Law:

Section:

SECTION 16(1)(B) OF THE INDIAN INCOME-TAX ACT, 1922 [CORRESPONDING TO SECTION 67(1) OF THE INCOME-TAX ACT, 1961]-PARTNER-METHOD OF COMPUTING PARTNER'S SHARE IN INCOME OF FIRM-PARTNERSHIP DEED PROVIDED FOR PAYMENT OF INTEREST ON PARTNERS' DEPOSITS AT 6 PER CENT PER ANNUM-NO INTEREST WAS RECEIVED BY ASSESSEE-PARTNER AS IT WAS RELINQUISHED-ITO ASSESSING FIRM DID NOT PROVIDE FOR INTEREST IN ITS ASSESSMENT-ITO ASSESSING ASSESSEE-PARTNER INCLUDED INTEREST AT 8 PER CENT PER ANNUM AS INCOME FROM OTHER SOURCES-AAC REDUCED INTEREST RATE TO 6 PER CENT-TRIBUNAL HELD THAT IT WAS NOT OPEN TO ITO ASSESSING ASSESSEE-PARTNER TO DETERMINE INTEREST DUE FROM FIRM INDEPENDENT OF THE ORDER OF ITO ASSESSING FIRM-WHETHER INTEREST ACCRUED TO ASSESSEE- PARTNER-HELD, YES-WHETHER INTEREST IS TAXABLE IN PARTNER'S HANDS IN THE ABSENCE OF ASSESSMENT ORDER FROM ITO ASSESSING FIRM-HELD, NO Facts The assessee is assessed at Hazaribagh and is a partner in a firm assessed at Calcutta. The partnership deed provided that any additional working capital brought in by a partner would be treated as debt due and bear interest at 6 per cent per annum. The ITO, Hazaribagh noticed an advance of about Rs. 11 lakhs by the assessee-partner to the firm. He calculated interest at 8 per cent on that amount and included it as income from other sources. The AAC reduced the interest from 8 per cent to 6 per cent as the partnership deed itself provided that rate. In appeal, the Tribunal held that, since the interest had not been reported by the ITO assessing the firm, the ITO assessing the assessee-partner was not entitled to take the same into account. At the instance of the High Court for obtaining additional material on specified lines, the Tribunal ascertained that on firm's request to forgo the interest in view of huge losses, the assessee-partner had agreed to the same by a release deed. On reference : Held 1. In the absence of any regular basis of accounting, the assessee-partner did not challenge the ITO's adoption of mercantile basis. Hence, on this basis, the interest accrued to the assessee-partner. 2. In the absence of an order of allotment from the ITO assessing the firm, the Tribunal, by applying…

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