1979 (1) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee's wife and son became partners in the main firm or whether a sub-partnership came into existence.
2. Whether the shares of the assessee's wife and son were liable to be included in the total income of the assessee under section 64 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Whether the assessee's wife and son became partners in the main firm or whether a sub-partnership came into existence:

The court examined the agreement dated December 7, 1967, and the subsequent partnership deed to determine if the assessee's wife and son became partners in the main firm, M/s. Mohansingh Sahebsingh, or if a sub-partnership was formed. The key clauses from the agreement indicated that the wife and son permitted the assessee to use their shares in the firm and agreed to share the profits equally, subject to a minimum annual payment.

The court observed that a partnership involves an agreement to share profits and mutual agency among partners. The court cited the Supreme Court's definition of a sub-partnership from Murlidhar Himatsingka v. CIT, which is an agreement to share profits that does not affect the main partnership but creates a partnership inter se among the parties to the agreement.

The court concluded that the wife and son did not become partners in the main firm because the amounts credited to their accounts did not form part of the firm's capital at risk. Additionally, the minor son could not be a full-fledged partner. Therefore, the first contention of the revenue was rejected.

However, the court found that a sub-partnership had come into existence between the assessee, his wife, and his son. The agreement to share profits and the authority given to the assessee to act as a partner on behalf of his wife and son satisfied the elements of a sub-partnership. The Tribunal erred in dismissing this contention without proper consideration.

2. Whether the shares of the assessee's wife and son were liable to be included in the total income of the assessee under section 64 of the Income Tax Act:

Given the establishment of a sub-partnership, the court addressed whether the income from the main firm, coming to the assessee's share, should be included in his total income under section 64 of the Income Tax Act. The court noted that the sub-partnership agreement involved sharing the profits earned by the assessee in the main firm, making the income from the main firm the income of the sub-partnership.

The court referenced previous judgments that emphasized examining the real relationship between parties and the substance of the agreement. The court found that the sub-partnership arrangement did not make the wife and son partners in the main firm but created a partnership among them for sharing the profits earned by the assessee.

Thus, the court concluded that the income of the wife and son from the sub-partnership should be included in the assessee's total income under section 64. The Tribunal's decision to exclude this income from the assessee's total income was incorrect.

Conclusion:

The references were accepted, and the court answered the questions as follows:
1. The assessee's wife and son did not become partners in the main firm, but a sub-partnership consisting of the assessee, his wife, and son came into existence on partial partition by virtue of the agreement dated December 7, 1967.
2. The shares of the assessee's wife and son were liable to be included in the total income of the assessee under section 64 of the Income Tax Act.

The court granted leave to appeal to the Supreme Court, recognizing that substantial questions of law were involved.