Partner interest from a firm retains business-income character and is not separately taxable in the partner's individual assessment.

Interest received by partners from a firm on capital invested in the firm retains the same business-income character in the partners' hands. The statutory scheme in section 67 of the Income-tax Act, read with section 28(v), treats interest, salary, bonus, commission or other remuneration from a firm as part of the firm's business income before allocation to partners. The analysis also reflects the principle that a firm, though assessed as a unit, does not alter the essential character of income merely because it is passed through to partners. CBDT clarification and supporting authorities are noted as consistent with this treatment.

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Issues: Whether interest received by partners from the firm on capital invested in the firm retained the character of business income in the partners' hands and was therefore not taxable as such in their individual assessments.

Analysis: The partnership firm's income, including amounts relatable to interest, was treated as business income in the hands of the firm. The statutory scheme in section 67 of the Income-tax Act, 1961, and the legislative indication in section 28(v) supported the view that interest, salary, bonus, commission or other remuneration due to or received from a firm is to be taken into account in computing the firm's business income and thereafter allocated to partners. The reasoning also proceeded on the settled principle that a firm, though assessed as a unit, is not a separate legal person in the full sense, and that income derived through the firm does not change its essential character merely because it reaches the partner through allocation. The Court also relied on the CBDT clarification and the line of authorities holding that the income of the partner bears the same character as in the hands of the firm.

Conclusion: The interest income received by the partners from the firm on their capital investments was not separately taxable in their hands and was to be treated as business income retaining the same character as in the firm's hands.

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