Fatehchand Murlidhar And Anr v. Commissioner Of Income-Tax, Calcutta

FATEHCHAND MURLIDHAR AND ANH • COMMISSIONEH OF INCOME-TAX, CALCUTTA July 19, 1966 [K. N. WANCHOO ANDS. M. S!KRI, JJ.] Income-tax Act (11 of 1932), s. 23(5)(a:-Scope of-Partnership-Sub-partnership between a pa.rtner and strangers-Agreement-to share profits and loss~s of partner in the Partnershqr--Income from the Partnership-Whether belongs to partner or sub-partnership. The assessee was a partner in a registered firm. In 1949, he entered into a partnership with persons v.rho \vere strangers to the registered firm and a deed of partnership was executed between them. It recited that the profits and losses for the share of the asscssce in the registered firm should belong to the new firm and be divided and borne by the partners of the new firm in accordance with the shares specified in the deed. On the question whether the income of the assessee from the registered firm for the years 1952-53, 1953-54 and 1955-56, should be jncluded in his individual assessment, HELD: The income should be included in the assessment of the new firm and not in the personal assessment of the assessee. (i) The new partnership constituted a sub-partnership in respect of the assessee's share in the registered firm. Tn the case of a sub-partnership, it creates a superior title and d1verts the lncome before it becomes the inoome of the partner, that is, the partner in the main firm receives the income not only on his o\vn behalf but on behalf of the partners in the sub-partnership. The fact that a sub-partner can have no direct claim to the profits vis-a·vis the other partners of the main firm and that it is the partner alone who is entitled to the profits vis-a-vis the other partners in the main firn1, does not show that the changed character of the partner should not be taken into consideration for income-tax purposes. r461E-F; 462Cl Iii) The object of s. 23(5)(a) is not to assess the firm itself but to apportion the income among the various partners. After the income has been apportioned, the Income-tax Officer has to find whether it is the partner who is assessable or whether the income should be taken to be the real income of some other person. If it is the real income of another firm, it is that firm which is liable to be assessed under the section. There is nothing in the section that prevents the income of the assessee from the registered firm being treated as the income of the sub-partnership and the section being applied again. r463C, Fl Charandas Haridas v. Commissioner of Income Taa:, [1960] 3 S.C.R. 296, and Commissioner of Income Tax, Bombay v. Sitaldas Tirathdas [19611 3 S.C.R. 634, followed. Commissioner of Income Ta~-:c, Punjab v. Laxmi Trading Co. 24 I.T.R. 173 and R.rititat 13. Daftari v. Commissioner of Income Ta.x, Bombay, 36 I.T.R. 18, referred to. Mahaliram Santhatia v. Commissioner of Income Tax 33 I.T.R. 261, overruled. tJ 966) ~Ul'P. S.tJ,11, SUPllElfE COURT REPORTS CIVIL APPELLATE JuRJsDICTION: Civil Appeal Nos. 1108 to A 1110 of 1964. Appeals by special lea.ve from the judgment and order dated August I, 1962 of the Calcutta High Court in Income-tax Refer-ence Nos. 20 and 21 of 1959. A. K. Sen, S. C. Mazumdar and J. Dalla Gupta. for the appellants. R. M. /lazarnavis, R. Ganapathy Iyer and R. N. Sac!tthey, fo! the respondent. The Judgment of the Court was delivered by Sikri, J. These appeals by special leave are directed against 154 the judgment of the High Court of Calcutta in two cases referred to it by the Income Tax Appellate Tribunal, Calcutta Bench, under s. 66(1) of the Indian Income-tax Act !XI of 1922) herein-after called the AcO. One of the references (income Tax Reference No. 20 of 1959) was made at the instance of Mis Fatehchand Murlidhar, and the other (income Tax Reference No. 21 of 1959) was made at the instance of Shri Murlidhar Himatsingka. ·In the former reference the question referred was "whether on the facts and in the circumstances of the case, the income of Murlidhar Himatsingka for his share in the firm of Messrs. Basantlal Ghan-;hyamdas for the assessment years 1952-53 and 1953-54 was rightly excluded from the income of the applicant firm". In the latter reference the question referred was "whether on the facts and circumstances of the case the income of Murlidhar Himat-singka for his share in the firm of Messrs. Basantlal Ghanshyam-das for the assessment year 