1972 (4) TMI 11 - HC - Income Tax

Firm deed loss - allocation of shares of partners - Whether the allocation must be in accordance with partnership deed held that, when a partnership is registered, who the partners are can be decided only with reference to the partnership deed whether treating the share of some of the partners as belonging to others is permissible held that clubbing of the share of some of the partners in the hands of their respective fathers was not justified - whether loss of cash by theft is a deductible expenditure held that such loss is admissible deduction in computing the business profit, if the loss is incidental to the business

Issues Involved:
1. Whether the sum of Rs. 10,500 stolen from the shop of the assessee was a business loss and allowable in its hands.
2. Whether the Income-tax Officer was justified in clubbing the share income of Sri Arjun Lall, Ratan Lal, and Rambilash in the hands of their respective fathers.

Issue-wise Detailed Analysis:

Issue 1: Business Loss Due to Theft
The primary question was whether the stolen sum of Rs. 10,500 could be considered a business loss and thus deductible. The Tribunal had disallowed the claim, stating it was a capital loss and not incidental to the business. The Tribunal emphasized that for a loss to be deductible, it must arise directly from the carrying on of the business and be incidental to it.

The assessee argued that the cash lost was the day's realization and kept at the business premises, making the loss incidental to the trade. The Supreme Court's principles in Commissioner of Income-tax v. Nainital Bank Ltd. were cited, suggesting the loss was admissible as a deduction.

The counter-argument from the Commissioner of Income-tax was that there was no established nexus between the business and the theft, making the loss non-deductible.

The judgment highlighted that the admissibility of such losses depends on the facts and circumstances of each case. The key facts were:
1. The assessee was a wholesale dealer in cotton piece goods.
2. The stolen sum represented the day's cash balance.
3. The theft occurred at the business premises.

The court noted that the loss must be incidental to the business operations. The Supreme Court cases of Badridas Daga v. Commissioner of Income-tax and Commissioner of Income-tax v. Nainital Bank Ltd. were referenced to support this criterion.

The court found no indication that the stolen cash was kept for business operations. The absence of this vital fact made it impossible to express an opinion on the deductibility of the loss. Therefore, the court declined to answer question No. 1 but suggested that the Tribunal reconsider the admissibility if it finds that the stolen sum was required for business operations.

Issue 2: Clubbing of Share Income
The second issue involved the clubbing of the share income of certain partners with their fathers. The assessee-firm had been reconstituted under a new partnership deed, and the Income-tax Officer allowed registration but clubbed the incomes of the new partners (sons) with their respective fathers.

The Tribunal upheld this action, stating that the new partners were mere benamidars, and the funds still belonged to the Hindu undivided families headed by their fathers.

The assessee argued that once the firm was registered, the income allocation should follow the partnership deed, irrespective of any beneficial interest held by the partners.

The court agreed with the assessee, stating that after registration under section 185(1)(a) of the Act, the assessment must follow section 182(1), which requires the income to be allocated according to the partnership deed. The relationship between partners and any third-party accountability is irrelevant for the firm's assessment.

The court emphasized that the firm's assessment should treat each partner as a separate entity and allocate income according to the partnership deed. The Tribunal erred in clubbing the incomes in the firm's assessment, which was deemed illegal.

Therefore, the court answered question No. 2 in the negative and in favor of the assessee, stating that the Income-tax Officer was not justified in clubbing the share income of the sons with their fathers while assessing the firm.

Conclusion:
- Question No. 1: The court declined to answer due to insufficient facts regarding whether the stolen cash was necessary for business operations.
- Question No. 2: The court answered in favor of the assessee, stating that the Income-tax Officer was not justified in clubbing the share income of the sons with their fathers in the firm's assessment.

Additional Observations:
The second judge concurred with the judgment and added that section 182(1)(ii) unambiguously requires the share of each partner to be determined separately. The taxing authority cannot question the genuineness of partners once the firm is registered. The decision in Agarwal and Co. v. Commissioner of Income-tax was cited to support this view.

Regarding question No. 1, the second judge noted that the Supreme Court's decisions in Badridas Daga and Nainital Bank Ltd. did not conclusively support the assessee's claim. The necessity of keeping the stolen amount for business operations was crucial, and the absence of this finding justified declining to answer the question.

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