1984 (4) TMI 21 - HC - Income Tax

Summary

Issues:
1. Whether the assessment of share income from the firm in the status of an unregistered firm was justified.
2. Whether a sub-partnership existed among the parties based on the agreement dated April 15, 1963.

Analysis:
1. The case involved a dispute regarding the assessment of share income from a firm for the assessment years 1970-71 and 1971-72. The issue was whether the share income should be assessed in the status of an unregistered firm consisting of a partner and her children. The Income Tax Officer (ITO) assessed the income as a sub-partnership between the partner and her children. However, the Appellate Assistant Commissioner (AAC) found the assessment unsustainable as it was not based on proper investigation and materials. The Tribunal upheld the AAC's decision, stating that there was no evidence of a sub-partnership and no diversion of share income from the main firm. The Revenue contended that the agreement established a sub-partnership, but the assessee argued that no new rights were created, and no sub-partnership existed.

2. The agreement dated April 15, 1963, was central to determining the existence of a sub-partnership. The agreement clarified the rights of the parties regarding the deceased partner's share in the firm. It was argued that the agreement did not create a sub-partnership as it did not involve an agreement to divide profits among the parties. The court analyzed the agreement and concluded that no sub-partnership was established. The terms of the agreement did not indicate an intention to form a partnership among the partner and her children. The court emphasized that a sub-partnership requires an agreement to share profits, which was absent in this case. The court found that the agreement merely reiterated existing rights under personal law and did not create new rights or obligations, thus ruling out the existence of a sub-partnership.

In conclusion, the High Court held that the assessment of share income from the firm in the status of an unregistered firm was not justified based on the terms of the agreement and the absence of a sub-partnership. The court ruled in favor of the assessee, stating that no sub-partnership was established, and the share income should not be assessed as an unregistered firm. The Revenue was directed to pay the costs of the reference to the assessee.