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TMI Blog1978 (12) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits in Chandrika Products in favour of the minor children of Kesavan Vaidyar and C.K. Manilal, the consideration for giving up this right being the benefits of more or less the same extent offered by the partners of Lal Products and S.V. Products namely Kesavan Vaidyar and C.K. Manilal to her own children. Thus, by foregoing her share in the profits of the firm she had secured more or less equal rights to her minor children. According to the ITO, the provisions of s. 64 of the IT Act were attracted to this transaction. He, therefore, included in the assessment, the share income of the minors Shyam, Navya and Mangal in the firm of S.V. Products and the share income of Shine and Dhanan in Lal Products. On appeal, the AAC held that there was no direct or indirect transfer of asset to her minor daughters notwithstanding the fact that the formation of three partnerships might well have been, as the ITO suspected, a carefully designed series of associated transactions intended to safeguard the assessee from the application of the s. 64. He, therefore, deleted the minor s shares in the two firms included in the assessee s income by the ITO. It is against this order of the AAC that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat they would have got prior to the arrangement. The provisions of the agreement also show that the parties were obliged to take minors into the partnership. All the documents wee created on the same day and all the adult partners were parties to the same. All this clearly indicated that there was a transfer of asset though not directly but indirectly to the minor children by their parents. The provisions of s. 641 (1)(iv) were thus clearly attracted. 3. For the assessee, it was pointed out that conferring a benefit a brother s children was only a working arrangement. There was no element of cross-transfer or transfer at all, whether direct or indirect. The admission of a minor to the benefits of partnership depends upon the sweet will of the adult partners. By such admission no portion of the assets of the partnership is also taken out. According to the learned counsel, the two essential ingredients for the application of s. 64(1)(iv) are : firstly a transfer of assets directly or indirectly to the minor and secondly as a result of this transfer a flow of income to the minor. The transfer of assets is an essential ingredient. In the present case the assessee has not transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm. The business carried on at Coimbatore was taken over by a partnership consisting of Sri. C.K. Ravi, Mrs. C.K. Leela and Mrs. C.K. Nalini. The minor children of Manilal, C.M. Chandrika, C.M. Lathika and C.M. Sunil and minor C.K. Jinan son of C.R. Kesavan Vaidyar were admitted to the benefits of partnership in the Coimbatore firm. Shri C.K. Manilal took over and succeeded to the business at Eranakulam. In that partnership firm the minor children of Smt. C.K. Leela, Shine and Dhanan and the minor daughter of Nalini, Beena were admitted to the benefits of partnership. The ITO s case is that the affairs of the three newly constituted firms were so arranged that each major partner admitted the minor children of a person not a partner in that firm but a partner in another firm where his minor children were admitted to the benefits of partnership, in such a way that the overall income accruing to each adult partner along with the minor children remained the same as before the reconstitution and the provisions of s. 64 (1) (iv) applied to this series of transactions. 5. The provisions of s. 64(1)(iv) relevant are as under: "64. Income of individual to include income of spouse, mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able and the two transfers are so intimately connected that they cannot but be regarded as parts of a single transaction." In R. Venkitachala Thevar vs. State of Madras (2), assets transferred by husband to his wife in 1954 continued to be assessed in the husband s hands till 1961-62. The wife settled a portion of those assets in 1960 on her two minor children born after 1954. The husband s claim that the assets so transferred should not be included in his holding for assessment to agricultural income-tax was negatived by the agricultural income-tax authorities. This was upheld by the High Court. Dealing with indirect transfers it is stated in the above decision. "There may be myriad circumstances in which an individual concerned may attempt to make such indirect transfers by legitimate means, such as the execution of registered documents of the execution of settlement deeds for love and affections, etc. But, such transactions have to be viewed with a lynx eye to find out whether it is a transaction which is attributable to the individual, though not directly but indirectly." In V. Amirtham Ammal vs. CIT(3) the assessee transferred 110 shares in a private limited company to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n possible be of that bundle or one or more rights comprised in that bundle. If grant of partnership amounts to transfer of property, logically we do not see why the distribution of two-ninths share out of the one-third share of the assessee is any the less transfer of property. A grant of partnership may mean an individual getting into a partnership agreement with another, implying by that process the creation of new rights between him and his partner. The terms may also include an existing firm of partnership taking one or more partners and re-aligning the basis of sharing. What we have before us may be yet another instance of none being newly taken into partnership but the sharing basis being re-aligned or redistributed among the partners. Quite apart from this reasoning, we are inclined to think that a right of a partner to share in the profits is as much property as a right of a partner to share in the assets of the firm. It is the right of a partner which entitles him to share in the profits of the firm and that, as we think, is a valuable right and capable of transfer at least as between the partners by common consent. When so much is clear, we encounter no difficulty in app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfers of Assets" from one person to another in the sense property which belonged to one person was handed over to another. In the case if partnership, though in Ayya Nadar s (7) case and Chhotalal Mohanlal s (6) case, share of profits is regarded as property, the facts of the cases closely show that persons owing a certain percentage of share in the profits surrendered a portion of that percentage thereby lessening the quantum of the share of profit. Under such circumstances it could be said that a person who had right to a particular property, namely, a surrendered share of profit, transferred it to the other partner of the firm who had lesser share of profit earlier. These were not cases where a partnership is newly constituted wherein the share of profit of any person is determined for the first time. Neither in the Partnership Act nor under the IT Act do we find provisions which require that a person who introduces a capital in the firm should get a proportionate share in the profit or only a person who furnishes capital should get a share of profit. The considerations which weigh with a partner is furnishing a particular figure of capital and obtaining a particular share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners. We are concerned with three firms carrying on business in three different areas The potentialities in these businesses, the profitability therein etc. depend on several factors. While it may be true that in a general way or in a particular year the profits of one firm are similar or equal to the profits of another firm, if one or other firm were to suffer a loss certainly the minors admitted to the partnership in that firm would not get any profit, whereas the minors admitted to the benefits in the other partnerships would be entitled to profits. Because of the difference in the area and the businesses even the quantum of profits might change. It cannot, therefore, be stated that in effect there is a transfer even of profits from the adult partner to the minors admitted to his own firm or acting in other firm, for all one knows if the firms were to suffer losses in one or other year one set of minors may go on gaining income year after year, whereas another set of minors may not (though not entitled to loss) gain any income at all. The result is there cannot be said to be any transfer of profits to the minors. The basis of the learned Departmental counsel s contention is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to earlier. s. 16(3) of the Act created an artificial income. That section must receive strict construction as observed by this Court in CIT vs. Keshavlal Lallubhai Patel (9). In our judgement before an income can be held to come within the ambit of s. 16(3), it must be proved to have arisen directly or indirectly from a transfer of assets made by the assessee in favour of his wife or minor children. The connection between the transfer of assets and the incomes must be proximate. The income in question must arise as a result of the transfer and not in some manner connected with it". Even, if, therefore it is found that assets have been transferred directly or indirectly to the minor children of the assessee, for the application of s. 64(1)(iv) there must be close proximity between the transfer of the assets and the income produced. The present is a case which falls directly within the ratio of Prembhai Parikh s (8) decision. The income which arose to the minors arose to them by virtue of their admission to the benefits of the partnership firms and has to close proximity to any assets transferred directly or indirectly to them. 10. In the light of the above we have no hesit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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