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TMI Blog1958 (10) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... that he might re-marry and stated that he would give out of his share in the business as computed at the end of the year 1/4th amount each to Harjivandas's wife and Harjivandas's son Manoo. 5. Prior to S.Y. 2003 no balance-sheet had been drawn up and the capital of the business which was carried on in partnership between Vithaldas and his son Harjivandas in equal shares had not been determined. At the end of S.Y. 2003, the total capital of the business was computed and credited in equal shares of ₹ 8,83,070 each to the account of Vithaldas and his son Harjivandas. The sum credited to Vithaldas's account thus represented his share of the capital and accumulated profits till S.Y. 2003. 6. On Aso Vad 30, S.Y. 2003 (November 12, 1947), entries were passed in the firm's books debiting the account of Vithaldas with a sum of ₹ 8,83,070 by crediting the following accounts: (1) ₹ 1,00,000 Narendrakumar Harjivandas (minor), (2) ₹ 25,000 Manjula Harjivandas (minor), (3) ₹ 25,000 Pushpa H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate Assistant Commissioner the assessee was successful and the interest paid on those accounts was allowed in the assessment of the firm, mainly on the ground that the gifts were genuine, they had been duly accepted by Lilavati on her own behalf and on behalf of her minor children, that the instruments relating to the gifts executed on February 2, 1946, April 15, 1948, and April 17, 1948, were all executed prior to the introduction of Income-tax Act or the Transfer of Property Act and the Indian Contract Act in Saurashtra. The Department acquiesced therein as well as for the subsequent assessment year 1951-52. For the assessment year 1952-53, the assessee firm claimed to deduct under section 10(2)(iii) interest of ₹ 15,947, credited to the accounts mentioned in paragraph 6, excepting the account at No. 4, in computing its profits under section 10. In the relevant assessment year 1952-53, the Department came on appeal to the Tribunal challenging the validity of the transfer but not the genuineness thereof. It was contended (1) that the ultimate transfer vide the entries dated November 12, 1947, in the account books of the firm to each donee was not strictly in a proportion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a partner he had therefore employed Bachubhai to supervise the general management work of that firm and Balkrishna to attend to the correspondence on his behalf and they were to be paid remuneration at the rate of 42 % and 7 % respectively, out of his share of profit from the said firm and in a year in which the firm made a loss, the share of loss was to be carried forward to the next year and remuneration was to be paid only out of the profits. In the relevant year of account the remuneration of the two employees worked out to ₹ 24,706 and ₹ 4,360 respectively. After disallowing this remuneration the share income and interest from the said firm worked out to ₹ 70,832. According to the Department this arrangement was tantamount to an appropriation of profits as it was not necessary for a partner to employ outsiders. The Appellate Assistant Commissioner, on appeal, held in the appeal, for the assessment year 1951-52, which was acquiesced in by the Department and repeated in the relevant year of account, that the assessee had considered it expedient from the commercial point of view to employ the said employees to look after its interest, that they were not related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, Vithaldas Dhanjibhai and his son Harjivandas Vithaldas, carrying on business at Jamnagar in Saurashtra. The relevant assessment year is 1952-53, the accounting year being S.Y. 2007 ending on 30th October, 1951. A writing was executed on 2nd February, 1946, by Vithaldas, the father, in which he declared his intention in writing in order to allay the fears of his son that he might re-marry. He stated in that writing that out of his ? share in the profits he would give ?th share to the wife of his son and another ?th share to Manu, his grandson, meaning thereby that he would keep to himself ? of his 8 annas share in the profits of the partnership. The account of the partners at the end of S.Y. 2003 showed this. To the credit of the two partners stood two sums of ₹ 8,83,070. These sums represented their share of the capital and their accumulation of profits upto the end of S.Y. 2003. On Aso Vad 30, S.Y. 2003 (12th November, 1947), entries were passed in the firm's books debiting the account of Vithaldas with a sum of ₹ 8,83,070 by making corresponding credit entries as we shall immediately state. The whole amount was debited to the account of Vithaldas and on the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 1947-48. Printed Block--Nawanagar State. Documentary Stamp ten rupees. Book No. 626 Ve Le (Purchaser) Vithaldas Dhanjibhai Resident Nagar. By Mohan, Dated, 10-4-1948. Chan. L.D. Vithaldas Gagubhai. Nawanagar Stamp Vendor. Jamnagar, dated 17-4-1948. (To) A. Sau. Lilavathi (Jog) given in writing Jamnagarwala Vithaldas Dhanjibhai (To say) That you are my daughter-in-law and you are equal to my daughter and according to written agreement with Bhai Harjivan of 15-4-1948 and for family peace and for the benefit of you and your children have given gifts out of my property and profits at the end of S.Y. 2003, ₹ 2,25,000 to you, ₹ 2,25,000 to Chi. Mansukh, ₹ 1,00,000 to Chi. Narendra and to Chi, Manju and Pushpa each ₹ 25,000 and which in the books of our firm have been debited to my account and have been credited to the account of each of you. Some conversation having taken place between us today in that matter I once again assure you that there is absolutely no heart-ache in my mind about that giving gifts nor any doubt and I have given all those gifts with pure intelligence and I do not want back even a pie out of it and that to me is equal to cow' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the firm and interest earned was credited. The donees have been assessed every year