9911796707
TMI Blog1985 (4) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... his minor son, Manickam, his wife, Thirumathi Rajammal, and six minor daughters. The assessee was co-nominee a partner in the firms Messrs. Sundaram Spinning Mills, M/s. Quality Traders, Messrs. Super Textiles and Messrs. Kandaswamy Weaving Factory and Company. Messrs. Quality Traders and Messrs. Super Textiles have been considered as branches of Messrs. Sundaram Spinning Mills. The funds of the aforesaid Hindu undivided family had been invested in the abovementioned firms with the result that the share income therefrom belonged to the said Hindu undivided family. On March 31, 1967, there was a partition in the said Hindu undivided family whereunder the net capital of the family in the abovementioned firms amounting to Rs. 3,72,592.19 was divided between the assessee and his son, Manickam, equally, each of them being allotted Rs. 1,86,296. 10. The said partition was recognised by the Incometax Officer by an order dated August 31, 1967, passed under section 171 of the Income-tax Act. Besides the above firms, there were certain other firms, namely, Messrs. Colombo Stores, Messrs. Ashoka Textiles, Messrs. Rathinam Traders, Messrs. Rajam Textiles and Messrs. Kandaswamy Spinning Mills ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irms was also put forward in respect of the years 1965-66 and 1966-67. The Income-tax Officer rejected the claim of the assessee by his order dated March 23, 1970, and determined the assessee's total income as Rs. 6,15,965, Rs. 3,12,304 and Rs. 83,238 for the assessment years 1965-66, 1966-67 and 1967-68, respectively, treating the entire share income of the assessee in all the firms as the income of the assessee. Aggrieved by such assessments, the assessee preferred appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, however, rejected the assessee's contention regarding the deduction of the alleged share income of the minor son from all the firms, though he held that interest at 6% of the capital invested in these firms which belonged to the minor son of the assessee should be deducted. Thereupon, the assessee preferred appeals to the Income-tax Appellate Tribunal contending that the Appellate Assistant Commissioner had erred in disallowing the deduction claimed towards the alleged minor's share income. The Revenue also filed cross-objections contending that the Appellate Assistant Commissioner had erred in holding that interest calculated at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son based on the principle of section 90 of the Indian Trusts Act, 1882. It was, however, contended by the Revenue that under the settlement arrived at between the assessee and his brothers on the one hand and the Department on the other, the assessee had agreed that the income from the export firms had to be taken as the income of the four brothers and that, therefore, it was not open to the assessee to contend that only 50% of his share income from the export firms should be considered as belonging to him and the other 50% should be considered as belonging to his son. It was also contended that there is no evidence of the funds of the Hindu undivided family of which the assessee was the karta having been utilised in the business carried on by the firms. It was further pointed out that three of the export firms, namely, Rajaram Textiles, Messrs. Colombo Stores and Messrs Rathinam Traders had been constituted on July 3, 1961, May 1, 1961, and July 3, 1961, respectively, subsequent to the partition between the assessee and his son. On a consideration of the rival contentions, the Tribunal rejected the contention of the Department that it was not open to the assessee to contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no interest in the partnership business and hence the entire profits belonged exclusively to the assessee. When the matter went to the Tribunal, it held that the profits, assets, accretions and investments made out of the profits attributable to the sons' share cannot be considered as the wealth of the assessee and, in that view, upheld the assessee's claim. On a reference, this court held that after the partition, the parties held the amount invested in the various firms as an investment made by the assessee and his two sons as tenants-in-common, that as such they are entitled to the profits arising therefrom in accordance with their shares and that, therefore, on and from the date of the partition, the assessee was not entitled to the profits in its entirety but was entitled to only that portion of the profit referable to his share in the capital investment and the sons were entitled to profits referable to their shares. Accordingly, the share of future profits from the firms was held by the assessee and his two divided sons and the same was not vested in the assessee wholly and exclusively and hence the profits attributable to the interest of the two minor sons in the various pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue would, however, point out that even then the principle of the decision in CWT v. J. K. K. Angappa Chettiar [1979] 116 ITR 456, will not apply to the income from the exporting firms, for the exporting firms were created after the partition and, therefore, there should be actual evidence of the investment of the son's moneys, and that in CWT v. J. K. K. Angappa Chettiar [1979] 116 ITR 456, the investment has already been made by the joint family and that investment continued even after the partition and, therefore, there was a justification in that case for raising the