Beneficial owner's share in firm profits taxable even where deemed dividend forms part of the partnership income

The second proviso to section 30(1) of the Indian Income-tax Act, 1922 barred objections only by a partner of the firm whose income or loss was under apportionment; because the assessee-family was found not to be a partner, it was not precluded from challenging inclusion in its own assessment. Deemed dividends received by the firm, however, formed part of the partner's share of business profits, and the family, as beneficial owner of that share, was taxable on its proportionate interest despite the dividend's notional character. The reference was thus partly in favour of the assessee and partly in favour of the revenue.

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Issues: (i) Whether the assessee-family was precluded by the second proviso to section 30(1) of the Indian Income-tax Act, 1922 from objecting, in its own assessment appeal, to inclusion of the sum of Rs. 26,708. (ii) Whether the sum representing half of the deemed dividends received by the firm could be included in the assessee-family's total income as its share of the firm's profits.

Issue (i): Whether the assessee-family was precluded by the second proviso to section 30(1) of the Indian Income-tax Act, 1922 from objecting, in its own assessment appeal, to inclusion of the sum of Rs. 26,708.

Analysis: The statutory bar in the second proviso to section 30(1) applies where the appellant is a partner of the firm whose total income or loss, or its apportionment, is in question. The Tribunal's finding was that the assessee-family was not a partner of the firm; Durgadutt alone was the partner, though the family was the beneficial owner of his share. On that footing, the proviso could not deprive the assessee-family of the right to challenge the inclusion in its own assessment.

Conclusion: The question was answered in the negative and in favour of the assessee.

Issue (ii): Whether the sum representing half of the deemed dividends received by the firm could be included in the assessee-family's total income as its share of the firm's profits.

Analysis: Dividend or deemed dividend received by a partnership firm is income of the firm, but in the hands of an individual partner it forms part of the partner's share of business profits. The Tribunal found that the assessee-family was the beneficial owner of Durgadutt's half share in the firm, and that share represented income, profits and gains accruing to the family through the partner's interest in the firm. The notional character of the dividend did not prevent taxation of the partner's share in the hands of the beneficial owner.

Conclusion: The question was answered in the negative and in favour of the revenue.

Final Conclusion: The reference was answered by holding that the assessee-family was not barred from contesting the assessment, but its beneficial share in the partner's profits, including the deemed dividend component, was taxable in its hands.

Ratio Decidendi: A statutory bar on appeals applicable to a partner of a firm does not extend to a beneficial owner who is not itself a partner, but the beneficial owner of a partner's share in a firm is taxable on that share of profits, including income derived from deemed dividends received by the firm.

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