1990 (12) TMI 191 - AT - Income Tax

Assessment of income from contract: Firm vs. individual partner. Recomputation ordered for tax assessment.

K. DAMODARASWAMY NAIDU. Versus ASSTT. COMMISSIONER OF INCOME TAX.

The judgment focused on the assessment of income from a contract in the hands of a firm versus an individual partner. The court determined that the income ... - Issues:1. Whether income from a contract should be assessed in the hands of a firm or an individual partner.Detailed Analysis:The judgment dealt with appeals regarding the assessment of income from a contract in the hands of a firm or an individual partner. The partnership deed dated 20th July, 1980, indicated the formation of a partnership with multiple partners. The firm applied for registration, and the income from the contract was initially included in the individual assessment of one partner. The Income Tax Officer (ITO) granted registration to the firm but assessed the income as a protective measure. The firm's appeal was allowed, deleting the income from the firm's total income. The Revenue appealed against the deletion of income from the firm's assessment, while the individual partner appealed against the inclusion of income in his total income.The first issue addressed was the constitution of the firm. The partnership deed stated that the partnership came into existence on 1st Jan., 1980, but the Revenue argued that transactions before the deed were conducted by one partner as a proprietor. The absence of evidence showing the partnership's existence before the deed led to the conclusion that the partnership began only upon deed execution. The judgment cited legal principles emphasizing that an agreement cannot alter past events. Despite the partnership deed, the ITO could question the partnership's existence and assess business parts belonging to individual partners.A crucial aspect was whether the business initially conducted as a proprietary one was converted into a partnership business. The individual partner claimed the conversion occurred before certain statements were made. The Revenue highlighted instances where the business was referred to as proprietary. However, the judgment reasoned that the conversion was evident through actions such as notifying the contractee and sharing profits among partners. Legal principles were cited to support the conversion of ownership from individual to partnership property. The judgment emphasized that profits accrue upon completion of a contract, and in this case, they were shared among partners after conversion to a partnership.The judgment addressed the individual partner's mistaken representation of the business as proprietary, stating that such errors do not divest the partnership of its property rights. It rejected the Revenue's suggestion of an afterthought claim for tax mitigation. Actions taken based on the conversion, like informing third parties, were deemed valid. The judgment concluded that the income derived by the firm should be included only in the firm's total income, directing the ITO to recompute the income for both the firm and the individual partner. As a result, both appeals were allowed.