HIGH COURT OF BOMBAY 

R. V. Desai with P. S. Jetly, for the Revenue : 

Kaka, Amicus curie, for the Assessee 

JUDGMENT 

SMT. RANJANA DESAI, J. : 

By this reference under section 256 (1) of the IT Act, 1961. The Tribunal has referred the following questions of law to this Court for opinion at the instance of the assessee : 

"(1) Whether, on the facts and circumstances of the case and in law, the Tribunal was right in holding that the assessee was entitled to deduction under section 80L of the IT Act in respect of interest income on fixed deposits with banks included in the assessee's share of profit derived by the assessee from the firm of M/s V. M. Jog & Co. Pune ? 

2. Whether, on the facts and circumstances of the case, the Tribunal was right in allowing the assessee's claim of deduction under section 80L, when it fact, the fixed deposits were held on behalf of the firm and, therefore, the interest income from such fixed deposits belonged to the firm and the assessee's share of the interest was assessable only under the head 'profit and gains of business or profession ?" 

2. The facts which are relevant for the purpose of this reference are as under : 

The assessee is a partner in the firm of M/s V. M. Jog & Co., Pune, which held fixed deposits in the Bank of Maharashtra on which it earned interest. The assessee's share income included the firm's proportionate business profits as well as proportionate share of interest income. In respect of the proportionate share of interest income, the assessee claimed deduction under section 80L of the IT Act ("the Act") for the asst. yrs. 1976-77 and 1978-79. 

The ITO disallowed the said claim. On appeal by the assessee, the AAC allowed the said deduction following the judgment of the Allahabad High Court in CIT vs. Brij Raman Das (1979) 9 CTR (All) 50 : (1979) 118 ITR 387 (All) : TC 26R.475. 

The Revenue carried appeals to the Tribunal. The Tribunal followed the decision of Allahabad High Court on which the AAC had placed reliance and upheld his order. The appeals filed by the Revenue were, therefore, dismissed. It is against this background that the present reference is made to this Court. 

3. We have heard Shri Kaka, learned amicus curiae and Shri R. V. Desai with Shri P. S. Jetly for the Revenue. 

4. Our attention was drawn to the decision of this Court in CIT vs. Gopalkrishna M. Singre (1995) 126 CTR (Bom) 304 : (1995) 214 ITR 443 (Bom) : TC S26.2704. In that case the assessees were partners in a firm. The firm derived income from interest on Central Government securities and deposits, including deposits with banking companies. For the asst. yr. 1973-74, the assessees claimed deduction under section 80L of the Act in respect of the share of profits from the firm which represented "interest on Government securities and interest on deposit from banking companies". The ITO rejected the claim for deduction on the grounds that it was the firm which had earned income from interest on the fixed deposits and securities and not the assessees who were partners thereof and that the nature of the income in the hands of the partner changed its complexion and it partook of the character of "share of profits from the firm". The CIT(A) upheld the orders of the ITO. The Tribunal accepted the contention of the assessees. 

5. On reference the High Court held that sub-section (2) of section 67 of the Act clearly provides that the partner's share in the income or losses of the firm should be apportioned in the assessment of the partner under various heads of income in the manner in which the firm's income had been determined under each head. That being so, interest earned by the firm on Government securities and fixed deposits with banking companies would retain its character despite apportionment of the income of the firm among partners. The income from interest in respect of which deduction was claimed by the partners under section 80L of the Act was determined in the assessment of the firm as "income on fixed deposits with Government companies and interest on Government securities". The share of the partners in such income of the firm would be apportioned under the same head and the assessees would, therefore, be entitled to get deduction under section 80L of the Act in respect of the same. 

6. It is pointed out to us by Shri Kaka, learned amicus curiae that though controversy in this reference has been decided by this Court in favour of the assessee by the above judgment, the legal position has since been changed by the insertion of sub-section (3) to section 80L by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from 1st April, 1976. Sub-section (3) of section 80L reads as follows : 

"(3) For the removal of doubts, it is hereby declared that where the income referred to in sub-section (1) is derived from any asset held by, or on behalf of a firm, an AOP or a BOI, no deduction shall be allowed under the said sub-section in respect of such income in computing the total income of any partner of the firm or any member of the association or body". 

7. In view of the above amendment, question No. 1 is answered in the negative i.e., in favour of Revenue and against the assessee. 

8. In view of the answer to question No. 1 in this negative, question No. 2 has become academic. The same is, therefore, returned unanswered. 

Reference is disposed of accordingly with no order as to costs.

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