MANCHANDA J. - This is a case stated under section 66(1) of the Indian Income-tax Act. The question referred is :
'Whether in the circumstances and facts stated above the entire share income of the assessee from the Bareilly firm, M/s. Sindh Gopal Amar Nath, or only 1/3rd of it was includible in the assessment of the assessee ?'
The material fact are these. The relevant assessment year is 1957-58, the previous year being Diwali Samvat 2013. The assessee was assessed to tax in the status of an individual. The assessee, Mahesh Prasad, and two others, Gopi Nath and Kashinath, were partners with equal shares in the registered firm of Messrs. Vishwanath Prasad Mahesh Prasad at Farrukhabad, hereinafter referred to as the Farrukhabad firm. On 29th January, 1956, the assessee, Mahesh Prasad, joined another firm Messrs. Sidh Gopal Amar Nath, Bareilly (hereinafter referred to as the Bareilly firm), as an employee on a salary of Rs. 200 per mensem. Subsequently, under an instrument of partnership dated December 4, 1955, Mahesh Prasad was made a partner in the Bareilly firm with a share of four annas with effect from 22nd June, 1955. The Bareilly firm was also registered under section 26A of the Act. Prior to the execution of the said instrument of partnership, the assessee, Mahesh Prasad, had contributed during the months of June and July three amounts totalling Rs. 5,002 as capital. This amount was found credited in the capital account of Mahesh Prasad. Some time there after, Mahesh Prasad entered into an agreement on 24th February, 1956, with the said Gopinath and Kashinath his old partners in the Farrukhabad firm, whereby he agreed to share the income that fell to the share of four annas in the Bareilly firm with them in equal proportion. The relevant clause of this agreement runs :
'Whereas Mahesh Prasad party No. 1 has entered into partnership with another firm of Bareilly styled Sidh Gopal Amar Nath situated in Bara Bazar of that place from Mah Sudi 6, Samvat 2011, where in in addition to being entitled to profits and liable for losses, he has also been getting a salary of Rs. 2,400 per annum for the work done with his individual efforts.
And whereas said Mahesh Prasad party No. 1 has invested that funds of the said firm Vishwanath Prasad Mahesh Prasad in the aforesaid Bareilly firm.
It has been agreed between the parties aforesaid that whatever shareprofits of party No. 1 accrue in the Bareilly firm, they will be divided equally between the parties aforesaid and similar is the case with the losses whenever occur and the parties aforesaid shall credit or debit the share result of the said Mahesh Prasad party No. 1 in equal shares in their respective Khatas in the firm Vishwanath Prasad Mahesh Prasad.'
The assessee, Mahesh Prasad, received the following sums as towards his four annas share from the Bareilly firm in the relevant assessment year : interest Rs. 371, share Rs. 9,113 and salary Rs. 2,600. It was claimed by the assessee before the Income - tax Officer that only 1/3rd of the share received from the Bareilly firm should be assessed in his hands because of the subpartnership between him and the Farrukhabad firm. The Income-tax Officer rejected the contention and included the entire sum of Rs. 12,084 in the assessment, holding that this was a diversion of income by the assessee after it had been earned.
On appeal, the Appellate Assistant Commissioner merely considered that the amount of interest received could not be treated to be the income of the assessee as the capital invested was from the Bareilly firm and not by the assessee personally in the Farrukhabad firm and further that the salary was Rs. 2,400 and not Rs. 2,600. He, therefore, reduced the assessment by Rs. 571, but in other respects confirmed the assessment.
On second appeal, the assessee relied upon the decision of Ratilal B. Dafatare v. Commissioner of Income-tax, whereas the department relied upon the decision of the Calcutta High Court in Mahaliram Santhalia v. Commissioner of Income-tax. The Tribunal relied upon the decision of the Calcutta High Court in Mahaleram Santhalia and distinguished the case of Ratilal B. Daftari by pointing out that the agreement to share the profits earned by the partners along with some others in the agreement to share the profits earned by the partners along with some others in that case was contemporaneous with the main partnership agreement relating to the parent firm but in the present case the sub-partnership was subsequent to the original partnership agreement of the parent partnership. The appeal was accordingly dismissed. Hence, this reference at the instance of the assessee.
The short question to be considered is whether the sub-partnership only enabled him to divert the income received by the assessee after it was earned by him as partner in the Bareilly firm or it created an overriding obligation The matter now stands concluded by a decision of the Supreme Court in Fatehchand Murlidhar v. Commissioner of Income-tax, where the decision of the Bombay High Court in Ratilal B. Daftari v. Commissioner of Income-tax was approved and that of the Collector High Court in Mahaliram Santhalia v. Commissioner of Income-tax on which the Tribunal placed reliance was overruled. The distinction sought to be drawn by the Tribunal and pressed before us by the learned standing counsel is a distinction without substance. Whether the sub-partnership was contemporaneous or not is not very material. Reading the sub partnership agreement as a whole and reasonably, it is quite clear that the share of capital invested by the assessee in the Bareilly firm was taken entirely from the Farrukhabad firm. Therefore, that fact alone, apart from anything, would have been sufficient ordinarily to establish that the other partners of the Farrukhabad firm had a share in the Bareilly firm, and further that the assessee was only a partner in that firm as representative of the Farrukhabad firm. It is also plain that the investment of capital was made more or less contemporaneously with the assessees joining the Bareilly firm as partner. The mere fact that the actual sub-partnership came to be recorded a little later will not in any way detract from the genuineness of the sub-partnership. In any event, the genuineness of the sub-partnership has not been doubted by the authorities. That being the position and when the loss from the Bareilly firm has been agreed to be shared by the other partners of the Farrukhabad firm, there cannot be the slightest doubt that the agreement created an overriding obligation upon him to pay to the sub-partners a share therein, and, as such, the whole of the share of income from the partnership cannot be said to be that of the assessee. This not being a diversion of income after it earned by the assessee, only 1/3rd thereof will fall to be assessed in his hands.
For the reasons given above, the question referred is answered by saying that only one-third of the income from Messrs. Sidh Gopal Amar Nath was includible in the assessment of the assessee. The department will pay the costs of the assessee which we assess at Rs. 250. Counsels fee is also assessed at Rs. 250.