1955-56 was rightly included in his personal assessment for that year". The tacts and circumstances out of which these references were made arc common because the real question raised by these references is whether the income of Murlidhar Himatsingka, from the firm of M / s Basantlal Ghanshyamdas, in which he was a part-ner, should be included in his personal assessment <'r in the assess-ment of the firm of Fatehchand Murlidhar, to which Murlidhar Himatsingka had purported to assign the profits and losses from M / s Dasantlal Ghanshyamdas. It is sufficient to take the facts from the statement of the case in Income Tax Reference No. 21 of 1959. made at the instance of Murlidhar Himatsingka. Murli-dhar Himatsingka was carrying on business in shellac, jute, hessian etc. under the name and style of "Fatehchand Murlidhar" at 14/1, Clive Row and 71, Durlolla Street, Calcutta. He was also a partner in the registered firm, Messrs Basantlal Ghanshyamdas having -i2/8 share. On December 21, 1949, a deed of partnership was executed by the said Murlidhar Himatsingka and his two sons, Madanlal Himatsingka and Radhaballav Himatsingka and a grandson named Mahabir Prasad Himatsingka. The deed recit-ed that Murlidlrnr llimatsingka had bec<'>me too old and infirm A to look after the various businesses and that Madanlal and Radha Ballav were already practically managing the business and that they had signified their intention to become the partners of the said firm "Fatehchand Murlidhar" and had agreed to contribute capital, Rupees ten thousand, Rupees five thousand and Rupees five thousand respectively. The parties further agreed to become B and be partners in the business mentioned in the deed. Clause S of this deed is important for our purpose and reads as follows: - "The profits and losses for the share of the said Mur-lidhar Himatsingka as partner in the said partnership firm of Basantlal Ghanshyamdas shall belong to the present partnership and shall be divided and borne by the parties hereto in accordance with the shares as specified here-after, but the capital with its assets and liabilities will belong exclusively to Murlidhar Himatsingka the party hereto of the First Part and the Parties hereto of the Second, Third and Fourth parts shall have no lien or claim upon the said share capital or assets of the party hereto of the first part in the business of the said Messrs Basantlal Ghanshyamdas". Clause IO provides: 455 "The Profits and losses (if any) of the partnership including the shares of the profits and losses of the said partnership firm of Basantlal Ghanshyamdas aforesaid shall be divided and borne by and between the parties in the following manner: - Party hereto of the First Part-Six annas (Murlidhar Himatsingka). Party hereto of the Second Part-Four annas (Madanlal Himatsingka). Party hereto of the Third Part-Three annas (Radhaballav Himatsingka). Party hereto of the Fourth Part-Three annas (Mahabirprasad Himatsingka). Clause 11 provides that "all partnership moneys and securities for money shall as and when received be paid into and deposited to the credit of the partnership account". In clause 13 it is pro-vided that "the party hereto of the First Part shall have the sole control and direction of the partnership business and his opinion shall prevail if there be any dispute between the parties hereto". Clause 16 provides that "the net profits of the partnership after payment of all outgoings interest on capital or loans and subject to the creation and maintenance of any reserve or other fund shall belong to the parties and the losses, if any, shall also be borne and paid by the parties in proportion to their shares as stated in Clause IO hereof''. For the assessment year 1955-56 the Income Tax Officer included the income from the share in the registered firm of L/S5SCI-31 (1966) SUI"l'. 