presumption that the funds of the shares had been utilised in earning the income, but that such a presumption cannot arise in the case of the exporting firms which came into existence after the partition. The question is, whether the principle of the decision in CWT v. J. K. K. Angappa Chettiar [1979] 116 ITR 456 (Mad) will apply to the income from the exporting firms as well, as contended by the assessee. Here, admittedly, there is no dispute that the assessee and the son got divided on March 31, 1961, and that the income from the non-exporting firms was invested by the assessee and his brothers. According to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghter was entitled to a half share also in the profits so arising as the uncles who were in fiduciary position and as such accountable and the fact that they were co-owners of the estate of the deceased along with the daughter does not affect their liability to account as guardians or as trustees. In N. C. T. Chidambaram Chettiar v. Ct. A. Ct. Subramaniam [1981] 11 MLJ 424, a question arose as to whether a coparcener in management acts in fiduciary capacity in relation to the other coparceners and the court held that unless section 90 of the Trusts Act is invoked, one coparcener in management cannot be said to act in a fiduciary capacity in relation to the other coparceners, and that section 90 of the Trusts Act will apply only if two essential conditions are satisfied, namely, that the person (coparcener) is placed in fiduciary capacity and that he gained an advantage by virtue of such position and it was further held that where it was established on the facts that the co-owner by his dealings derived benefit and advantage to himself, section 90 of the Trusts Act would come into operation and he would be regarded as being in a fiduciary position. Lewin on Trusts, sixteenth editi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtition agreement, it is stated that there are no other movable properties to be divided between the assessee and his minor son, Manickam, and that if there are any movable properties not mentioned in the agreement, the minor son shall be entitled to share them equally. The mediators also have signed the partition agreement. In the third paragraph of the partition agreement dated March 31, 1961 the circumstances and the reasons that necessitated such a partition arrangement in the presence of mediators have been mentioned as follows: "As the party of the first part was obliged to stay in foreign countries for a long time, the condition of his health is not satisfactory FURTHER THE PARTY OF THE FIRST PART IS DESIROUS OF ENGAGING IN SPECULATIVE AND OTHER RISKY BUSINESSES. These factors are not considered to be conducive to the well-being of the family by the mother and guardian of J. K. S. Manickam, the party of the second part and also by the well-wishers of the family. Accordingly, the Panchayatdars interested in the family members and in their well being have with the concurrence of the mother and guardian of the party of the second part, brought about partition of the family ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as the assessee's minor son's share under the partition agreement dated March 31, 1961, is concerned, they continued to be invested in the four registered firms, which are mentioned therein and that is the subject-matter of question No. 1 that has been referred to by the Tribunal to this court and we have accepted the finding of the Tribunal on that question since the assessee had received profits subsequent to the partition by utilising the share of the capital allocated to the assessee's minor son represented by the mother and the Department also had not found any material that the assessee had paid away the minor's share of the capital, which has been arrived at in the agreement of partition dated March 31, 1961. With regard to the undisclosed income of Rs. 2,52,739 for which also the assessee was fully assessed, the Tribunal had turned down the contention of the assessee to say that he should be assessed only on the 50% of the undisclosed income, since the other 50% belonged to his divided son on the ground that the assessee had not raised that point in the earlier proceedings before the Tribunal. It appears that the learned counsel for the assessee had argued that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In paragraph 13 of its order also, the Tribunal has dealt with this aspect as well as the settlement arrived at between the assessee and his three brothers on the one hand and the Department on the other with respect to Rs. 1,17,503 for 1965-66 and Rs. 2,52,739 for 1966-67. The assessee has not now challenged the finding of the Tribunal regarding the undisclosed income of Rs. 2,52,739. Now, it has to be seen whether the assessee has established that the capital which was allocated to the minor son of the assessee under the partition agreement in the four registered firms had been withdrawn and invested or utilised by the assessee in the export firms. Admittedly, the assessee did not make any reference to such investment of the minor's share of capital in the unlawful trade activity in export licences. The Tribunal has discussed in paragraph 15 of its order about the contention raised on behalf of the Department to the effect that the export firms, Rajaram Textiles, M. S. Colomboo Stores and M/s. Rathinam Traders, were constituted on July 3, 1961, May 1, 1961 and July 3, 1961, respectively, subsequent to the partition between the assessee and his son on March 31, 1961, and that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been