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Jwala Prasad Agarwala Vs. Commissioner of Income-tax, Assam. - Court Judgment

LegalCrystal Citation
Subject;Direct Taxation
CourtGuwahati High Court
Decided On
Case NumberIncome-tax Reference No. 2 of 1962
AppellantJwala Prasad Agarwala
RespondentCommissioner of Income-tax, Assam.
Prior history
MEHROTRA C.J. - The following questions of law have been referred to this court for opinion under section 66(2) of the Indian Income-tax Act, 1922, by the Income-tax Appellate Tribunal, Calcutta Bench "A :
"(i) Whether, under the facts and circumstances of the case, the share income of the minor son from the three firms is liable to be included in the assessment of the father under section 16(3)(a)(iv)?
(ii) Whether, in view of the fact that there was no contribution of any sum in th
Excerpt:
- - as regards the first circumstance pointed out by the tribunal, the failure of the assessee to raise the said objection in the earlier proceedings does not debar him from raising the point that the minors share of profits in the said firm cannot be regarded as the income of the assessee......calcutta bench "a :"(i) whether, under the facts and circumstances of the case, the share income of the minor son from the three firms is liable to be included in the assessment of the father under section 16(3)(a)(iv)?(ii) whether, in view of the fact that there was no contribution of any sum in the galla and calcutta firms by the minor son out of the gift money from the father, the share income from these two firms was liable to be included in the assessment of the father under section è16(3)(a)(iv)?"the assessment year is 1959-60, the corresponding previous years being 2014-15 r.j. year, 2014-15 dewali year and 2015 ram navami. the assessee, jwalaprasad agarwala, was partners in messrs. onkarmal jwalaprasad. as disclosed in the books of account he divided.....
Judgment:

MEHROTRA C.J. - The following questions of law have been referred to this court for opinion under section 66(2) of the Indian Income-tax Act, 1922, by the Income-tax Appellate Tribunal, Calcutta Bench "A :

"(i) Whether, under the facts and circumstances of the case, the share income of the minor son from the three firms is liable to be included in the assessment of the father under section 16(3)(a)(iv)?

(ii) Whether, in view of the fact that there was no contribution of any sum in the Galla and Calcutta firms by the minor son out of the gift money from the father, the share income from these two firms was liable to be included in the assessment of the father under section è16(3)(a)(iv)?"

The assessment year is 1959-60, the corresponding previous years being 2014-15 R.J. Year, 2014-15 Dewali year and 2015 Ram Navami. The assessee, Jwalaprasad Agarwala, was partners in Messrs. Onkarmal Jwalaprasad. As disclosed in the books of account he divided the balance of his capital account in four equal parts and made a gift of a sum of Rs. 74,721 to each of his four minor sons in July, 1953. Three of his sons have attained majority but the fourth son, Parmeshwar Agarwala, was a minor during the relevant accounting year. He was admitted to the benefits of the partnership in three firms known is (1) Jwalaprasad Mulchand, Dhubri (Assam). (2) Jwalaprasad Mulchand (Galla department), Dubri (Assam) and (3) Jwalaprasad Mulchand, Calcutta. The amount which is gifted by the father to the minor, Parmeshwar Agarwala, is found to have been invested in the firm of Jwalaprasad Mulchand, Dhubri. The other fact referred to in the statement of the case is that a sum of Rs. 11,000 out of the credit appearing in the personal account of Parmeshwar Agarwala in the account books of Jwalaprasad Mulchand, Dhubri, is transferred to the firm of Jwalaprasad Mulchand, Calcutta, during the previous year for the 1957-58 assessment year. In the firm of Jwalaprasad Mulchand (Galla department), Dhubri, no money of the minor has been invested. The shares of profit which the minor derived from the above three firms were included in the income of the father, Jwalaprasad Agarwala, under section 16(3)(a)(iv) of the Indian Income-tax Act, 1922.

The contention raised by the assessee before the Tribunal was that the shares of profits which the minor derived from the three firms were not liable to be included in the income of the assessee.

Section 16(3)(a) of the Income-tax Act reads as follow :

"16.(3) In computing the total income of any individual for the purpose of assessment, there shall be included -

(a) so much of the income of wife or minor child of such individual as arises directly or indirectly -

(i) from the membership of the wife in a firm of which her husband is a partner;

(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner;

(iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart; or

(iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise then for adequate consideration."

