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Shiv NaraIn Agarwal Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference Nos. 361 and 764 of 1975 and 511 of 1977
Judge
Reported in(1980)19CTR(All)314; [1983]139ITR999(All)
ActsIndian Partnership Act, 1932 - Sections 4 and 15; Income Tax Act, 1961 - Sections 64(1)
AppellantShiv NaraIn Agarwal
RespondentCommissioner of Income-tax
Excerpt:
- - both the brothers then formed a firm on december 2, 1947, with 50% share both in the capital, as well as in the profits and losses. 'but before a particular relationship leads to the creation of a partnership, one has to see whether the requirements of sections 4 and 6 of the partnership act are satisfied. it is better to extract the relevant part of these two sections: on january 10, 1961, there was a partial partition as regards investment made by the respective families of each of the assessee in the firm, as well as regards the business carried on by the firm. , which contained the following statement of law :an agreement to share profits and losses, in the sense of making good losses if any are sustained, may be said to be the type of a partnership contract. whatever.....c.s.p. singh, j.1. the income-tax appellate tribunal has referred the following questions of law for opinion of this court:'1. whether on a true construction of the memorandum dated january 2, 1963, the tribunal could on the facts and in the circumstancesof the case, legally draw an inference that the business which the assessee carried on as a partner of m/s. shiv narain karmendra narain was so carried on by him on his own behalf and also on behalf of his wife constituting the sub-partnership between themselves ? 2. whether the tribunal was right in law in holding that even in the case of sub-partnership between the husband and the wife from the main partnership, the provisions of section 64(1) of the i.t. act, 1961, are applicable ?' the assessment years involved in this reference are.....
Judgment:

C.S.P. Singh, J.

1. The Income-tax Appellate Tribunal has referred the following questions of law for opinion of this court:

'1. Whether on a true construction of the memorandum dated January 2, 1963, the Tribunal could on the facts and in the circumstancesof the case, legally draw an inference that the business which the assessee carried on as a partner of M/s. Shiv Narain Karmendra Narain was so carried on by him on his own behalf and also on behalf of his wife constituting the sub-partnership between themselves ?

2. Whether the Tribunal was right in law in holding that even in the case of sub-partnership between the husband and the wife from the main partnership, the provisions of Section 64(1) of the I.T. Act, 1961, are applicable ?'

The assessment years involved in this reference are 1966-67, 1967-68, 1968-69 and 1969-70, the relevant previous years ending on December 31, 1965, December 31, 1966, December 31, 1967 and December 31, 1968, respectively. Lala Prag Narain Agarwal constituted an HUF, and died on June 18, 1938, leaving behind him six sons and movable and immovable properties and certain business. After the death of Lala Prag Narain, his sons constituted a firm under a deed of partnership dated January 25, 1941, and on the dissolution of the firm, the business at Aligarh was allotted to Sri Shiv Narain Agarwal, the assessee in this case, and his, brother Karmendra Narain Agarwal. Both the brothers then formed a firm on December 2, 1947, with 50% share both in the capital, as well as in the profits and losses. Sri Shiv Narain Agarwal was a partner in the firm as karta of an HUF. On July 1, 1953, his son Shri Ajay Narain Agarwal was made a partner in his individual capacity, and he separated from the family vis-a-vis the business. Similarly, on January 1, 1957, the assessee's other son Sri Vinay Narain also become a partner having two shares in his own right, and severed his interest in the family in so far as the business was concerned. The firm was granted registration by the AAC. Sri Shiv Narain Agarwal then effected a partition of the capital in the firm in two equal parts between himself and his wife. He made a declaration to that effect on January 1, 1963, which was reduced into writing in the shape of memorandum. It is necessary to extract paras. 8 to 16 of the said memorandum.

'And whereas after the partial partition on two occasions referred to above with regard to the family's business assets in the firm Sri Shiv Narain Karmendra Narain the following properties remained joint:--

(i) Share of M/s. S.K. Agencies of the face value of Rs. 2,48,000 after the sale of two shares worth Rs. 2,000 to Sri Ajay Narain and any sum which may be standing to the credit of Sri S.N. Agarwal on account of and jointly owned by Sri S.N. Agarwal, Smt. Vishwa Mohini Agarwal, Sri Ajay Narain Agarwal and Sri Vinay Narain Agarwal and registered and held in the name of S.N. Agarwal in the books of M/s. S.K. Agencies Private Limited.

(ii) An whereas on January 1, 1957, at the time of partial partition of the assets of the family consisting of Sri S.N. Agarwal, Smt. Vishwa Mohini Agarwal and Sri Vinay Narain Agarwal invested in the firm M/s. Shiv Narain Karmehdra Narain, Smt. Viswa Mohini Agarwal got 1/3rd shares in the assets and her l/3rd share of the said assets remained standing joint in the name of Sri S.N. Agarwal by mutual consent who got 1/4th share in the firm of Shiv Narain Karmendra Narain in the names of himself and Smt. Vishwa Mohini Agarwal's capital invested in the firm ;

And whereas this 1/4th share in the partnership firm together with Capital of Rs. 3,79.433.75 as on December 31, 1962, standing in the name of Sri S.N. Agarwal in the above-mentioned partnership is jointly owned by Sri Shiv Narain Agarwal and Smt. Vishwa Mohini Agarwal in equal shares;

And whereas Sri S.N. Agarwal declared on January 1, 1963, that the above joint assets at No. 8(i) and (ii) above would no longer remain joint and should be divided ;