having his separate funds which had been invested by him in the export firms. " It is quite strange that the Tribunal has made such an observation quite against the partition document. It is the duty of the assessee to place necessary materials and accounts to show that after partition he had invested his Hindu joint family funds in the export firms. It is uncharitable that the Tribunal has thrown the blame and burden upon the Department to prove that after March 31, 1961, the assessee had invested his divided capital in the export firms, which are fictitious firms. The only reasoning given by the Tribunal for the above is that having regard to the background and the circumstances under which the agreement (partition agreement) has come to, it will be quite clear that the funds of the respective Hindu undivided families of the assessee and his three brothers alone had been invested in the export firms. Such an observation is not based on any material or evidence. The export firms mentioned in the grounds have not been mentioned in the partition agreement. The Tribunal has unwittingly given indication to protect the other three brothers also which is quite uncalled for and un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement. It is admitted that no evidence was furnished by the assessee to prove that the divided capital under the partition agreement, allotted to the minor son, had been taken away from the four registered firms in which the assessee and his three divided brothers are co-nominee partners. The consistent contention is that the share of minor's capital continued in the four registered firms only. It is only in the course of the argument that the learned senior counsel appears to have raised the new contention that it shall be presumed from the settlement dated March 14,1970, that the minor's capital also had been utilised in the export firms. There is no basis for this argument. Therefore, the decision in CWT v. J.K.K. Angappa Chettiar [1979] 116 ITR 456, cannot be applied to the facts of the present case. In that case, it appears to have been established that the capital of the minors continued to be utilised in the four registered firms and, hence, the father was held liable for one-third share only, whereas the two minor sons were entitled to two-thirds share of the income. In that case also, J. K. K. Angappa Chettiar entered into a partition arrangement with his two minor so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M. N. CHANDURKAR C.J.-This reference which was made at the instance of the Revenue under section 256(1) of the Income-tax Act has been placed before me because there is a difference of opinion between Ramanujam J. and (late) Fakkir Mohammed J. on the answer to be given to question No. 2. The two questions referred were: " 1. Whether, on the facts and in the circumstances of the case only 50% of the share income of the assessee from M/s. Sundaram Spinning Mills, M/s. Kandaswamy Weaving Factory and Company, M/s. Quality Traders and M/s. Super Textiles could be assessed in the hands of the assessee for the assessment years 1965-66, 1966-67 and 1967-68 ? 2. Whether on the facts and in the circumstances of the case, only 50% of Rs. 1,17,503 and Rs. 9,103 can be assessed as the income of the assessee from the export firms for the assessment years 1965-66 and 1966-67, respectively? " The first question has been answered by both the learned judges in the affirmative and against the Revenue. I am, in this reference, concerned only with the second question. The relevant facts have been set out in sufficient detail in the separate judgments of both the learned judges. I shall, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s entitled to 50% of the share income from the export firms and the same could not be assessed in the hands of the assessee. It is an admitted position that there was a partition on March 31, 1961, and on the basis of that partition, question No. 1 was answered against the Revenue and in view of that partition, only 50% of the share income of the assessee from M/s. Sundaram Spinning Mills, M/s. Kandaswamy Weaving Factory, M/s. Quality Traders and M/s. Super Textiles could be assessed in the hands of the assessee for the assessment years 1965-66, 1966-67 and 1967-68. The Income-tax Officer, following the wealth-tax assessment for the assessment year 1962-63, included Rs. 1,17,503 and Rs. 9,103 as income from the export firms for the assessment years 1965-66 and 1966-67, respectively, and also Rs. 2,52,739 as undisclosed income of the assessee for the two assessment years. The Appellate Assistant Commissioner, following his order in Wealthtax Appeals Nos. 104, 105 and 106/68-69, relating to the assessment years 1962-63 to 1964-65, rejected the assessee's contention that the share income of his minor son from the four export firms could not be included in his income. The Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee then filed a miscellaneous petition under section 254(2) of the Income-tax Act, 1961, for rectification of a mistake in the order of the Tribunal dated November 30, 1973, by directing (i) exclusion of half share of the share income from the export firms, and (ii) exclusion of half share of the undisclosed income which had been included in the assessments. Before the Tribunal, the Department had contended that under the settlement arrived at between the assessee and his brothers on the one hand and the Department on the other, it has been agreed that the share income of the relations, who were shown to be partners in the