Somnath Iyer, J.
1. This reference, sought by the Commissioner of Income-tax, under section 66(1) of the Indian Income-tax Act, 1922, has for its source an assessment for the assessment year 1960-61. The assessee is Rangappa Setty who unsuccessfully made several attempts during the earlier period to have an assessment made on the basis that the income was the income of a Hindu joint family.
2. It is undisputed that on December 8, 1958, a partition deed was executed, under which properties were allotted to Rangappa Setty, his wife and his three sons. One of the properties so allotted was the shop in which the Rangappa Setty conduct his business.
3. The contention of the assessee was that by the execution of the partition deed in this way, there was a throwing of the self-acquired properties of Rangappa Setty into the hotchpot of a Hindu joint family and the coming into being of a partnership between Rangappa Setty, his wife and two of his sons. But the Income-tax Officer repelled these contentions and assessed the income from both the properties as well as from the business as the individual income of Rangappa Setty The Appellate Assistant Commissioner, who did not discuss the question whether a partnership was formed under the partition deed, shared the view taken by the Income-tax Officer that the income could not be assessed as the income of the Hindu joint family.
4. In the further appeal preferred by Rangappa Setty to the Appellate Tribunal, he was able to secure an order by which it was directed that the income for the period commencing from July 1, 1958, and ending on December 7, 1958, should be assessed as the income of Rangappa Setty and that the income for the latter period ending on June 30, 1959, should be assessed as the income of an unregistered firm.
5. In this situation, the Commissioner of Income-tax sought a reference and the question of law before us reads :
'Whether, on the facts and in the circumstances of the case, the assessment of the assessee in the status of an 'individual' was correct ?'
6. Mr. Rajasekhara Murthy, appearing on behalf of the Commissioner, asked to us to say that the Tribunal was in error in thinking that there was at the time when there was the execution of the partition deed on December 8, 1958, a declaration of Rangappa Setty by which his individual properties became transformed into those of a Hindu joint family and he submitted that there was no such declaration and that the partition deed contained none, and that, without an express declaration in that form, there could be no throwing of the property of Rangappa Setty into the hotchpot of a Hindu undivided family.
7. In the view that we take it is really not necessary for us to investigate the question whether there was any such declaration or whether the self-acquired properties of Rangappa Setty became the properties of a Hindu undivided family by any other process.
8. We find from the partition deed which was executed on December 8, 1958, that the properties, whose income was assessed during all the earlier periods as the individual income of Rangappa Setty, were subjected to distribution between Rangappa Setty, his wife, Danamma, and his three sons. The resulting position emerging from the distribution made in that way is that the properties, which until December 8, 1958, were the sole and exclusive properties of Rangappa Setty, became distributed between himself, his wife and his three sons, and the property allotted to each of them became his or her own individual and separate property. That is what happened in consequence of the execution of the partition deed whether or not, by reason of any declaration which Rangappa Setty made before such distribution, the property was made the property of a Hindu undivided family. It was not necessary that the property should have become the property of a Hindu undivided family in order to enable the distribution which indeed was made under the partition deed.
9. It is a familiar principle that a person can distribute his property amongst his own wife and children and that such distribution could be made of property which is not the property belonging to a Hindu undivided family. So, after December 8, 1958, in consequence of the distribution which was made under the document which was styled as a partition deed, the property which exclusively belonged to Rangappa Setty became properties of the persons to whom they were distributed.
10. Now, among the properties so distributed a shop and business carried on it by Rangappa Setty fell to the share of Rangappa Setty. The other properties fell to the share of others. It is not necessary to refer to the details thereof. But there was a recital in the partition deed in regard to the profits of the business of the shop which fell to the share of Rangappa Setty. The recital was that if Chennappa and Manjunath, the second and third sons of Rangappa Setty, co-operated with Rangappa Setty in the conduct of the business of the shop, out of the net profits, a two annas share should be paid to Danamma, wife of Rangappa Setty, a four annas share to Chennappa and another four annas share to Manjunath.
11. At one stage the argument constructed was that this provision for the distribution of profits between Rangappa Setty, his wife and his two sons brought into being a partnership and that, therefore, a partnership came into existence on December 8, 1958. That was also the view which found favour with the Appellate Tribunal.
12. But it is obvious that the recital in the partition deed, or the arrangement made by it, for the distribution of profits in this manner a cannot establish a partnership. A partnership is a relationship between persons who have agreed to share profits of a business carried on by all or any of them, and the partition deed contains no evidence of any such agreement having been reached between Rangappa Setty and his wife and his two sons. All that the partition deed stated what if Chennappa and Manjunath assisted Rangappa Setty in the conduct of the business, and such assistance was to the satisfaction of Rangappa Setty, each of them would be paid a four annas share in the net profits and that Danamma, his wife, would be paid a two annas share.
13. The clear meaning of this recital is that Rangappa Setty held out an inducement to his two sons that if they helped him in the conduct of the business, and if their co-operation was made available in the required degree, they would be remunerated in the form of a distribution of a share of the profits. So neither the recital that Danamma would be given a share in the profits nor the recital that Chennappa and Manjunath would be given a share in the profits if they worked satisfactorily is surely no evidence or indication of an agreement to share profits of a business carried on by all those persons or by any of them acting for all of them. We have, therefore, no hesitation in reaching the conclusion that the partition deed and the recitals there in did not have the effect of constituting a partnership in respect of the business which was carried on in the shop which fell to the share of Rangappa Setty. Rangappa Setty was the owner of that business and he was under an obligation to pay a portion of the profits to his sons and wife in a certain contingency.
