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TMI Blog1979 (1) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital invested by the said family in the aforesaid firm as well as its share in the profits of the said firm equally amongst the said three members of the family. An agreement was effected on December 7, 1967, between the assessee on the one hand and his wife, Devendra Kaur, and son, Shailendrasingh, on the other with regard to the invested capital in the said firm and the share of the family therein. Broadly stated, it was agreed by and between the parties under the said agreement that according to the partition effected between the parties on November 2, 1967, the capital and share of the family in the said firm were divided equally amongst the three members of the said family, and that each one of them had become owner to the extent of 1/3rd share in the capital and the share of the family in the firm. It was further agreed between the parties under the said agreement that Devendra Kaur and Shailendrasingh permitted the assessee to use the amounts representing their shares in the capital and the share of the family in the firm and also required the assessee to continue as a partner in the said firm for himself and as representative of Devendra Kaur and Shailendrasingh. In co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 360 which included the shares of the wife and son were liable to be taxed in the hands of the assessee under s. 64 of the I.T. Act, 1961. The assessee, therefore, carried the matter in appeal before the AAC, Ahmedabad, who, following the decision of the Supreme Court in Charandas Haridas v. CIT [1960] 39 ITR 202, held that the provisions of s. 64 of the Act had no application in the facts of the present case and having regard to the agreement effected on December 7, 1967, pursuant to the partial partition between the members of the family, the assessee had merely utilised the amounts representing the shares of his wife and son in the firm and the respective amounts of profits coming to their shares cannot be taxed in the hands of the assessee and should, therefore, be deleted from his income. The revenue, therefore, carried the matter in appeal before the Income-tax Appellate Tribunal at Ahmedabad. It was contended, inter alia, on behalf of the revenue before the tribunal, that according to the agreement executed between the parties, a sub-partnership consisting of the assessee, his wife and son had come into existence and that under s. 64 of the Act, the shares of the wife, D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alternative, on the true construction of the aforesaid agreement the effect of the arrangement was that a sub-partnership between the assessee, his wife and son came into existence each having 1/3rd share, since there was an agreement between them to share the profits from the main firm coming to the share of the assessee. 3. In any case,the income of Devendra Kaur and Shailendrasingh was liable to be included in the income of the assessee and be taxed in his hands. Two questions, therefore, arise for our determination of these references. Firstly, what is the effect of the agreement of December 7, 1967 ? Whether Devendra Kaur and Shailendrasingh--the wife and son, respectively, of the assessee--became partners in the main firm, or, as contended in the alternative, whether a sub-partnership consisting of the assessee, his wife and son came into existence for purposes of sharing the profits coming to the share of the assessee from the main firm. Secondly, if the answer to either of the alternative. questions is in the affirmative, whether the profits from the main firm coming, to the share of the assessee would be income of the sub-partnership or of the partners thereof and, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f December 7, 1967, between the assessee, his wife, Devendra Kaur, and his minor son, Shailendrasingh (who are described as parties of 1st, 2nd and 3rd parts, respectively, in the agreement) and the corresponding reference to the arrangement ill the new deed of partnership of the same date executed by the partners of the main firm. Clause (1) of the agreement provides as under : " (1) The parties of the second and third parts have permitted and allowed the party of the first part the use of their one-third share in the share in the partnership business run under the name and style of M/s. Mohansingh Sahebsingh so far held in the name of the party of the first part including goodwill for a period of one Samvat year, i.e., for S.Y. 2024 and have agreed to continue to keep their share of capital in the said partnership AND THE PARTY OF the first part shall become on and from 3-11-67 and continue as a partner in the said firm as for himself and as representative of the parties of the second and third parts." (Emphasis supplied by us) Clauses (2) and (3) of the agreement provide as under : " (2) In consideration of the parties of the second and third parts having permitted the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Shailendrasingh. AND WHEREAS on and from Kartak Sud 1, S.Y. 2024, the amount standing to the credit of the said Mahendrasingh with the said firm has been equally divided amongst the aforesaid three members of the HUF, and whereas it is further agreed between the said three members of the HUF that the share as a partner in the said concern and all benefits accruing thereto shall on and from Kartak Sud 1, S.Y. 2024, be enjoyed by and belong to the said three members equally and in severalty." We have, therefore, to find out in the context of the relevant clauses of the agreement and the deed of partnership, whether the first contention advanced on behalf of the revenue is well-founded. A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. The contract of partnership regulates the rights and liabilities of partners. A person can be a partner in his capacity as a karta, trustee, representative of his sub-partners or of a group of persons or a benamidar for another. In all such cases his is a dual position. He functions in his personal capacity in relation to partners while in his representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... full-fledged