8.C.R. Basantlal Ghanshyamdas in the individual assessment of Murli· dhar Himatsingka, Murlidhar Himatsingka appealed to the Appel· late Assistant Commissioner. Referring to s. 23(5)(a) of the Act, he held that as Murlidhar Himatsingka was a partner in the registered firm of Hasantlal Ghanshyamdas, his share had to be assessed in his hands. He further held that the agreement was merely an arrangement which came into force after the profits were earned and not before they were earned. He held that this agreement being a subsequent disposition of profits, after they had been earned, had to be disregarded. Murlidhar Himatsingka appea'ed to the Income Tax Appel· late Tribunal. The Appellate Tribunal heard this appeal together with the two appeals filed by Mis Fatehchand Murlidhar. The Appellate Tribunal, agreeing with the views of the Appellate Assistant Commissioner, dismissed the appeal. The High Court held that it was a case of diversion of in· come by Murlidhar Hirnatsingka after it had accrued to him and it was not a diversion at the source by any overriding interest. In the result, the High Court answered the questions in the affir· mative in both the references. Murlidhar Hirnatsingka and Mis Fatehchand Murlidhar having obtained special leave, the appeals are now before us. The learned counsel for the appellants, Mr. A. K. Sen, con· tends that a partner"s share is property capable of being assigned, mortgaged, charged and dealt with as any other property, and where a partner sells his share to a stranger, though that stranger does not become a partner yet the vendor partner holds the pro-perty as trustee for the purchaser and consequently the income received by the partner is not his income but the income of the purchaser. He says that similarly if a partner assigns part of his share the same result fol'ows. He further contends that in this case, by the agreement dated December 21, 1949, Murlidhar Hirnatsingka had entered into a sub-partnership with his two sons and a grandson in respect of his share in the firm Basantlal Ghan· shyamdas, and it is the sub-partnership that is entitled to the income from the firm Basantlal Ghanshyamdas and not Murli· dhar Himatsingka who must be taken to be acting on behalf of the firni Fatehchand Murlidhar. Mr. Sen further urges that the lndian Income Tax Act taxes real income and not notional in· come and the real income in this case belonged not to Murlidhar but to Mis Fatehchand Murlidhar. Mr. Hazarnavis, on the other hand, contends that this agree- 457 1.7 1 458 ment is a mere device for dividing income which had accrued to Murlidhar Himatsingka among his sons and grandson. In the alternative he contends that the Indian Income Tax Act does not contemplate the application of s. 23<5)(a) twice. He says that the firm of Basantlal Ghanshyamdas was a registered firm and the A Income Tax Officer was bound, under s. 23(5)(a), to assess Murli-dhar in respect of the income received from this firm; he could not carry this income to the assessment of another registered firm, namely, Fatehchand Murlidhar, and then apply s. 23(5)(a). The first point that arises is whether the agreement dated December 21, 1949, has succeeded in diverting the income from Murlidhar's share in Mis Basantlal Ghanshyamdas to Mis Fateh-chand Murlidhar before it reached Murlidhar. What is the effect of the agreement? In our opinion the agreement dated December 21, 1949, constituted a sub-partnership in respect of Murlidhar's share in MI s Basantlal Ghanshyamdas. The High Court in this con-nection observed : - "At best it could be called a sub-partnership enter-ed into by Murlidhar with strangers in respect of his share of the partnership". In arriving at this conclusion we attach importance to the fact that losse~ were also to be shared and the right to receive profits and pay losses became an asset of the firm, Fatehchand Murli-dhar. In Commissioner of Income-tax, Bombay v. Sitaldas Tirath-das,(') Hidayatullah, J., speaking for the Court, laid down the following test for determining questions like the one posed above. After reviewing a number of authorities, he observed: - "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the asses-see as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obli-gation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted be-fore it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it is pay-able". This test c~early shows that it is not every obligation to apply . income in a particular way that results in the diversion of income before it reaches the asse5fce. In its judgment in the above case (Sitaldas Tirathdas v. Commissioner of Income-tax. Bombay(') the High Court of Bombay had observed: - "It is not essential that there should be a charge, it is quite sufficient if there is a legally enforceable claim". These observations must be treated as unsound. The test laid down by this Court is quite clear, though like some other tests it is not easy of application in all cases. 1.7 1 458