Law:

Section:

Section 40(b) , read with section 67, of the Income-tax Act, 1961, and rule 8 of the Income-tax Rules, 1962 – Business disallowance – Interest, salary, etc. paid by firm to partner – Assessment year 1962-63 – Assessee-firm derived income from sale, cultivation and manufacture of tea, 40 per cent of which was made taxable under rule 8 – ITO while allocating share of income between partners, allocated 100 per cent of salary and interest to them and arrived at their share income which totalled upto 100 per cent of firm's income – Whether since only 40 per cent of income from sales of tea was treated as taxable under Act and balance 60 per cent was regarded as agricultural income exempt from tax and since 60 per cent of salaries paid to partners came out of that exempted gross sum, said part of salaries would also get benefit of exemption under Act – Held, yes – Whether on same principle as applied to salaries, 60 per cent of interest paid to partners would also exempt under Act – Held, yes FACTS The assessee-firm having two partners, derived income from sale, cultivation and manufacture of tea. The ITO computed the firm's income for the relevant assessment year, and under rule 8, 40 per cent of this income was made taxable under the Act. The ITO while allocating the share of the income between the partners, allocated 100 per cent of the salary and interest to the partners and thus arrived at the share income of the two partners which totalled up to 100 per cent of the firm's income and not merely 40 per cent which was taxable. In appeal, the AAC held that only the income which was taxable to income-tax could be allocated and that only 40 per cent of salary and interest had to be considered while allocating the profits of the firm among the partners. The Tribunal upheld the order of the AAC. On reference : HELD Since only 40 per cent of the income from sales of tea was treated as taxable under the Act and the balance, namely, 60 per cent, was regarded as agricultural income and exempt from tax under the Act and 60 per cent of the salaries paid to the partners came out of this exempted gross sum, it was held that the said part of the salaries also got the benefit of…

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