export firms, had to be taken as the income of the four brothers and the assessee having accepted the settlement, it was not open to him to contend that only 50% of such income from the export firms should be considered as belonging to him and the other 50% should be considered as belonging to his son. The contention was that there was no claim in the settlement proceeding that the funds of the Hindu undivided family, of which the assessee was the karta, had been utilised in the business carried on by the export firms and it was for the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat from the material on record, it was not possible to specifically hold that the amount allotted to the son's share has not been utilised by the father by way of investments in the exporting firms. The learned judge referred to the finding of the Tribunal that the assessee had invested the funds of the erstwhile joint family and, therefore, the amount allotted to the share of the son under the partition deed should also be taken to have been invested by the assessee on behalf of his minor son in the exporting firms. The learned judge held that as guardian the assessee was liable to account for the profits of the minor son and, therefore, the ratio of the decision in CWT v. 1. K. K. Angappa Chettiar [1979] 116 ITR 456 (Mad), where it was held, in respect of the same assessee, that on and from the date of the partition dated March 31, 1961, the assessee had become liable to render an account of the profits and the liability to such account is that of a trustee or agent, would be applicable in the instant case. Thus, the learned judge took the view on the second question against the Revenue. Fakkir Mohammed J. approached the controversy by posing the question whether the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that this question would include the controversy whether the Tribunal had before it evidence to hold that the share income from the export firms belonged to the erstwhile Hindu undivided family. It was contended that there has to be positive evidence of investments of the Hindu undivided family funds and that the Tribunal was in error when it placed the burden of proof on the Revenue to show that separate funds owned exclusively by the erstwhile manager of the joint family were invested in the export firms. Learned counsel appearing on behalf of the assessee has contended that the question as to whether there was evidence before the Tribunal to hold that the funds invested in the export firms belonged to the erstwhile Hindu undivided family has not been referred, and unless such a question is specifically referred, it is not open to the Revenue to challenge the finding of fact recorded by the Tribunal. Learned counsel has also contended that the decision in the wealth-tax reference of one of the brothers of the assessee reported in CWT v. J. K. K. Angappa Chettiar [1979] 116 ITR 456 (Mad), should be followed in the instant case. In any case, according to learned counsel, once t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diction of the High Court in a reference as follows (p. 551): " The jurisdiction of the High Court in dealing with a reference under section 66 is a very limited one. It must take the facts as stated in the statement of the case unless the question whether the findings of the Tribunal are vitiated for one or the other of the reasons recognised by law is before it. " After referring to this decision, the Supreme Court in CIT v. S. P. Jain [1973] 87 ITR 370, has undoubtedly taken the view that though the question referred to the High Court did not challenge the validity of the finding given by the Tribunal, if the Tribunal fails to take into account the relevant material on record in arriving at its finding and acts on inadmissible evidence or misreads the evidence and bases its conclusion on conjectures and surmises, the court could ignore the finding of the Tribunal and re-examine the issue arising for decision on the basis of the material on record. Undoubtedly, the Revenue could have asked for a reference of the specific question as to the finding recorded by the Tribunal with regard to the funds invested in the export firms being owned by the Hindu undivided family. The Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case would fall within the ratio of the decision of the Supreme Court in S. P. Jain's case [1973] 87 ITR 370 and unless I come to the conclusion that though the correctness of the finding recorded by the Tribunal as being without any evidence is not specifically referred to the High Court, can it be said that the finding is based on conjectures and surmises, or is it vitiated on account of the failure to take into account any relevant material on record, or, as the learned counsel for the Revenue put it, by placing the burden of proof wrongly on the Department. The circumstance that when the settlement was made in 1970, the assessee and his three brothers were not co- nominee partners and yet the aggregate share of profits of all the partners was to be equally divided between the four brothers, was a relevant fact. The two firms, viz., M/s. Colombo Stores and Ashok Traders, were already in existence on the date of partition, they having been formed on December 19, 1957, and August 17, 1958, respectively. These firms having been formed prior to the partition, the only inference can be that the funds of the Hindu undivided family were already invested in these firms and the mere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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