14. But Mr. Srinivasan strenuously conceded before us that there was very satisfactory evidence of the partnership having come into existence with effect from December 8, 1958, in a partnership deed which was executed on November 18, 1959. The terms and conditions which that instrument of partnership sets out make it abundantly clear that at least from November 18, 1959, a partnership came into being between Rangappa Setty and his two sons, Chennappa and Manjunath. Of that there can be very little doubt. That partnership deed clearly indicates that these three persons share the profits of the business carried on by them on terms and conditions enumerated in the instrument of partition.
15. But the use to which Mr. Srinivasan attempted to put this instrument of partition was to deduce from the recitals therein that there was an earlier partnership which commenced on December 8, 1958. The relevant recital, upon which Mr. Srinivasan depends, reads :
'Whether as a partition has taken place in the said family on and with effect from 8-12-1958 as per registered partition deed; and
Whereas the parties to this deed thereafter are carrying on business in partnership on and with the effect from 8-12-1958.'
16. The other part of the partnership deed on which reliance is placed is clause 2, which reads :
'The partnership shall be deemed to have come into operation on and with effect from 8-12-1958.'
17. The clear meaning of the recitals on which Mr. Srinivasan depends is that in consequence of what was stated in the partition deed in regard to the distribution of the profits of the business to which it refers, the partnership came into being on December 8, 1958. Rangappa Setty and his two sons thought that that arrangement for the distribution of profits produced a partnership and that mistaken belief in their mind is what is responsible for the recital in the instrument of partnership that the partnership commenced on December 8, 1958. It is again that mistaken understanding and comprehension of the relevant recitals in the partition deed that was responsible for the provision in clause 2 of the instrument of partnership that the partnership shall be deemed to have come into existence on and with effect from December 8, 1958.
18. Mr. Srinivasan contended that no sufficient investigation was made by any one in these proceedings into the question whether independently of the arrangement recorded in the partition deed for the distribution of profits, a partnership came into existence by some other process. We do not think that this submission is substantial since it is clear from the order of the Income-tax Officer and from the order of the Tribunal that the foundation for the contention that there was a partnership on December 8, 1958, was what was contained in the partition deed. The assessee made no attempt to establish that the partnership was born by some other process.
19. Dependence was, however, placed upon a statement in the order of the Appellate Tribunal that the departmental representative's contention was that a partnership was formed when the partition deed was executed. We do not think that we can attach that much important to that statement made by the departmental representative which Mr. Srinivasan asks us to attach. We have to decide on the materials and facts and circumstances before us whether there was a partnership at any time antecedent to November 18, 1959, when the partnership deed was executed and we do not find it possible to say that there was any such partnership at any time antecedent to November 18, 1959. In our opinion, the partnership was born and was constituted for the first time on November 18, 1959.
20. The Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal bestowed though over the question whether the formation of a partnership was possible unless it was preceded by the transformation of the self-acquired properties of Rangappa Setty into properties of a Hindu undivided family. Mr. Srinivasans, in our opinion, is right in submitting that the question as to whether there was such transformation had no relevance to the question whether there was a partnership. A partnership may be formed with the aid of any asset, and even if the shop with the business a carried on it was the self-acquired property of Rangappa Setty and even if that property was allotted to him under the partition deed executed on December 8, 1958, it was possible for Rangappa Setty and his two sons to become partners in respect of that business. It is not necessary for Rangappa Setty to convert his self-acquired property into family property before he could enter into a partnership in respect of that business with his two sons. In that view of the matter, the importance which was given to the question as to whether the properties became properties of a Hindu undivided family was unjustified.
21. We have come to the conclusion that on November 18, 1959, a partnership was indeed and in truth formed between Rangappa Setty and his two sons. So the assessment with respect to the income of the business, which was carried on in partnership in that way, ought to be made on that basis and the supposition made by the Tribunal that there was an antecedent partnership is unsupportable.
22. So, the conclusions emerging from the discussion made so far ar : (a) that there was a distribution of the properties on December 8, 1958, under the document styled as a partition deed, under which Rangappa Setty, his wife and his three sons became entitled to the properties allotted to them there under; and (b) that a partnership was formed between Rangappa Setty and his two sons, Chennappa and Manjunath, on November 18, 1959. On the basis of these conclusions what should follow is that for the period commencing on July 1, 1958, and ending on December 7, 1958, the income from all the properties and the income from the business on Rangappa Setty ought to be assessed as the individual income of Rangappa Setty. In regard to the income from the properties for the period commencing on December 8, 1958, and ending on June 30, 1959, the assessment ought to be made on each of the individuals to whom there was an allotment of the property under the partition deed.
23. For the entire assessment year commencing on July 1, 1958, and ending on June 30, 1959, the income from the business ought to be treated as the individual income of Rangappa Setty and assessed accordingly.
24. The appellate Tribunal was obviously in error in making a direction that the entire income from the property and from the business should be treated as the income of an unregistered firm from December 8, 1958, and overlooked the distribution of the properties under the partition deed.
25. So our answer to the question referred to us is as above. In the circumstances, no costs.