1981 (4) TMI 89 - HC - Income Tax

Partners not eligible for tax exemption on firm's interest income. Exemption only for assessee.

The High Court held that partners in a firm are not entitled to exemption under section 80L of the Income-tax Act for interest earned by the firm on bank ... Interest On Bank Deposits Issues:Whether a partner is entitled to exemption under section 80L of the Income-tax Act in respect of interest earned by the firm on bank deposits held in its nameRs.Analysis:The case involved a question regarding the entitlement of a partner to exemption under section 80L of the Income-tax Act in relation to interest earned by the firm on bank deposits. The assessee, a Hindu Undivided Family (HUF), represented by the karta, was a partner in a firm that received interest on bank deposits during the relevant assessment year. The Income Tax Officer disallowed the claim for exemption under section 80L, but the Appellate Assistant Commissioner (AAC) allowed the claim. The Tribunal upheld the decision of the AAC, stating that the interest earned by the firm and allocated to the partners could still be considered as interest received from the bank by the partners for the purposes of section 80L of the Act.The Tribunal emphasized that there is no distinction between the firm and the partners concerning the acts of the firm. Section 67 of the Act provides the method for computing a partner's share in the firm's income, and the Tribunal held that the interest earned by the firm, even after apportionment to the partners, retains its character as interest received from the bank. The Tribunal also noted that section 80L does not limit the exemption to income received as interest on deposits made by the individual himself. Therefore, the Tribunal upheld the order of the AAC, granting the exemption to the partners.However, the High Court disagreed with the Tribunal's interpretation. It pointed out that section 80A(1) of the Act specifies that deductions shall be allowed to the assessee alone, and section 80L provides deductions in respect of interest on certain securities, dividends, etc. The Court highlighted that the firm is an assessee under the Act, and while section 67 outlines the method for computing a partner's share in the firm's income, it does not provide grounds for extending the benefit of exemption under section 80L to the partners. The Court emphasized that the firm and the partners are separate assessees, and the benefit of exemption cannot be extended to anyone other than the assessee.Therefore, the High Court held that a partner is not entitled to the exemption under section 80L of the Act in respect of interest earned by the firm on bank deposits held in its name. The Court ruled against the assessee, stating that the benefit of exemption under section 80L is not extendable to the partners constituting the firm, as they are separate assessees.In conclusion, the High Court's judgment clarified that the exemption under section 80L of the Income-tax Act is limited to the assessee alone, and partners in a firm cannot claim this exemption in relation to interest earned by the firm on bank deposits.