partner in the main firm. The first contention, therefore, should be rejected. It is really the alternative contention which has been the subject matter of debate between the parties. What is " sub-partnership " has been laid down by the Supreme Court in Murlidhar Himatsingka v. CIT [1966] 62 ITR 323 at page 329. Sikri J., as he then was, speaking for the court, referred and set out with approval the passage from Lindley on Partnership, 12th Edn., page 99 dealing with sub-partnership. The passage reads as under: "A sub-partnership is, as it were, a partnership within a partnership; it pre-supposes the existence of a partnership to which it is itself subordinate. An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, several persons are partners and one of them agrees to share the profits derived by him with a stranger, this agreement does not make the stranger a partner in the original firm. The result of such an agreement is to constitute what-is called a sub-partnership, that is to say, it makes the parties to it partners inter se; but it in no way affects the other members of the principal firm. " Sik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tners and their business as that of a partnership of architects, civil engineers and surveyors and it was to be carried on in the firm name of " N. R. Wadia Co." It was agreed in the partnership deed that each partner was only to attend to the work secured by him and in respect of such work he had to keep and maintain a separate work-book, bill-book and other necessary books, and each of them had to recover bills in respect of the work done by him. At the end of every year all expenses jointly incurred were to be apportioned in proportion to the gross receipts of the three persons. The firm " N. R. Wadia Co." was also registered under the Indian Partnership Act, 1932, with the Registrar of Firms, but there was no banking account in the name of the firm. Letter-heads were printed in the name of the firm, the names of the three persons with their qualifications also being given therein. No formal written contracts were entered into either in the name of the firm or in the names of the persons and the correspondence showed that some of the letters were signed by the three persons personally and some in the name of the firm. Each of the three persons secured his own work and receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Treating this even as a case of some difficulty, we do not see how we would be justified in saying that the element of agency has been established. The true test for determining whether a person deriving income from a business in the form of profits is or is not a partner is to examine whether the business was carried on by the others acting for him ; whether the relation of principal and agent subsisted between them, i.e., whether one was authorised to work on behalf of another and not merely whether there was any arrangement of sharing the profits. The question is always one of agency and authority." Similarly, in Ramniklal Sunderlal v. CIT [1959] 36 ITR 464 (Bom), a joint Hindu family consisting of the assessee, Ramniklal, his wife and his two sons entered into an agreement of partnership on January 25, 1949, whereby they agreed to divide in equal shares the income derived from certain properties and certain leases, after partitioning some of the joint family properties. The partnership was to derive income from certain of the partitioned properties and was given the firm name of Messrs. Ramniklal Sunderlal. It was also mentioned in the agreement that the income derived from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee on September 20, 1968, that all the three elements--(i) agreement entered into by all the persons concerned, (ii) agreement to share profits of business, and (iii) the business carried on by all or any of the persons concerned acting for all, are present in the case before us. The clauses which we have set out above from the agreement as well as the deed of partnership clearly establish that the assessee, his wife and his minor son agreed to share the profits earned by the assessee, by his continuing to act as a partner not only on behalf of himself but also on behalf of his wife and minor son in the main firm. In other words, not only was there an agreement between the assessee, his wife and his minor son for shares, but the assessee, as guardian of the minor son, could continue as a partner in the main firm not only on behalf of him self but also on behalf of his wife and minor son and that they would share the profits equally earned by the assessee from the main firm. The learned advocate, appearing on behalf of the assessee, made a strenuous attempt to persuade us that this is virtually an arrangement for the use of the capital of Devendra Kaur and Shailendrasingh b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond contention is concerned. The Tribunal, in our opinion, has not dealt with this question at all and brushed aside the contention in a cryptic manner without considering the different aspects of the question, which have a bearing on the contention urged. The Tribunal, in our opinion, therefore, has committed an error of law in rejecting the contention of the revenue that a sub-partner ship had come into existence between the assessee, his wife and his son. The learned advocate for the assessee has invited our attention to the earlier decision of this court in Addl. CIT. v. Chandulal C. Shah [1977] 107 ITR 91, where a Division Bench of this court, speaking through T. U. Mehta J., found itself unable to spell out the existence of a partnership firm since the stipulation in the deed of partition before it did not contain anything which could be suggestive of the relationship of partnership between the members of the family, and more particularly because the contention of the revenue that a sub-partnership came into existence would result in minors becoming liable for the losses of that sub-partnership, a situation which was patently illegal, because no minor can legally enter in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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