1. This is a reference at the instance of the Commissioner under section 66(1) of the Indian Income-tax Act, 1922. Respondents to the reference are three individuals : (1) Tolaram Jalan, (2) Amarchand Jalan, and (3) Champalal Jalan. The assessment year involved in each case is the assessment year 1958-59, governed by the Indian Income-tax Act, 1922. A few facts may be stated :
In this reference, we are concerned with two firms. The facts pertaining to both are almost identical, as the Tribunal observes in its statement of case. The two firms are : M/s. Ramkumar & Co., a firm of Delhi, and M/s. Birla Cotton Mills Cloth Shop. M/s. Ramkumar & Co. was at all material times governed by a deed dated January 20, 1954, and there were 12 partners in the firm who were all members of either the Jalan family or the Kejriwal family, although they did not represent these families. On December 28, 1956, which date falls in the accounting year, the firm, Ramkumar & Co., constituted by the deed dated January 20, 1954, was dissolved and a new firm formed on the next day, i.e., December 29, 1956. By a deed of dissolution, 8 of the 12 partners, including the three assessees, retired from the partnership and the remaining four partners, called the continuing partners, were by the said deed deemed to carry on the business formerly owned and carried on by the firm of 12 partners. It was further provided that accounts were to be made up as on December 28, 1956, and the continuing four partners were to pay to the retiring partners amounts due to them and until such payment was made, interest was to be added at the rate of 6% per annum. It was specifically provided that the continuing partners were to carry on the business in the name of Ramkumar & Co. and retain the goodwill of the said business. All assets and liabilities of the firm were to vest entirely in the continuing partners. It was further ascertained by the Tribunal that at the end of the Diwali year in which dissolution took place the amounts payable to the retiring partners were transferred to another concern, viz., M/s. Ramkumar Jalan, Calcutta, in which all the retiring partners, including the assessees, were partners. In the new firm which was constituted on the next day, the minor sons of Tolaram and Champalal Jalan by name Ashokkumar and Pradeepkumar, respectively, were admitted to the benefits of the partnership and similarly Amarchand's wife, Gita Devi, was also made a partner. The facts, in respect of the other firm of M/s. Birla Cotton Mills Cloth Shop, according to the Tribunal, were identical.
2. On the above facts, the Income-tax Officer held that Amarchand, Tolaram, Loknath and Champalal, four of the partners who retired from each of the two firms, adopted the device of substituting their minor sons and wife in the firm in their places in order to escape what the Income-tax Officer called 'the proper incidence of taxation'. He laid emphasis on the fact that the two minor sons and Gita Devi did not invest any capital, nor did they contribute their labour to the working of the firm. It was also noticed that while the Jalan group as a whole had 11 annas and 3 pies in the old firm, that group as reshuffled had a share of 10 annas in the new firm. Considering these facts, it was held by the Income-tax Officer that factually the retiring partners transferred their shares of profit to their minor sons or wife. According to him, by reason of these facts, the transaction fell within the mischief of section 16(3)(a). Income from the two firms attributable to the shares of the two minor sons was, therefore, clubbed with the income of their respective fathers and the income of Gita Devi was clubbed with the income of her husband, Amarchand Jalan.
3. The three assessees preferred appeals to the Appellate Assistant Commissioner who, however, upheld the action of the Income-tax Officer. In further appeals to the Tribunal, the Tribunal held, on the facts of the case, that there was no transfer of assets by the retiring partners and hence the provisions of section 16(3)(a) of the Act could not be successfully invoked by the Revenue. The Tribunal noted that in the deed of January 20, 1954, which governed the firm prior to its dissolution on December 28, 1956, there was no provision which conferred any right on any of the partners to nominate a successor either on his death or on his retirement. It was also found that the amounts payable to the retiring partners did not continue with the later constituted firm for a long time but was transferred to an allied concern by the end of the accounting year. Accordingly, it was found by the Tribunal that the Department's contention that there was a transfer of assets to the minor sons and the wife by the three assessees concerned was without any basis whatsoever. The relevant observations of the Tribunal in this behalf are to be found extracted in para 7 of the statement of the case.
4. It is unnecessary to set out in this judgment the provisions of section 16(3)(a), but when they are perused properly, it is perceived that none of the four clauses of section 16(3)(a) can be brought into use by the Department As the assessees had ceased to be partners, the case clearly falls outside clauses (i) and (ii). Further, there is no warrant for applying clauses (iii) and (iv) in view of the clear finding by the Tribunal that there were no assets of the assessees transferred to the two minor sons or to the wife. In view of this clear finding, it must be held that the conclusion of the Tribunal is correct and unexceptionable.
5. In the result, the question referred to us is answered in the negative and in favour of the assessees. There will, however, be no order as to costs of this reference.