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TMI Blog1972 (4) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 ? The facts relevant for each of the two questions are distinct and separate and therefore for the purpose of giving opinion on them, I would like to mention the facts separately. The facts relevant, as found by the Income-tax Appellate Tribunal (hereinafter referred to as " the Tribunal "), in respect of the first question are that the assessee carried on business in cotton piece goods as a wholesale dealer. It had filed a return showing a taxable profit of Rs. 54,152 after deducting amongst others a sum of Rs. 10,500 which was cash stolen from the business premises. The assessee stated, which statement has not been doubted, that the said sum of Rs. 10,500 represented the cash balance of the day and that the said amount was lost by reason of theft. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal disallowed the claim to deduct the said loss on the ground that it was a capital loss. According to the Tribunal the loss did not arise out of carrying on of the business and it was not incidental to it. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ash balance of the day; and (iii) as a result of theft in the shop premises that amount was lost. The question of admissibility of loss of cash by theft in computing the profits of business has been the subject-matter of decisions of various High Courts. One of the essential tests which has, however, been consistently laid in all those cases is that the loss of cash by theft must be incidental to the operation of the business. This criteria has been confirmed by the Supreme Court in the cases of Badridas Daga v. Commissioner of income-tax and Commissioner of Income-tax v. Nainital Bank Ltd. Now the argument on behalf of the petitioner-assessee is that the amount lost represented the sale value of its stock-in-trade and if such amount was lost by theft or other reasons it would in effect be a loss of stock-in-trade and consequently a business loss. The argument on behalf of the department, however, is that once the stock-in-trade is sold and converted into cash, the loss of such cash by theft could not be deducted in computing business profits unless it was established that the loss was incidental to the business. I think it cannot be denied that if stock-in-trade is lost by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing the legal position, after quoting from the said judgment of the Supreme Court of New Zealand, the Supreme Court observed: " Under section 10(1) of the Indian Income-tax Act, 1922, the trading loss of a business is deductible in computing the profit earned by the business. But, every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business is a question to be decided on the facts of each case, having regard to the nature of the operations carried on and the nature of the risk involved in carrying them out." Reverting to the facts found in this case, the three facts enumerated above do not give any indication as to whether the cash which was lost was kept at the business premises for carrying out operation of the business. Those facts merely indicate that sale proceeds of the business which might or might not be required for carrying out the operation of the business was kept at the business premises and while so kept was lost by theft. May be that the said cash was required for carrying out the operation of the business or may be that it was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 185 of the Act (wrongly captioned as order under section " 182 " in the printed paper book), he, however, observed: " In view of the facts stated above the registration of the firm is allowed subject to the condition that Sri Kewal Ram and Gopi Ram will be deemed to be the partners representing their old Hindu undivided family as before and the other alleged new-comers, Sri Arjun Lall and Ratan Lall, will be deemed to be the nominees of their father, Kewal Ram, and Rambilash Agarwal as nominee of his father, Gopi Ram. " On computation of the total income of the firm he allocated the shares in the manner as observed above in the said order under section 185 of the Act, namely, that he included the share income of Arjun Lall Agarwal and Ratan Lall Agarwal in the hands of Kewal Ram Agarwal and the share income of Rambilash Agarwal in the hands of Gopi Ram Agarwal. Such action of the Income-tax Officer was confirmed both by the Appellate Assistant Commissioner as also by the Tribunal. The Tribunal observed that "........ the transferees were mere benamidars and the funds still belonged to the Hindu undivided families headed by Kewal Ram and Gopi Ram......." Mr. Tarkeshw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. The third step, namely, the clubbing of the share income of one partner in the hands of the other is to be done not while computing the income of the firm or while allocating the shares of the partners of the firm in the firm's assessment, but while assessing the total income of the partners individually. It is an accepted principle of law that the relationship inter se the partners qua the partnership cannot be affected by the accountability of the partners to another partner or to some one else : See Commissioner of Income-tax v. Bagyalakshmi Co. In all cases, where a partner represents his joint Hindu family or some other person or persons, the partner occupies a dual position; qua the partnership, he functions in his personal capacity; qua the third party, in his representative capacity. The share of the partner depends on the terms of the partnership deed and the share of the persons whom that partner might be representing depends on a separate contract altogether. Therefore, while computing the income of the firm and allocating such income in the hands of the partners thereof, the share which has to be allocated to the partners in the firm's assessment must be in accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich has to be determined separately and then to be clubbed with his other income for the purposes of assessment to tax. Once the partnership is registered under section 185 of the Act, who the partners are can be decided only with reference to the deed of partnership. It is not open to the taxing authority to go into the question whether a person mentioned as partner in the deed is a partner in reality or mere benamidar of another partner or someone else. Learned standing counsel for the department was not oblivious of this difficulty and, therefore, he contended that the order dated 30th of November, 1962, relevant portion of which has already been quoted in the judgment of my learned brother, is not an order allowing the registration of the firm, but an order refusing the registration of the partnership as evidenced by the deed dated 11 th of November, 1960. It is not possible to accept his contention. Under section 185 of the Act, it is not open to the Income-tax Officer to pass a conditional order. If he is satisfied as to the existence of a genuine firm during the previous year, he must register the firm. If he is not so satisfied ,he should refuse to register the firm. It has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on the Full Bench decision in Ramaswami Chettiar v. Commissioner of Income-tax , and the majority view of that decision was overruled by the Supreme Court in Nainital Bank Ltd.'s case.' The ratio decidendi of the Supreme Court in this case is that cash is a stock-in-trade of a banking business and its loss in the course of its business under varying circumstances is deduct ible as a trade loss in computing the total income of the business. With reference to the observations of Venkatarama Aiyar J. in Badridas Daga's case , Subba Rao J., who spoke for the court in Nainital Bank Ltd.'s case , observed as follows: " That passage in terms refers to a money-lender and does not deal with a public company carrying on banking business. In the case of a money-lender the profits he made may form part of the private funds kept in his house which he may or may not invest in his business. It is indistinguishable from his other moneys. But, in the case of a bank the deposits received by it form part of its circulating capital and at the time of the theft formed part of its stock-in-trade. In one case it cannot be posited that the amount robbed is part of the stock-in-trade of the trader ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he instant case, there is no finding that it was necessary for the assessee to keep the amount which was lost by theft in the shop premises for the transactions of the next day. True it is that the case of the assessee has always been that the amount which was lost by theft was not credited to the personal account of any of the partners, but that fact by itself, in my opinion, would not make the amount an admissible deduction. Whether the amount was credited to individual partners or not is not very material. What is material is whether the amount had gone home to the firm or not. The decision in Basantlal Sanwar Prasad's case, therefore, is not applicable to the facts of the case before us. Reliance was also placed on the decision in Pohoomal Bros. v. Commissioner of Income-tax, in support of the proposition that stock-in-trade, if lost, is an admissible deduction, In my opinion, that decision is not an authority for the proposition that sale proceeds of the stock-in-trade in the hands of the assessee continued to be values of the stock-in-trade and, therefore, are admissible deductions. Ordinarily, sale proceeds include some profit and the profit part of it cannot be said to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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