1. The assessee, an individual, is a chartered accountant by profession. Apart from his individual proprietary concern, the assessee is also a partner in a chartered accountants' firm. The accounting year followed by the assessee for his own profession is the year ending 31-8-1976. The firm in which he is a partner, on the other hand, follows the financial year as the accounting year. We are concerned in this appeal with the assessment year 1977-78. For this year, the profit of the firm allocable to the assessee was Rs. 1,114.
2. In the return filed by him, he did not show this amount as taxable in his hands. On the other hand, he showed his share of profit at Rs. 900. The reasons he gave were that the income from the partnership firm is also professional income and he has the right to record that income according to the method of accounting he chooses. It was the assessee's case that as far as the income from the firm is concerned, he has chosen the cash basis. Since he has drawn only Rs. 900 from the firm, only this amount could be taxed on cash basis. The ITO, however, did not accept the assessee's contention and brought to tax Rs. 1,114.
3. The assessee appealed. The AAC, after considering the assessee's submissions, pointed out that there is in law no difference between the partner and the firm. The term 'firm' was being treated as a separate assessable entity only for tax purposes. He pointed out that the income from the business carried on in partnership accrues when it accrues to the partnership. When the income is earned by the partnership, it can be said that it is earned by the partner also. There is no question of a second earning since a partner cannot receive the income from himself. He then referred to the decision of the Bombay High Court in the case of CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95 wherein it was observed that a partner's share of profit that may ultimately be determined in the assessment of the firm will be includible in the total income.
4. The assessee is in further appeal before us. Shri Mathur submitted that firm and partner are different entities for income-tax purposes.
He further submitted that it is indisputable that the share a partner receives from a firm is also business or professional income. He then submitted that a business or a professional income has to be computed only according to the method of accounting followed by the assessee. In this case, he submitted that he is following the cash method as far as this source of income is concerned. Therefore, he cannot be assessed on any figure other than what his method of accounting shows. He then submitted that the provisions of Section 67 of the Income-tax Act, 1961 ('the Act') do not derogate an assessee's rights in this matter.
According to him, Section 67 is a machinery section. It is not a charging section. Unless an income is chargeable, it cannot be brought to tax merely because there is a provision in the machinery section. He then relied on the decision of the Delhi High Court in the case of CIT v. Sohan Lal Nyyar [1974] 95 ITR 90 to show that there was nothing in Section 67 to indicate that the provisions were excessive and that deductions other than those mentioned in the section could be allowed to the partners. He pointed out that the High Court has held that if a deduction is admissible in respect of a partner's share in the income of the firm under Section 37 of the Act, it would have to be allowed even though it might fall within the ambit of Section 67(3). Applying this logic, he submitted that the provisions of Section 37 would come in only after determination of opinion by resorting to the provisions of Section 145 of the Act.
5. Shri Krishnan, for the department, pointed out that under the general law there is no difference between a firm and a partner. There are certain specific exemptions made to this position of general law in the Act. But for this specific provision, the general law will always be applicable. Therefore, when the firm maintains accounts, it means ispo facto that those accounts are maintained by the partners. He then submitted that it is not conceivable to have a separate accounting in respect of the allocation of profits alone to the partner. He submitted that the order of the AAC is correct.
6. We have considered the submissions. It is no doubt true that the share of profit of a partner has the same characteristics as it has in the hands of the firm. But this position in law is of no relevance to the question we are faced with. The assessment of a firm and its partners have to be under the special provisions made applicable to the firm which are contained in Chapter XVI of the Act. Section 182(1) of the Act reads as follows : Notwithstanding anything contained in Sections 143 and 144 and subject to the provisions of Sub-section (3), in the case of a registered firm, after assessing the total income of the firm, - (i) the income-tax payable by the firm itself shall be determined ; and (ii) the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly.
It will be seen from this that Section 182 is a non obstante section, i.e., it overrides the provisions contained in Sections 143 and 144 of the Act. It says that in the case of the assessment of a registered firm, after assessing the total income of the firm, the tax payable by the firm itself will be determined and thereafter the share of each partner in the income of the firm shall be included in his total income and assessed accordingly. There cannot be anything more categorical than the provisions of Section 182(1)(ii). It categorically says that the share allocated to each partner shall be included in the total income of the partner and it should be assessed accordingly. Since these provisions are non obstante to Sections 143 and 144, these will override all other provisions while assessing a partner.
7. The same result is seen while considering the provisions of Section 67(1). Section 67(1)(b), which is relevant for us, reads as follows : (1) In computing the total income of an assessee who is a partner of a firm, whether the net result of the computation of total income of the firm is a profit or a loss, his share (whether a net profit or a net loss) shall be computed as follows : (a) any interest, salary, commission or other remuneration paid to any partner in respect of the previous year, and, where the firm is a registered firm or an unregistered firm assessed as a registered firm under Clause (b) of Section 183, the income-tax, if any, payable by it in respect of the total income of the previous year, shall be deducted from the total income of the firm and the balance ascertained and apportioned among the partners ; (b) where the amount apportioned to the partner under Clause (a) is a profit, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be added to that amount and the result shall be treated as the partner's share in the income of the firm ; (c) where the amount apportioned to the partner under Clause (a) is a loss, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be adjusted against that amount and the result shall be treated as the partner's share in the income of the firm.
On a reading of the provisions of the above sub-section, it will be seen that sub-section treats the amount allocated as the partner's share in the income of the firm. Thus, a fiction is created under this section that whatever is allocated is the income of the partner.
145. It is no doubt true that the income of a profession has to be computed according to the method of accounting followed by the assessee. But we do not have to go to Section 145, when there are two sections in the Act itself which say what would be the income in the hands of the partner. Besides, Section 145 is a section which is required to be resorted to where an income has got to be ascertained.
In other words, this section comes into play only before an income could be determined in respect of varied receipts an assessee may have against which a varied expenditure will have to be considered. Where the statute deems a particular amount as the income, the exercise required under Section 145 is unnecessary.
9. These points have been fully realised by the Supreme Court in the case of CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 and the Bombay High Court in the case of Arvind Bhogilal v. CIT [1976] 105 ITR 764.
The Bombay High Court has pointed that the income in the case of a partner accrues only when the firm closes its books of account. The profit or loss of a partnership from a commercial point of view can only be ascertained on the last date of each accounting year and it would be impossible to predicate of this partnership and that it had made any profits or any losses in any day preceding or prior to that last date of the accounting year. If that is the position in law with regard to the income accruing to a partner from a partnership, the method of accounting, either cash system or mercantile, which the partner himself follows in recording his income from the firm, loses all significance. If the income has to be determined only on the last day of the accounting year, any amount of drawing he might have made before that last date of the accounting year is no income at all.
Indeed, such a type of maintaining of accounts is not the books of account contemplated to be maintained under Section 145.
10. Shri Mathur's second line of argument is regarding those cases where the High Courts have held that an assessee-partner is entitled to certain further deductions in ascertaining the share of profit. Now, this line of authorities is easily reconciliable. The starting point in determining the income of a partner is the share allocated from the firm. From that figure, if the assessee is able to prove that he has incurred some further expenditure, he can certainly be allowed a deduction. But that does not change the position that the starting point for computing the income of a partner is the share allocated to him.
11. We see no merit in the assessee's submissions. The appeal is dismissed.