Partner's share of firm profits remains business income despite partition, allowing carry forward of related unabsorbed loss.

A partner's share of profits or losses from a firm retains its character as business income even when, by partition or an overriding arrangement, the income is shared with another person. The diversion at source does not change the nature of the underlying income, and the same position applies where the arrangement is treated as a sub-partnership. On that basis, the unabsorbed loss relatable to such income was eligible for carry forward and set-off under section 72(1) of the Income-tax Act, 1961, and the disallowance was unsustainable.

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Issues: Whether the assessee's half share in the profits and losses of the firms, received by virtue of partition and overriding title, retained the character of business income so as to permit carry forward and set-off of the unabsorbed loss under section 72(1) of the Income-tax Act, 1961.

Analysis: The share income of a partner in a firm is income from business carried on by him, and that character does not change merely because the partner's interest is shared with another under an overriding arrangement arising from partition. The partition only diverts the income at source and does not alter the business character of the underlying share of profits or losses. Even if the arrangement is treated as a form of sub-partnership, the income attributable to the sub-partner continues to be business income in the hands of the person entitled to the share.

Conclusion: The assessee was entitled to carry forward and set off the unabsorbed loss; the disallowance was unsustainable and the issue was decided in favour of the assessee.

Ratio Decidendi: A share of partnership profits or losses retains the character of business income notwithstanding partition or overriding title, and an unabsorbed loss relatable to such income is eligible for carry forward and set-off under section 72(1) of the Income-tax Act, 1961.

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