1. The following two questions are required to be answered in this reference u/s 256 of the IT Act, 1961, at the instance of the Revenue.
'1. Whether on the facts and in the circumstances of the case, was there sub-partnership having regard to the agreement dt. 30-7-1969 ?
2. Whether on the facts and in the circumstances of the case, s. 64 was applicable for clubbing of the income ?'
2. The factual background is as under :
There was a HUF of which one Shri Vasant Rao Sahukar, the husband of the assessee Smt. Sindhubai, was a Karta. Family consisted of Karta-Vasantrao, his wife Sindhubai, three minor sons and three minor daughters. Oral partition was effected on 1-4-1969 as to a portion of the joint family properties, namely, (1) share capital appearing as credit balance in the HUF account in the account books of the partnership firm - Messrs N. V. S. Balaji & Company, Chanda, as on that date and (2) 1/7th share of the HUF in that very firm. A sum of Rs. 7,51,000 was standing to he credit in the account of the firm to the HUF styled as 'Vasant Balaji Sahukar' in the books of the firm. After adjustment of certain share profit of Rs. 2,82,808.35 as on end of March 1969, a sum of Rs. 2,51,006.69 was kept as reserve for meeting the tax liabilities of the family, for education maintenance and marriage expenses of the children, etc,. a balance of Rs. 5,00,000 was divided in five equal shares. Thus, Vasantrao, his wife and three minor sons Sureshkumar, Umeshkumar and Satishkumar were allotted a sum of Rs. 1,00,000 each. The right to claim 1/7th share in the profit of M/s. N. V. S. Balaji and Company (hereinafter referred to as 'Balaji Firm' for short) was also equally divided among the 5 members. It is a part of the agreement that each of the 5 persons was to enjoy the property allotted to his share separately and in severally from one another. In the deed, it is further mentioned that Vasantrao was to hold the share capital and 1/7th share in the profit or losses standing in his name in Balaji Firms as a trustee for the benefit of the 5 divided members and that he was accountable for the same to each one of them. Declaration further proceeds to record that all the 5 members would share equally the assets and so also profits and losses. The said deed of declaration is dt. 30-7-1969. This deed was subsequently amended retrospectively from 12-8-1969. That amendment is not included in the paper book but consent of parties, the copy of the same has been taken on record as Annexure 'F'. Vasantrao made an application to the ITO u/s 171 of the IT Act for recognition of the partial partition referred to above. All details regarding the capital shares etc. were mentioned in an application which was filed on 16-8-1971. After making necessary enquiries, the ITO passed an order on 25-3-1972 giving recognition to the aforesaid partial partition. In other words the claim of the partial partition was accepted.
2. Assessee - Smt. Sindhubai filed a return of her income on 5-8-1970 declaring total income of Rs. 55,670. This income was shown to have been received from the house property, other business of rice-mill and transport, 1/5th share of income from Balaji Firm out of 1/7th of the share which Vasantrao originally held as Karta of the family. While making assessment of the income for the asst. yr. 1970-71, the ITO came to the conclusion that the whole of the income from Balaji Firm accruing to Vasantrao in his representative capacity belonged to an unregistered sub-partnership firm consisting of himself, his wife and his three minor sons. Consequently, income of four other separated members was clubbed in her income in terms of s. 64 of the IT Act. Appeal carried at the instance of the Assessee before AAC was unsuccessful but second appeal before the Tribunal succeeded, holding that agreement did not spell out partnership and consequently clubbing of income u/s 64 of IT Act was set out of place.
3. As much turns on recitals in the deed, we are reproducing the relevant portions from the said deed as it originally stood.
'1. The parties to this agreement affirm that there was oral partial partition on 1-4-1969 and confirm the terms and conditions as declared in the deed of declaration dt. 30-7-1969 executed by Shri Vasant Balaji Sahukar, the party No. 1.
2. That the party No. 1 shall hold the capital of Rs. 7,51,035.69 standing to his credit as on 31-3-1969 and thereafter such varied or different sum as may appear as capital amount in his account in the books of the firm M/s. N. V. S. Balaji and Co. and the 1/7th share in profits or loss in the said partnership business, that may accrue from 1-4-1969 onwards year after year as trustee for and on behalf of the separated members, viz.,
(i) Vasant Balaji Sahukar (Individual)
(ii) Smt. Sindhubai w/o Vasant
(iii) Umeshkumar s/o Vasant
(iv) Sureshkumar s/o Vasant
(v) Satishkumar s/o Vasant
as profit or loss accruing or arising to them in equal shares as evidenced by deed of declaration dt. 30-7-1969.
3. That the share income accruing in the name of Vasant Balaji Sahukar in the firm of M/s. N. V. S. Balaji & Co. and credited in his account in the books of the partnership firm accrue and belong to the five separated members equally i.e., each one has got 1/5th share in the 1/7th share arising in the name of Vasant Balaji Sahukar from the business of the said partnership firm M/s. N. V. S. Balaji & Co.