Admittedly, the assessee father is not partner in any of these firms and thus section 16(3)(a)(ii) will not apply. The department claimed that under section 16(3)(a)(iv) the share of the profit of the minor in the three firms is liable to be included in the income of the father. The share of the profit of the minor in these three firms is the income which is derived from the assets transferred to the minor, Parameshwar Agarwala, without any consideration. The Tribunal has found that the minor had been admitted as a partner in Jwalaprasad Mulchand, Dhubri, only because of the introduction of the initial capital of Rs. 74,721 in his name by his father. So far as the other firms are concerned, the finding is that it is apparent that these are allied concerns and there must be intimate financial connection subsisting between them and èMessrs. Jwalaprasad Mulchand, Dhubri, and the Calcutta firm Thus, in spite of the fact that each of these firms is paying interest to the minor, the Tribunal held that the share incomes which the minor had been deriving from each of these firms is directly attributable to the introduction of the original capital of Rs. 74,721 which the assessee had given to his minor son and thus in the opinion of the Tribunal the provisions of section 16(3)(a)(iv) were applicable both in respect of the interest on the original capital sum Rs. 74,721 and the share incomes of the minor as derived from the above-mentioned three firms.

So far as the two firms, namely, Jwalaprasad Mulchand (Galla department, Dhubri) and Jwalaprasad Mulchand, Calcutta, are concerned, there is neither any finding by the Tribunal that the minor contributed any money towards the capital of these firms out of the sum of Rs. 74,721, the amount of money transferred to the minor by his father, the assessee, not is there any material for coming to such a finding. The Tribunal has held that the minors share of profits in these two firms will be included in the income of the father, only on the ground that the three firms are allied firms and there must be an intimate financial connection subsisting between these firms and Messrs. Jwalaprasad Mulchand, Dhubri. What would be the extent of the financial connection between the two and whether any money out of the sum Rs. 74,721 transferred to the minor was contributed by the minor towards the capital of the Calcutta and Galla firms cannot be determined by the material on the record. Thus, merely because the minor was admitted to the benefits of these two firms and as there must be some sort of financial connection between the three firms, it cannot be said that the minors share of profit in these two firms is the benefit directly arising or indirectly arising to the minor from the assets transferred by the assessee to him. Section 16(3)(a)(iv) will thus not be attracted in this case.

Mr. Choudhuri who appears for the department, has contended that at least a sum of Rs. 11,000 is admitted to have been transferred from the accounts of the Dhubri firm to be Calcutta firm and thus it should be presumed that at least to that extent the minor contributed out of the assets transferred to him by the father towards the capital of the Calcutta firm. The Tribunal has referred to the transfer of Rs. 11,000 only in dealing with the question as to whether the interest on this sum is to be excluded from the purview of section 16(3)(a)(iv) or not. The Tribunal has held that only the interest on the original capital of Rs. 74,721 could be included in the income of the father. The interest on the other accretions to the capital of the minor as appearing in the three firms accounts is to be excluded from the assessment of the appellant. Thus, there is no finding by the Tribunal that this sum of Rs. 11,000 was a part of the original capital Rs. 74,721 transferred to the minor by the father. Apart from the fact that there is no material to justify a finding that this sums of Rs. 11,000 was the minors ècontribution to the capital of the Calcutta firm, there is no material on the record to show that the sum of Rs. 11,000 transferred to the Calcutta firm from the minors account in the Dhubri firm formed part of the original capital of Rs. 74,721 transferred by the father to the minor.

The next question which arises for consideration is how far the share of the minor in the partnership business of Jwalaprasad Mulchand, Dhubri, to the benefits of which he was admitted, will be included in the income of the father, the assessee.

