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Report No. 12

Chapter VI

Aggregation of Income and Set-off or Carry Forward of Losses

Notes to clause 68

Incomes on which income-tax is not payable have been dealt within a separate Chapter. Since such incomes form part of the total income for purposes of rate etc., this clause states that rule clearly.

Notes to clause 69

Sub-clause (1)-Existing section 16(1)(b), dealing with the method of computing the share of the partner in the income of the firm, presents some difficulties. In the first place, he words "increased or decreased respectively by his share in the balance of the profits or loss after the deduction of any interest, salary, commission or other remuneration payable to any partner, in respect of the previous year" create some ambiguity, as it is not clear whether the words "after the deduction" are to be read with "his share" or with "balance" or with "profits or loss of the firm". Secondly, the words "increased or decreased respectively" leave some scope for improvement and simplification. Lastly, the section is a bit involved. An attempt has, therefore, been made to recast the provision and state the mode of computing the share step by step.=

The direction to deduct interest etc. payable to any partner, contained in the existing section, is obviously necessary, in view of the fact that existing section 10(4) (b) disallows the deduction of any payment by way of interest etc. made by the firm to a partner. What section 16(1)(b) does is to authorise this deduction by a positive provision, when computing the partner's share.

The existing expression "profits or loss" has been replaced by "total income", which is more precise.

The word "paid" has been used in paragraphs (a), (b), (c), instead of the existing word "payable". The word has been defined in the 'clause. This will secure uniformity with existing section 10(5).

Sub-clause (2)- This clause is new and is intended to make it clear that the classification of income under the various heads as given in existing section 6 is applicable to the share of a partner, in the same way as it applies to the firm. In other words, just as a firm's income can be classified under "Income from house property", "Income from business" etc., similarly, even after the apportionment of the income to the. partner, the amount apportioned to a partner is classified under various heads.

Sub-clause (3)- This is new. It gives effect to a decision of the Bombay High Court1 which holds that interest paid on money borrowed by a partner and utilized by him for - investing as capital in the firm is allowable as a deduction in computing the partner's total income, in so far as the total income comprises his share in a firm's income.

1. Shanti Kumar Morajee v. C.I.T., (1955) 27 ITR 69.

For the sake of comprehensiveness, it has also been made clear that no other deduction is allowed in respect of the share.

Sub-clause (4)- Existing section 16(1)(b), proviso, has been reproduced in this sub-clause. Strictly speaking this provision should be placed along with provisions for set off. However, it serves a useful purpose as indicating that there is scope for set off. It has therefore been allowed to remain here. The words "in accordance" would, of course, make it clear that a partner's right to set off is not absolute, but is subject to the provisions of existing section 24.

Notes to clause 70

This clause is new and is intended to give effect to the legal principle that unexplained cash credits appearing in the books of accounts of the assessee are assessable as income2.

Under the decision of the Patna High Court cited, above1, such cash credits are treated as the income on the financial year preceding the assessment year, as the assessee could not have opted for any other previous year for such items. We have by this clause definitely laid down that the previous year to which the income represented by such cash credits could be related is the previous year for which the account books are maintained and the cash credit is entered.

1. Cf. C.I.T. v. P. Darolia & Sons, (1955) 27 ITR 515. (Pat HC). See also p. 557 of Kanga and Palkhiwala, 1958 Edn.

Notes to clause 71

This is new. Investments not appearing in the books and not explained satisfactorily are made assessable for the financial year in which the investments have been made.

Notes to clause 72

This is new. It deals with set off of a loss from one business against profits under any other business.1 The principle is well accepted by courts1, and has been codified for the sake of comprehensiveness.

1. Anglo-French Textile Co. Ltd. v. C.I.T., (1953) 23 ITR 82., For other cases see Kanga and Palkhivala's Commentary to the Act, 1958 Edn., p. 322.

Income-Tax Act, 1922 Back

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