4. That the party No. 1 shall render full and complete account separately to each of the members of party No. 2 of the capital which he is holding in his name in the said firm for and on behalf of the separated members and also the share profits or losses that may arise in his name from the said partnership business year after year. He shall distribute and divide in five equal shares amongst the five separated members the share profits or losses in 1/7th share. The party No. 1 will be getting from or paying to, the said firm and he shall pay to or recover from each of the five separated members (including himself) one-fifth share of the 1/7th share profits or share losses as the case may be which he shall get from, or become liable to pay to, the said firm on account of his share in the said partnership.'
Relevant amendment which is added at the bottom of term No. 4 reads as under :
'Provided however that the losses if any that may come to the share of separated minors will be adjusted and met out of their accumulated profits only. If per chance the loss falling to the minor is in excess of the accumulated profit then such excess shall be borne by the major parties to this agreement equally and that the capital of the minor that has been allotted to him in the partial partition shall not be allowed to be depleted not shall the minors be held personally liable for any of the acts of the firm'.
4. The principle, the Tribunal did not dispute that under certain given set of circumstances, there can be a valid sub-partnership. However, on their terms of the deed in question, a finding was reached that the deed did not spell out an agreement of partnership. Reference was made to the three necessary requisite for formation of partnership namely (1) An agreement for creation of partnership, (2) agreement to share the profits and losses of the business and (3) mutual agency. Relying on certain decisions, it was held that none of the requirements was present in the present case and consequently, the appeal was allowed on that basis and the order of clubbing of income u/s 64 was quashed, and allowing an application filed by the Commr., the present reference is made.
5. Shri Joshi, the ld. counsel for the Department, invited our attention to the two decisions in CIT v. Laxmi Trading Company and Murlidhar v. CIT : 62ITR323(SC) . These authorities were cited in support of the proposition that the concept of sub-partnership has been recognised in India since long before. As neither the Tribunal nor any party has disputed the proposition, consideration of these authorities unnecessary. The further submission was that all the three elements necessary for formation of partnership are very much present in the present case and are obvious on bare reading of the deeds and declaration. It seems to us that as far as this aspect is concerned, he is right. There was a business as well as an agreement for carrying it. Element of profit and loss and also of agency was there. Vasantrao was an agent of other members for carrying on the business on their behalf as a partner of Balaji Firm. Indeed he was made a trustee by them. One of the partner being authorised to carry on the entire business is not only not foreign but indeed is specifically provided for in the very scheme of the Partnership Act. Thus nature of agency can assume different form depending upon terms mutually agreed upon. It is an entirely different matter that as far as Balaji Firm is concerned it would not recognise anybody also excepting Vasantrao as partner even after the disruption of joint family status. Under these circumstances, in our judgment, there is no scope to come to the conclusion that the deed and the declaration did not in fact create a sub-partnership. This aspect however cannot close the controversy. There is yet one more crucial point in the case, and that is whether the so called sub-partnership is legal in view of s. 30 of the Partnership Act which in terms prohibits sharing of losses by a minor. Our view of the matter is that the present sub-partnership is illegal and therefore has no legal existence and as a result there cannot be clubbing of income u/s 64 of the IT Act for this reason. Here are our reasons for this conclusion.
6. Our attention was invited on behalf of the Department to a decision of the Gujarat High Court in the case of CIT Gujarat v. Mahendra Singh Mohansingh : 123ITR938(Guj) . This was also a case of sub-partnership between husband, wife and a minor son, after disruption of HUF which was a partner in another firm, partial partition had taken place. Minor was admitted only to benefits of partnership. The separated members arrived at an independent agreement Interest which could and did not have any impact on the bigger firms. This sub-partnership was not recognised in terms of s. 171 of the Act and income of all the partners was clubbed u/s 64, ratio of this decision was sought to be applied to the present case; but we notice that there is a clear distinguishing feature between the case with which we are presently concerned and the case with which we are presently concerned and the case with which Gujarat High Court was dealing with. Indeed, in this very Judgment the ld. Judges have referred to their earlier decision in the case of Addl. CIT & Ors. v. Chandulal C. Shah & Ors. (1971) 107 ITR 91 to which one of the ld. Judges (Diwan, C.J.) was a party. We will mention the distinguishing features in the words of the Division Bench itself :
'The learned Advocate for the assessee has invited our attention to the earlier decision of this Court in Addl. CIT v. Chandulal C. Shah (1971) 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 of 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 penitently illegal, because no minor can legally enter into a partership, a situation which was penitently illegal, because no minor can legally enter into a partnership agreement. We do not think that this decision can be of any assistance of the cause of the assessee, because in the present case before us, the agreement in question was merely for sharing the profits coming to the assessee from the main firm and, therefore, the minor son of the assessee could never be held liable for the losses of that sub-partnership, if at all losses arise in the business of the sub-partnership.'