The Tribunal has relied upon two circumstances in support of its finding that the share of the minor in the firm of Jwalaprasad Mulchand, Dhuri, was his income arising out of the transfer of the assets of the father, the assessee. The first circumstance is that the past record of the assessee shows that this objection was never raised before. On the other hand, in connection with the assessment for 1953-54, the assessee had claimed before the Tribunal that earned income allowance be granted by the department in respect of the share incomes of the minor had been assessed in the hands of the father. The second circumstance is that the minor had been admitted as a partner in Jwalaprasad Mulchand, Dhubri, only because of the introduction of the initial capital of Rs. 74,721 in his name by his father. As regards the first circumstance pointed out by the Tribunal, the failure of the assessee to raise the said objection in the earlier proceedings does not debar him from raising the point that the minors share of profits in the said firm cannot be regarded as the income of the assessee. This circumstance can also not be regarded as evidence of the fact that the minors share of profit in the firm arose out of the assets transferred by the father. The claim of the assessee in the assessment year 1953-54 that he should be granted earned income allowance in respect of the share incomes of the minor, does not also debar the assessee from contending that the share of the minor in the business cannot be regarded as his income under section 16(3). The decision by the Income-tax Tribunal does not constitute res judicata. Regarding the second circumstance relied upon by the Tribunal there is no evidence on the record to justify a finding that the minor had been admitted as a partner in Jwalaprasad Mulchand, Dhubri, only because of the introduction of the initial capital of Rs. 74,721 in his name by his father. From the account books it appears that Rs. 74,721 were taken as the minors deposit in the account books and, further, that the minor was admitted to the benefits of the partnership. There is no evidence to show that he was admitted to the benefits of the partnership because he had undertaken to deposit the sum of Rs. 74,721 given to him by his father in the firm. In the absence of any such connection between the deposit and the admission of the minor to the benefits of the firm, it cannot be said that the minors share of profit in the firm of Jwalaprasad Mulchand, Dhuri, arose out of the assets transferred to him by the assessee. As observed by èChagla C.J. in the case of Bhogilal Laherchand v. Commissioner of Income-tax section 16(3) of the Income-tax Act deals with notional or artificial income and it makes an assessee pay tax on income which in fact not his own, but which is notionally made to be his income, and therefore section 16(3) must be very strictly construed, and it is only if a particular income comes within the strict ambit of section 16(3) that the assessee can be made liable to pay tax on that income.

There is another aspect of the matter which may be examined. Under section 2(6B) of the Income-tax Act, a "partner" has been defined as follow :

"2. (6B) firm, partner and partnership have the same meanings respectively as in the Indian Partnership Act, 1932 (IX of 1932 : provided that the expression partner includes any person who being a minor has been admitted to the benefits of partnership."

Section 3 of the Income-tax Act says that where any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with and, subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association in dividually. Thus the firm has also been made liable to pay income-tax under section. For income-tax purposes the firms may be classified into two categorie : (1) those which are registered under section 26A, and (2) those which are not registered. Under section 23 the Income-tax Officer has to determine both the tax payable by the firm as such and also the total income of each partner, that is, including his share of profits of the firm. The income, however, of the partner cannot be taxed twice over, one as forming part of the total income of the firm and then as his individual income. A minor, who has been admitted to the benefits of the partnership, is a partner for the purposes of the Income-tax Act and thus his share of profit will be included in his separate income and the income of the firm will also include his share of profit. The Income-tax Act has provided for the contingency to avoid double payment by the partner in the event of the firm paying tax on its total income. If the father is a partner in the firm and the minors share is regarded as his income under section 16(3)(a)(ii), he can avoid double payment of taxation if the firm has been taxed. But the father is not a partner of the firm, in that event, if the minors share of profits is regarded as the fathers income, the father will have to pay tax on that income, and there being no provision for excluding that amount from the total income of the firm, the firm may also be made to pay income-tax on the said amount and in that event the share of the minors profit will be liable to double taxation. It is, therefore, clear that the minors share of profit can be regarded as the income of the father only if section 16(3)(a)(ii) is attracted. In cases where the father is not a partner in the firm, the share èof the minor in another partnership cannot be regarded as the income of the father. The share which the minor gets in the partnership business is on account of the fact that he has been admitted to the benefits of the partnership and not as the result, direct or indirect, of a deposit made by him in the firm of the sum of money which he got on transfer from his father. Section 16(3)(a)(ii) specifically say :

"In computing the total income of any individual for the purpose of assessment, there shall be included so much of the income of a wife or minor child of such individual as arises directly or indirectly from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner." When this language is contrasted with section 16(3)(a)(iv) it is abundantly clear that the share which the minor gets in the business is due to the fact that he has been admitted to the benefits of the partnership and not directly or indirectly as the result of the transfer of the money to him.

The argument of Mr. Choudhuri is that as the minor has been admitted to the benefits of the partnership in lieu of his depositing Rs. 74,721 which he got on transfer from this father in the accounts of the firm, the profits which he gets in the business arises out of the transfer of the assets to him. The share of the minor in the partnership business is his income and this income has arisen out of the transfer of the assets. If this argument is accepted, then even if the minor had deposited Rs. 1,000 out of the sum of Rs. 74,721, in the accounts of the firm, the profit to the extent of the whole of his share would be regarded as arising from the deposit made by the minor. This interpretation would not be justified on the language of the section. As I have already indicated earlier, the share of profits which the minor gets in the partnership business is the result of his being admitted to the benefits of the partnership and not the result of his deposit.

In our opinion, therefore, both the questions referred to us are to be answered in the negative and the minors share of profit in any of these firms is not liable to be included in the assessment of the father, that is, the assessee.

Questions answered in the negative.


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