Accrual of partner's interest income does not justify separate taxation without allocation in the firm's assessment.

Interest on advances to a firm was held to have accrued to the partner on the mercantile basis because the right to receive had arisen, the amount was acknowledged as due, and relinquishment came only after accrual. However, the partner's assessing officer could not treat that interest as a separate taxable item in the partner's hands without the requisite allocation from the firm's assessment, since the partner's share of firm income depended on the computation made in the firm's case. The taxability issue was therefore resolved in favour of the assessee on the separate-assessment point.

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Issues: (i) Whether the sum of Rs. 42,595 accrued as interest on the advances made by the assessee to the firm during the relevant year. (ii) Whether the said interest could be included as a separate item of taxable income in the hands of the assessee without awaiting an allocation from the assessment of the firm.

Issue (i): Whether the sum of Rs. 42,595 accrued as interest on the advances made by the assessee to the firm during the relevant year.

Analysis: The assessee was assessed on the mercantile basis after the Income-tax Officer found that no regular method of accounting had been followed, and on that basis income was chargeable on accrual and not on receipt. The Tribunal's supplementary findings recorded that the assessee had acquired a right to receive the interest, that the amount had been acknowledged as due, and that the relinquishment deed was executed only after the interest had accrued. The record also showed that the claim was treated as a debt due before relinquishment.

Conclusion: The interest of Rs. 42,595 accrued to the assessee. This issue was decided against the assessee.

Issue (ii): Whether the said interest could be included as a separate item of taxable income in the hands of the assessee without awaiting an allocation from the assessment of the firm.

Analysis: In computing a partner's total income, the share under the governing provision depends upon the figure determined in the assessment of the firm, including the allocation of interest, salary, commission, or other remuneration payable by the firm. The firm's assessment had already been completed, but no allocation of the interest in question had been made by the officer assessing the firm. In the absence of such allocation, the assessing officer of the assessee could not independently treat the accrued interest as a separate assessable item.

Conclusion: The interest could not be brought to tax as a separate item in the assessee's hands without the requisite allocation from the firm's assessment. This issue was decided in favour of the assessee.

Final Conclusion: The income was held to have accrued, but the addition could not be sustained as a separate assessment in the assessee's hands in the absence of allocation from the firm's assessment, so the taxability question was answered for the assessee.

Ratio Decidendi: For a partner's income from a firm, accrual alone does not permit separate assessment of interest in the partner's hands where the statutory computation depends on the firm's allocation and the partner's share as determined in the firm's assessment.

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