COMMISSIONER OF INCOME TAX Vs. NARANDAS AND SONS

JUDGEMENT

(1.) THREE questions have been referred to this court by the I.T. Tribunal at the instance of the CIT, Bombay City -II, under s. 66(1) of the Indian I.T. Act, 1922, and these questions run as follows :

(2.) SO far as question Nos. (2) and (3) are concerned, the relevant facts in regard there to will have to be stated. The question related to assessment years 1949 -50 to 1953 -54, in the case of the firm of Messers. Narandas and Sons, and assessment years years 1949 -50 to 1953 -54, 1957 -58 to 1959 -60 and 1961 -62, in the case of individual partners, N. R. Cantol and V. N. Cantol. The firm of Messers. Narandas and Sons consisting of two partners, N. R. Cantol and V. N. Cantol, was registered under s. 26A of the I.T. Act, 1922, for the purpose of assessment to income -tax. The firm was a dealer in Government securities and it is also received interest of Government securities, which formed its stock -in -trade, for the aforesaid assessment years. It appears that the income of the firm was determined by the ITO for assessment purposes under two heads, viz., (i) Business, and (ii) Interest on securities. Since the firm was registered under s. 26A of the Act, the ITO did raise a demand on the firm but apportioned the firm's total required by s. 23(6) of the Act among its partners in the same manner and under the same heads as it was assessed in the assessment of the firm, i.e., interest on securities and business income. In the individual assessments of the partners of the aforesaid assessment years 1949 -50 to 1953 -54, 1957 -58 to 1959 -60 and 1961 -61, 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.

(3.) AGGRIEVED by the orders passed by the AAC, the firm as well as the individual partners preferred appeals to the Appellate Tribunal. On behalf of the individual partners three separate and independent contentions were urged on the basis of which earned income relief was claimed. Since, however, out of the three contentions two were not accepted by the Tribunal, we need refer only to the third contention which was accepted by the Tribunal on the basis of which th relief sought was granted. It was urged on behalf of the individual partners that irrespective of the head under which interest on securities was assessed in the assessments of the firm, what the partner received from the firm was his share of the profit from the firm and the share was assessable in his hands as business income. It was further urged that the ITO had wrongly apportioned the income and assessed it in the hands of the partner under different heads, and the correct procedure according to s. 16(1)(b) should have been considered in the hands of the partners as their respective share of income from the firm assessable under s. 10. This contention was accepted by the Tribunal who observed that whatever be the source of income of the firm, all the income which were assessed under different heads merged into one category and would be the total income of the firm and when it was apportioned under s. 23(6) read with s. 16(1)(b), what was apportioned to the partners was only their share income from the firm. The Tribunal found that instead of apportioning income as required by s. 16(1)(b) of the 1922 Act which governed the assessment d for the concerned years, the ITO had wrongly apportioned the income under two heads, viz., (i) Business income, and (ii) Interest on securities, and according to the Tribunal this was done by the ITO, in view of the provisions of s. 67(2) of the 1961 Act, which was in applicable to the instant case. Accordingly, the Tribunal held that the share income of the individual partners from the firm was only assessable under s. 10 and in that view of the matter it further held that the individual partners were entitled to earned income relief under s. 15A even in respect of a portion of share income which interest on securities. The decision of this court in the case of Arvind N. Mafatlal v. ITO : [1957]32ITR350(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.