since 1949-50 to 1955-56 on the interest earned by them on the amount of these gifts, which as a result of the agreement evidenced by the writing and the book entries was the result of a tripartite transaction between the two partners and the donees. Now, let us see what was the position in the matter of the assessment of the firm itself. In the assessment year 1949-50 deduction was claimed by the firm in respect of interest paid on the amount of these gifts and that was allowed by the Department. In respect of the next assessment year 1950-51, the Income-tax Officer disallowed the amount of interest claimed as a deduction, but in appeal the Appellate Assistant Commissioner allowed the deduction and the contention that was raised before the Appellate Assistant Commissioner was mainly on the question of validity of the gifts and not that the gifts were not genuine. The Appellate Assistant Commissioner held that the gifts had been duly accepted by Lilavati on her own behalf and on behalf of her children. He also held that the documents were all executed prior to the introduction of income-tax i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Halar Salt Chemical Works. There were four other partners in that business. An agreement was executed on 20th April 1948, in which it is stated by Harjivandas that as it was not possible for him to attend to the business of the Salt and Chemical Works in which he was a partner, he had employed Bachubhai and Balkrishna to supervise the general management of that firm and to attend to the correspondence of that firm on his behalf and they were to be paid remuneration at the rate of 42?% and 7?% respectively out of the 20% share of Harjivandas in the partnership firm of Halar Salt Chemical Works. That agreement states that the remuneration of the two employees was to be paid out of the profits made by the parent firm and in case that firm made a loss the share of the loss was to be carried forward to the next year and the remuneration was to be paid to the two employees only out of profits. In the relevant assessment year, the amount of remuneration of the two employees worked out at ₹ 24,706 and ₹ 4,360 respectively. After disallowing this remuneration, the assessable income of the assessee firm from the parent firm was computed at ₹ 70,832. The Income-tax O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Vithaldas, to which we have already made reference and particularly the document of 17th April, 1948,--once accepted as genuine--clinch the whole matter. The donees accepted the transaction of gift, the firm accepted the transaction and not only paid interest on the amounts accepted as due to the donees but also allowed the donees to withdraw moneys from time to time. In case of any gift of such a nature, the court has to satisfy itself that there is substitution of some other obligations for the original one and that there is the animus novandi. There is, in our opinion, ample material which satisfies the legal requirements of a completed and valid gift. The rights of the donees were defined and ascertained; they became creditors of the firm and received interest as such and withdrew part of the moneys accepted and agreed as due to them by the firm as a result of what was a tripartite arrangement. Once you accept the genuineness of the facts relating to the transaction, there is little scope, in the facts and circumstances of this case, for suggesting that what was done was inchoate or incomplete or invalid in law. Before we proceed to consider another argument of Mr. Josh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad been accepted by the daughter-in-law on her own behalf and on behalf of her minor children and that the instruments relating to the gifts executed on 2nd February, 1946, 15th April, 1946, and 17th April, 1948, were all executed prior to the introduction of the Income- tax Act in Saurashtra. The Department did not carry the matter any further in respect of the assessment for that year. In respect of the subsequent assessment year 1951-52 also no objection was taken to the deduction being claimed. It was only for the assessment year 1952-53 which is the subject-matter of this reference that an objection was taken. No objection, however, was taken by the Income-tax Officer on the ground that the sums shown to the credit of the donees did not amount to capital borrowed for the purpose of the business of the assessee; nor does it appear that any such contention was raised before the Appellate Assistant Commissioner; and when such attempt was made before the Tribunal, it was bound to be discountenanced. Therefore, the present argument must fail. To turn to the second question which arises on this reference. In our survey of facts we have already referred to the circumstances whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tend to the management and affairs of the partnership business and he finds he is unable or disabled to do so and if the other partners permit him to have some other person to discharge his duty by the firm or so to say deputise for him, can he or can he not say that the remuneration paid to that person is a legitimate expenditure? Can it be said in such a case that the agreed payments he may bona fide make to such person are no more than appropriation of profits. We see no difficulty in reaching the conclusion that in such a case the payments that would be made would be legitimate deductions under section 10. Only recently in Ratilal Daphtary's case (I.T. Reference No. 9 of 1958) [1959] 36 I.T.R. 18 we had occasion to consider a somewhat similar matter and in Shantikumar's case [1955] 27 I.T.R. 69, somewhat similar considerations arose before this court. The question here is not of wiredrawn technicalities or any refined distinction but what is the real income of the partner. The matter has to be approached bearing in mind the commercial aspects of the same. Therefore, in our opinion, the Tribunal was right in the conclusion reached by it that these two sums were legitimat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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