Commissioner of Income-tax Vs. Gopalkrishna M. Singre and Others - Court Judgment

Excerpt:
- - ' 6. this sub-section clearly provides that a partner's share in the income or losses of the firm shall be apportioned in the assessment of the partner under various heads of income in the same manner in which the firm's income has been determined under each head.dr. b.p. saraf, j.1. by this reference under section 256(1) of the income-tax act, 1961, at the instance of the revenue, the following question of law has been referred by the income-tax appellate tribunal, pune bench, pune ('tribunal'), to this for opinion: 'whether, on the facts and in the circumstances of the case, the tribunal was right in law in holding that the assessees were entitled to deduction under section 80l of the income-tax act, 1961, in respect of their share of profit from the interest on fixed deposits with banking companies and interest on government securities earned by the firm in which the assessees are partners?' 2. the assessees in this reference are (1) vishnu m. singre, (2) gopalkrishna m. singre and (3) shrikrishna m. singre and all of them are assessed in the status of 'individual'. the assessment year involved is 1973-74, the corresponding previous year being the year ended on november 5, 1972. all of them are partners in a registered firm, namely, bengal coal supplying co. the said firm derives its income from sale and supply of coal. it also derives income from interest on central government securities and deposits, including deposits with banking companies to which the banking regulation act, 1949, applies. the total income of the firm for the assessment year 1973-74 was apportioned by the income-tax officer under the heads (1) 'interest to partners', (2) 'interest on fixed deposits', and (3) 'residue share of profits'. in their assessments, the assessees claimed deduction under section 80l of the income-tax act, 1961 ('the act'), in respect of such share of profits from the said firm which represented 'interest on government securities and interest no deposits from banking companies'. this claim of the assessees was rejected by the income-tax officer on the ground that it is the firm which had earned income from interest on fixed deposits and securities and not the assesses-individuals who were partners thereof. the nature of income in the hands of the partners, according to the income-tax officer, changed its complexion and it partook of the character of 'share of profits from the firm'. he, therefore, rejected the claim of the assessees for deduction under section 80l of the act in respect of their share of interest on fixed deposits and securities received from the firm. 3. the assessees appealed to the commissioner of income-tax (appeals), who upheld the orders of the income-tax officer and dismissed the appeals. on further appeal, the tribunal accepted the contention of the assessees and held that each of the assessees was entitled to deduction under section 80l of the act as claimed in his assessment for the assessment year under consideration. hence, this reference under section 256(1) of the act at the instance of the revenue. 4. mr. g.s. jetley, learned counsel for the revenue, contended before us that the assessees are not entitled to any deduction under section 80l of the act, because it is the firm which received interest on fixed deposits and not its partners. according to mr. jetley, what was received by the assessees was only a share of the income of the partnership firm. to put it differently, the submission of learned counsel is that the character of the income in the hands of the firm underwent a charge on its apportionment in the hands of the partners and lost the character of 'interest on government securities and fixed deposits.' in support of this contention, reliance was placed on the decision of the orissa high court in cit v. janardan subudhi : [1981]131itr287(orissa) . 5. we have carefully considered the above submission. section 80l of there act, inter alia, provides that where the gross total income of an assessee being an individual includes any income specified in the various clauses of sub-section (1) thereof which includes interest on any security of the central government or the state government and interest on deposits in a banking company, there shall be allowed a deduction specified therein in computing his total income. in this case, the only income of the assessees, who are individuals, was their share in the income of the firm. there is also no dispute about the fact that the profits of the firm included income from interest on fixed deposits with banking companies and interest on government securities. the only controversy is whether it will retain its character of income from deposits with banking companies in the hands of the partners who have received the same as their share in the income of the firm. evidently, the determination of this controversy will depend upon the answer to the question as to whether the share of the partners from income of the firm would be assessed as 'profits or gains of business' or it shall be apportioned under the various heads of income in the same manner in which the income of the firm has been determined under each head of income. the answer to the above question is evident from sub-section (2) of section 67 of the act, which provides: 'the share of a partner in the income or loss of the firm, as computed under sub-section (1) shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income.' 6. this sub-section clearly provides that a partner's share in the income or losses of the firm shall be apportioned in the assessment of the partner under various heads of income in the same manner in which the firm's income has been determined under each head. that being so, interest earned by the firm on government securities and fixed deposits with banking companies would retain its character despite apportionment of the income of the firm among the partners. in the instant case, the uncontroverted factual position is that the income from interest in respect of which deduction is claimed by the partners under section 80l of the act was determined in the assessment of the firm as 'income on fixed deposits with government companies and interest on government securities'. the shares of the partners in such income of the firm would be apportioned under the same head and the assessees would, therefore, be entitled to get deduction under section 80l of the act in respect of the same. in our above conclusion, we are supported by the decision of the allahabad high court in cit v. brij raman das : [1979]118itr397(all) . therein also, relying on sub-section (2) of section 67 of the act, it was held that the income of a firm, despite apportionment among the partners under each head, would retain its character even though it is assessed all over again in the hands of the individual partner. the process of allocation of the income in the hands of the partner does not change the head under which it was determined in the assessment of the firm. the character of the income will remain the same even in the hands of the partners. therefore, even after allocation, the income relatable to interest from deposits, etc., would be taxable in the hands of the partners concerned under the appropriate head. since the nature of the income does not change while being assessed in the hands of the partners, the partners, as individuals, would be entitled to the benefit of section 80l of the act. 7. we have also considered the decision of the orissa high court in cit v. janardan subudhi : [1981]131itr287(orissa) . in view of the clear provisions of sub-section (2) of section 67 of the act and for the reasons set out above, we find it extremely difficult to agree with the reasoning of the above decision and the conclusion. 8. in the result, we answer the question referred to us in the affirmative and in favour of the assessee. 9. in the facts and circumstances of the case, there shall be no order as to costs.