where the firm is in receipt of business income or professional income assessable under the relevant head, the aliquot part of the partner's share income from the firm must also be treated as his business income or professional income and dealt with as such in his individual assessment for all purposes, including further allowances and deductions in his hands. Section 67(2) is said to have carried into the statute book only what was implicit in the scheme of the incometax law even before. We would like to point out that section 67(2) of the Income -tax Act also recognises the basic principle of partnership law, according to which partnership business is nothing but the business carried on by every partner acting for all the partners. It seems to us, therefore, that both in legal theory and in fiscal theory, a partner may be truly regarded as carrying on business, even if he is a "sleeping partner" and the other partners look after the business of the firm. We, therefore, agree with the conclusion of the Tribunal in the present case that the portion of the assessee's house occupied by the assessee's auditing firm for its Office must be held to be used for the purposes of the business carried on by the assesseeIt is a minor question whether the office portion of the house can be regarded as being under the assessee's occupation within the meaning of section 22 of the Income -tax Act. For, having arrived at the position that the user by the firm for the firm's audit practice has to be regarded as the user by the assessee for his profession, we can hardly strain at the corollary that the assessee himself is very much in occupation of the office portion, and none the less so far as the fact that it is the firm's office which is housed in that portion.