2011 (4) TMI 41 - HC - Income Tax

Partnership firm - transactions between firm and partners - As per the case of Lovelock & Lewes v. Commissioner of Income-tax (1993 -TMI - 20088 - CALCUTTA High Court), the Division Bench held that when the firm pays to its partners, it pays to itself and likewise when the firm extends to the partners a benefit, the benefit is availed of by the firm itself - Where the two partners of the firm after withdrawing from capital of the partnership-firm by mutual consent of the two partners decided to purchase and subsequently to sell shares of different companies by giving brokerage to the assessee-firm of which they are the partners - In such circumstances, there is no just reason of treating the income from such share transactions of the partners of the assessee as those of the firm - The firm in those transactions only got the brokerage and those brokerages would be the income of the firm. Held that the Tribunal erroneously set aside the order of the Commissioner of the Income-tax (Appeals) as regards the income arisen out of the sale of the shares in respect of ITC Ltd. and Tata Tea Ltd. at the instance of the partners by adding the same to the income of the assessee - Therefore, allow this appeal by answering the question in the negative in favour of the assessee

Summary

Issues Involved:
1. Whether the short-term capital gains earned by the appellant's partners in transactions relating to purchase and sale of shares in ITC Ltd. and Tata Tea Ltd. were to be assessed as the appellant's profits.
2. The legality of the transactions made by the partners through the assessee-firm.
3. The treatment of shares in Castrol India Ltd. in the assessee's assessment.

Detailed Analysis:

1. Assessment of Short-Term Capital Gains:
The primary issue was whether the short-term capital gains of Rs.44,56,360 earned by the appellant's partners in transactions relating to ITC Ltd. and Tata Tea Ltd. should be assessed as the appellant's profits. The Tribunal held that the funds were not available to the partners for entering into the transactions and that the purchases and sales were made by mere book entries. However, the High Court found that the partners had sufficient credit balance in their capital accounts to cover the payment for the shares, and the transactions were evidenced by proper entries in the assessee's books, including brokerage charges. The Court concluded that there was no just reason for treating the transactions as those of the firm, and the income from such share transactions of the partners should not be added to the income of the assessee-firm.

2. Legality of Transactions by Partners:
The Court examined whether the transactions by the partners through the assessee-firm were lawful. It was noted that the partnership deed allowed the partners to withdraw capital with mutual consent and there was no restriction on carrying on similar business. The Court referred to sections 11 and 16 of the Partnership Act, which permit partners to derive personal profits from firm transactions and to carry on competing business, provided there is no contract to the contrary. The Court found that the partners lawfully withdrew funds from their capital accounts to purchase shares and paid brokerage to the firm, thus legitimizing the transactions.

3. Treatment of Shares in Castrol India Ltd.:
The Tribunal had allowed the appeal of the Revenue concerning the shares in Castrol India Ltd., treating them as belonging to the partnership firm and adding the difference between the market value and purchase price to the assessee's assessment. However, the High Court did not address this issue in detail in the judgment, as the appeal primarily focused on the transactions relating to ITC Ltd. and Tata Tea Ltd.

Conclusion:
The High Court allowed the appeal, holding that the short-term capital gains earned by the partners in transactions relating to ITC Ltd. and Tata Tea Ltd. should not be assessed as the appellant's profits. The Court found that the transactions were lawful and properly documented, and there was no just reason to treat the income from these transactions as the income of the firm. The Tribunal's order was set aside, and the question was answered in the negative in favor of the assessee. There was no order as to costs.