Turning to the decision in Chandulal C. Shah's case (supra) it will be seen that that case again of a sub-partnership between the members of the family, some of whom were minors who were made liable also for losses. It was held that section 30 of the 'Partnership Act' puts a total ban against a minor becoming a partner though it allows his admission merely for benefits of partnership with consent of all partners. Dealing with the argument advanced on behalf of the Revenue that in that particular case losses were to be adjusted against the profits and, therefore, there was no violation of s. 30, the ld. Judges proceeded to observe :
'The ld. Advocate-General contented that in fact the losses referred to in the above observations were capable of being adjusted against the profits of other preceding years with the result that the minors were not required to suffer any loss, and hence it must follow that the intention of the parties was not to make the minors suffer the losses in partnership business. The contention is wholly unacceptable because if minors were not to suffer any loss, nothing could be deducted from their profits of the previous years on account of the los suffered in the business during a particular period.'
7. In CIT Bombay v. Dwarkadas : 41ITR528(SC) , it has been held that any partnership agreement making minor liable also for losses is illegal. How the present agreement stands to these tests is now to be examined. Clause 2 reproduced above makes a clear mentioned that all the five persons including three minors were responsible for profits as well as losses in equal shares. Not that absence or presence of a recital in a particular form is conclusive of the matter, but it is significant to note that nowhere there is even a whisper in the deed that the minors were admitted only to the benefits of the partnership. It is on the background of these basic features that the amendment to cl. 4 on which strong reliance was placed on behalf of the Revenue, has to be viewed. Under this clause accumulated profits are burdened with the liability of the losses. In the face of these recitals we fail to appreciate the contention addressed on behalf of the Revenue that the minor under the circumstances cannot be held to be personally liable for losses and the legality of agreement is salvaged keeping in view s. 30(3) of the Partnership Act. Now it is not a case of partnership already in existence and minor having been admitted to the benefits of the partnership subsequently. Apart from this aspect only because the liability of the minor with relation to losses is restricted only to his particular property, namely, accumulated profit, it cannot be reasonably said that the minor is not personally liable; for even the accumulated profits is only a specie of the property and the provisions of s. 30(3) of the Partnership Act cannot be pressed into service for coming to the conclusion that liability of the minor was not personally under the circumstances. We are in complete agreement with the view taken in Chandulal's case (supra) that nothing could be deducted by way of losses from the profits of a minor accrued in previous year or from accumulated profits.
8. Strong reliance was placed on behalf of the revenue on the decision of Calcutta High Court in the case of Rameshwarlal Lohariwalla v. CIT, West Bengal (1908) 126 ITR 209 . In this case, grandfather of the minor, a partner in a firm executed a will under which an independent and separate fund was created providing that in the event of the firm suffering losses and the minor in whose favour the will was executed being required to suffer the said losses, the same had to be adjusted from the fund. After few months, the executor died and his legal heirs including the minor entered into fresh agreement of partnership. As regards the losses a separate cl. No. 6 was incorporated making a reference to the will and providing that the minor would be made liable to the losses only to the extent of the fund which was created for a particular purpose. Considering these basic distinguishing features to which our attention was drawn by Shri Thakar, the ld. counsel for the assessee, it seems to us that the ratio does not at all apply to the facts of the present case and to the agreement with which we are presently dealing. Now that we are fully in agreement with all that Calcutta High Court has said in this connection. Suffice it to say for the purposes of the present matter that considering the following observations made in this decision, it is of no help whatsoever to the Revenue, in support of the contention that in view of an amended clause, the minor was not made personally liable for the losses :
'As we have mentioned before, clause 6 of the present deed, in our opinion, read in the background of the will of Sagarmall, clearly indicates that the minor was being only admitted to the 'benefits of partnership'. We have also set out the other clauses which indicate that in the management of the business of the firm third party, namely, the minor, was not being given any part. These clauses, read in conjunction with in the background of the will of Sagarmall, in our opinion, clearly establish that the minor was admitted to the benefits of partnership and was not made a full partner.'
Our reading of the agreement in question is that it does make minor personally liable for losses though only a particular property is burdened with that liability. Hence minors are not admitted only to benefits and indeed they are also given a say in management of sub-partnership. Thus, Rameshwarlal's case (supra) is of no assistance to the Revenue.
9. Kerala High Court in Krishna & Bros. v. CIT (1968) 69 ITR 138 was dealing with the question of personal liability of minor for 'act of the firm' as defined in s. 2(a) and as incorporated in s. 30(3) of the Partnership Act vis-a-vis the particular deed which in terms admitted minors only to benefits. Reading the document as a whole finding was recorded that minor was not personally made liable for losses. It is no authority in support of the view canvassed before us. In the case, provision is for deduction of losses from accumulated profits, a term which is violative of s. 30 of the Partnership Act rendering the very agreement as illegal. Thus no legal partnership came to existence, as a result the question of formation of sub-partnership and so also of clubbing of income on that basis does not arise. Hence we answer the question as follows :
Question No. 1. In law there was no sub-partnership.
Question No. 2. In the negative and against the Revenue.
The assessee to get the costs of this reference from the Revenue.