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Additional Commissioner of Income-tax Vs. N. Vaidyanathan - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 307 of 1977 (Reference No. 167 of 1977)
Judge
Reported in[1989]180ITR198(Mad)
ActsIncome Tax Act, 1961 - Sections 22, 32 and 67(2)
AppellantAdditional Commissioner of Income-tax
RespondentN. Vaidyanathan
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateS.V. Subramaniam, Adv.
Excerpt:
- - 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......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 heard, the aliquot part of the partner' 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 income-tax 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.....
Judgment:

Balasubrahmanyan, J.

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.

2. 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.

3. 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, 'other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him'. In terms of this savings clause, the inquiry in the present case must be whether, as to one-half of the house used by the assessee's auditing firm for its office, the assessee can be said to be in occupation for the purpose of his business.

4. The assessee's share income from this partnership firm certainly falls to be assessed and has, in fact, been assessed, under the head 'Profits and gains of business or profession'. But can we say that the portion of the house under the firm's occupation if for the purposes of the assessee's profession The Tribunal's answer was in the affirmative. They held that the assessee must be held to be carrying on the profession, even though it was only the partnership practice which he, along with his partner, exercised from that portion of the house.

5. The Department contests the validity of this legal determination. Learned counsel for the Department goes to the fundamentals of partnership jurisprudence and says that a firm has a limited personality of its own which distinguished it from its partners, and in any case, a firm is dealt with under the income-tax law as a separate fiscal entity different from its partners. He accordingly urges that whatever is done by a firm is done by it for its own purposes and cannot be regarded, ipso jure, as done by the individual partners.

6. 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 a business carried on by or any of them acting for all. The idea is that a 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 heard, the aliquot part of the partner' 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 income-tax 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 assessee.

7. It 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.

8. The next question in this reference also arises from the circumstance that a half-portion of the assessee's house is being used by his partnership firm. At the time of the assessment, the assessee claimed depreciation allowance on his portion as an admissible deduction in the computation of his professional income. The two prime requirements for allowance of depreciation under the Income-tax Act are (1) the ownership of the depreciable fixed assets such as building, plant or machinery, as the case may be, and (ii) the user of the building, plant or machinery for the purposes of the assessee's business.

9. Mr. S. V. Subramanian, learned counsel for the assessee, cited two recent decisions of his court as supporting, in principle, the claim of the assessee in this case. They are CIT v. M. Rajeswari Vedachalam [1972] 86 ITR 753 and CIT v. K. G. Sadagopan : [1976]104ITR412(Mad) . The basic facts were similar in both the cases. The assessee, in each case, was a partnership firm. The firm claimed depreciation on certain items of machinery. There was no dispute about the fact that the machinery was used for the firm's business. The only snag was that the firm did not own the machinery as one of its assets. The ownership of the machinery was retained with one partner to the exclusion of the other partners. This divergence between ownership and user raised a piquant situation; the firm could not get the depreciation allowance, because the firm did not own the machinery; the partner owned the machinery, but could not claim depreciation, because it was not used in his business. This court, in both the cases, came to the conclusion that the firm was entitled to depreciation. We must, with respect, isolate these two decisions as largely turning on their facts, or rather, on this court's view of the facts.

10. In the present case also, there is a divergence between ownership and user. The claim for depreciation allowance is in respect of a depreciable asset which is owned by a partner, but used in the firm's business. But in one vital respect, this case differs from the two reported decisions. The claim for depreciation in those cases was made by the firm in the context of its assessment. In the present case, the claim is made by the individual partner in the context of his personal assessment. We feel our decision making in this case has been rendered so much easier by the claim having been made in the partner's assessment. For, we do not have to strip our findings as respects ownership of the depreciable asset in question, namely, one-half of the house. The only other requirement which has to be examined in this case is whether one-half of the building is used for the purposes of the assessee's business. For an answer, we need only refer to our earlier determination, which we have rendered while considering the assessee's claim for relief from taxation as respects the annual value of this very portion of the house. We held that the assessee must be regarded as using this portion of the house himself and for the purpose of his own business, in spite of, or probably because of, its being used by his firm as office for the firm's professional practice. Following the line of reasoning that the business of the assessee's firm is the business of the assessee himself, we must hold that the assessee is entitled to depreciation allowance for the user of the half portion of the house on its written down value.

11. Having discussed the points arising in this reference, it only remains for us to reproduce the questions of law propounded by the Tribunal in this case, and render our formal answers thereto. The questions of law are as follows :

'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that no notional income in respect of the portion of property occupied by the firm should be assessed in the hands of the assessee

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that depreciation is allowable in respect of the share of income on the property occupied by the firm and belonging to the assessee ?'

12. For the reasons we have earlier mentioned, our answers to both the questions of law are in favour of the assessee and against the Department. The Department shall pay the assessee's costs. Counsel's fee Rs. 500.


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