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TMI Blog1996 (7) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... - - - - Dated:- 19-7-1996 - Judge(s) : K. N. WANCHOO., S. M. SIKRI JUDGMENT The judgment of the court was delivered by SIKRI J.---These appeals by special leave are directed against the judgment of the High Court of Calcutta in two cases referred to it by the Income-tax Appellate Tribunal, Calcutta Bench, under section 66(1) of the Indian Income-tax Act, 1922 (XI of 1922) (hereinafter called the Act). One of the references (Income-tax Reference No. 20 of 1959) was made at the instance of Messrs. Fatehchand Murlidar, and the other (Income-tax Reference No. 21 of 1959) was made at the instance of Shri Murlidhar Himatsingka. In the former reference the question referred was " whether on the facts and in the circumstances of the case, the income of Murlidhar Himatsingka for his share in the firm of Messrs. Basantal Ghanshyamdas for the assessment years 1952-53 and 1953-54 was rightly excluded from the income of the applicant firm ". In the latter reference the question referred was "whether on the facts and circumstances of the case the income of Murlidhar Himatsingka for his share in the firm of Messrs. Basantlal Ghanshyamdas for the assessment year 1955-56 was right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " Clause 10 provides: " The profits and losses (if any) of the partnership including the shares of the profits and losses of the said partnership firm of Basantlal Ghanshyamdas aforesaid shall be divided and borne by and between the parties in the following manner: Party hereto of the first part---six annas (Murlidar Himatsingka). Party hereto of the second part---four annas (Madanlal Himatsingka). Party hereto of the third part---three annas (Radhaballav Himatsingka). Part hereto of the fourth part---three annas (Mahabir Prasad Himatsingka)." Clause 11 provides that "all partnership moneys and securities for money shall as and when received be paid into and deposited to the credit of the partnership account ". In clause 13 it is provided that " the party hereto of the first part shall have the sole control and direction of the partnership business and his opinion shall prevail if there be any dispute between the parties hereto ". Clause 16 provides that " the net profits of the partnership after payment of all outgoings, interest on capital or loans and subject to the creation and maintenance of any reserve or other fund shall belong to the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntlal Ghanshyamdas and not Murlidhar Himatsingka who must be taken to be acting on behalf of the firm, Fatehchand Murlidhar. Mr. Sen further urges that the Indian Income-tax Act taxes real income and not notional income and the real income in this case belonged not to Murlidhar but to M/s. Fatehchand Murlidhar. Mr. Hajarnavis, on the other hand, contends that this agreement is a mere device for dividing income which had accrued to Murlidhar Himatsingka among his sons and grandson. In the alternative he contends that the India Income-tax Act does not contemplate the application of section 23(5)(a) twice. He says that the firm of Basantlal Ghanshyamdas was a registered firm and the Income-tax Officer was bound, under section 23(5)(a), to assess Murlidhar in respect of the income received from this firm ; he could not carry this income to the assessment of another registered firm, namely, Fatehchand Murlidhar, and then apply section 23(5)(a). The first point that arises is whether the agreement dated December 21, 1949, has succeeded in diverting the income from Murlidhar's share in M/s. Basantlal Ghanshyamdas to M/s. Fatehchand Murlidhar before it reached Murlidhar. What is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, though like some other tests it is not easy of application in all cases. The other cases cited before us, namely, K. A. Ramachar v. Commissioner of Income-tax and Provat Kumar Mitter v. Commissioner of Income-tax do not assist us in disposing of this case because the facts are not similar. Only two cases, one of the Bombay High Court and the other of the Calcutta High Court, have close resemblance to the facts of this case and we may now consider them. In Ratilal B. Daftari v. Commissioner of Income-tax the assessee who was one of the sixteen partners in a registered partnership had contributed Rs. 25,000 out of the capital of the partnership, Rs. 3,45,000. In order to contribute this capital of Rs. 25,000 he had entered into an agreement with four others on the same date on which the registered partnership deed was executed, which provided for contribution of diverse sums by the four others and it was further provided in this agreement that the five parties would share the profits and losses in proportion to their individual contribution. It was also mentioned that the terms and conditions mentioned in the registered partnership were to be applicable and binding on them. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership in the profits received from the main partnership is of such a nature as diverts the income from the original partner to the sub-partnership. Suppose that A is carrying on a business as a sole proprietor and he takes another person B as a partner. There is no doubt that the income derived by A after the date of the partnership cannot be treated as his income ; it must be treated as the income of the partnership consisting of A and B. What difference does it make in principle where A is not carrying on a business as a sole proprietor but as one of the partners in a firm ? There is no doubt that there is this difference that the partners of the sub-partnership do not become partners of the original partnership. This is because the law of partnership does not permit a partner, unless there is an agreement to the contrary, to bring strangers into the firm as partners. But as far as the partner himself is concerned, after the deed of agreement of sub-partnership, he cannot treat the income as his own. Prior to the case of Cox v. Hickman, sub-partners were even liable to the creditors of the original partnership. Be that as it may, and whether he is treated as an assignee within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided that the partnership income from M/s. Benares Steel Rolling Mills would belong not to Mahaliram Santhalia individually but to the firm of M/s. Radhakissen Santhalia. The High Court of Calcutta held that the agreement amounted only to voluntary disposition by Mahaliram Santhalia of his income and there was no diversion of income to the firm, M/s. Radhakissen Santhalia, before it became Mahaliram Santhalia's income. The High Court observed at page 272 : " If, as Mr. Mitra conceded, Mahaliram was rightly taken as a partner of the Benares Steel Rolling Mills in his personal capacity and if a one-fourth share of the income was rightly allocated to him, any agreement between him and his three partners of the firm of Radhakissen Santhalia, under which the income was to be treated as the income of the whole firm, could only be an agreement by which Mahaliram Santhalia was allowing what was really his income to be treated as the income of the firm or, in other words, an agreement by which he was applying or distributing an income which he had already himself earned and received. Such application or distribution would be a voluntary act of Mahaliram Santhalia in respect of a sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, married daughter and minor daughter. It was a pure case of assignment of profits (and not losses) by the partner during the period of eight years. Further the fact that a sub-partner can have no direct claim to the profits vis-a-vis the other partners of the firm and that it is the partner alone who is entitled to profits vis-a-vis the other partners does not show that the changed character of the partner should not be taken into consideration for income-tax purposes. This court held in Commissioner of Income-tax v. A. Abdul Rahim Co. that registration of the firm could not be refused on the ground that a partner was a benamidar and that a benamidar is a mere trustee of the real owner and he has no beneficial interest in the profits of the business of the real owner. Under the law of partnership it is the benamidar who would be entitled to receive the profits from the other partners but for income-tax purposes it does not mean that it is the benamidar alone who can be assessed in respect of the income received by him. In conclusion we hold that the High Court was in error in holding that there was no question of an overriding obligation in this case and that the income rema ..... X X X X Extracts X X X X X X X X Extracts X X X X
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