And, whereas, the same has been divided by proper book entries in the account books of the joint family of Sri S.N. Agarwal on January 1, 1963, as recited hereunder : '248 shares held and registered in the name of Sri S.N. Agarwal in the account books of M/s. S.K. Agencies which belonged jointly to Sri S.N. Agarwal, Smt. Viswa Mohini Agarwal, Sri S.N. Agarwal and Sri V.N. Agarwal shall be held separately in equal numbers, viz., 62 shares each, by Mohini Agarwal. The transference shall be got done as soon as possible in favour of the respective members and steps shall be taken to have these shares registered in the company in the names of the abovenamed members. The above shares are now no longer jointly owned and would henceforth be the property of the above-named parties individually to the extent of their respective shares. Any sum found to the credit of Sri S.N. Agarwal with M/s. S.K. Agencies P. Ltd., would also be divided in equal shares of 1/4th each between Sri S.N. Agarwal, Smt. Vishwa Mohini Agarwal, Sri S.N. Agarwal Sri V.N. Agarwal;

And, whereas, on January 1, 1964, it was also declared by Sri S.N. Agarwal, that the share of his wife Smt. Vishwa Mohini Agarwal in asset No. (ii) above which remained invested in the firm of M/s. Shiv Narain Karmendra Narain through Sri S.N. Agarwal will no longer remain joint.

And, whereas, pursuant to the above declaration proper book entries of the joint capital as on December 31, 1962, have been made in the account books maintained by Sri S.N. Agarwal showing the division in two equal shares;

And, whereas, it was further declared by him, that the division of profits for the calendar year 1962, from the said firm shall further becredited to her account as and when the account books of the said firm have been completed and proper statements made :

And, whereas, it was also declared that Sri S.N. Agarwal shall pay from the future profits 2 annas share to his wife Smt. Viswa Mohini Agarwal on account of her separated share in the capital still invested in the said business so long as her capital remains invested in the said business of M/s. Shiv Narain Karmendra Narain through Sri S.N. Agarwal;

Now, therefore, it is recorded that the shares of M/s. S.K. Agencies Private Limited which stood in the name of Sri S.N. Agarwal along with any sum standing to his credit in the books of M/s. S.K. Agencies Private Ltd. on December 31, 1962, which remained joint between Sri S.N. Agarwal, Smt. Vishwa Mohini Agarwal, Sri A.N. Agarwal and Sri V.N. Agarwal have already been divided in equal 1/4th share between the abovementioned four persons. It is further recorded that the severance of the share of Smt. Vishwa Mohini Agarwal in the capital which remained standing in the name of Sri S.N. Agarwal after the separation of Sri V.N. Agarwal in the said share of 4 annas in the firm M/s. Shiv Narain Karmendra Narain, as stated above in para. 8(ii), has already been made and that future profits arising from that firm shall be paid to her to the extent of 2 annas in a rupee, so long as her capital remains invested in the firm M/s. Shiv Narain Karmendra Narain through Sri S.N. Agarwal. The profits shall include loss also which the lady shall be under an obligation to pay to the extent of her 2 annas share.

In the assessment years in question although Sri S.N. Agarwal had 4 annas share in the firm M/s. Shiv Narain Prag Narain, Aligarh, in the return of income filed, he had shown only 2 annas share income from the said firm. In the books, it was stated that the remaining 2 annas share belonged to Smt. Vishwa Mohini Agarwal, his wife, and, hence, it had not been shown in the return. It was stated that there was overriding charge of 2 annas share in favour of Smt. Vishwa Mohini Agarwal on account of her share in the capital investment in the said firm. The ITO rejected these contentions. The assessee filed an appeal. The Appellate Commissioner found that the partition of the 4 annas share of the assessee in the firm M/s. Shiv Narain Karmendra Narain was effected on December 31, 1962, which was reduced in writing in the form of a memorandum dated January 2, 1963, the relevant part of which we have already extracted. Relying on the decision given in the assessee's wealth-tax appeal, wherein it had been held by the Tribunal that 1/2 share of the capital invested in the said firm did not belong to the assessee, he held that the assessee's income from the share should be taxed at only 2 annas of the profits. On appeal, the Tribunal found that his two sons Sri Ajay Narain and SriVijay Narain Agarwal had separated on July 1, 1953 and January 1, 1957. Thereafter, the capital investment of Rs. 3,79,433'75 as on December 31, 1962, outstanding in the name of Sri Shiv Narain in the books of the firm was jointly owned by him and his wife, Smt. Yishwa Mohini Agarwal. On December 31, 1962, Sri Shiv Narain Agarwal declared that the assets no longer were joint and would be divided. Pursuant to that declaration, entries were made in the account books maintained by Sri Shiv Narain Agarwal showing the division of the capital in two equal shares as on December 31, 1962, and Sri Shiv Narain Agarwal agreed to pay 2 annas share in future profits to his wife, Smt. Vishwa Mohini Agarwal, on account of her separated share in the capital, which are invested in the business of the firm M/s. Shiv Narain Karmendra Narain, Aligarh. On these findings, the Tribunal held that there was a partition of the capital investment and an overriding charge was created by the memorandum dated January 2, 1963, to the extent of 2 annas in favour of the assessee's wife, Smt. Vishwa Mohini Agarwal. The Tribunal, then, considered the question whether the memorandum of January 2, 1963, created a sub-partnership in respect of the assessee's 1/4th share from M/s. Shiv Narain Karmendra Narain, and held that as in the memorandum dated January 2, 1963, the assessee and his wife had agreed to share the profits to the extent of 1/4th, a sub-partnership had been created between the assessee and his wife in respect of the 1/4th share in the business of the firm.

2. We propose to answer the questions seriatim.

3. Coming to the first question, we will address ourselves to the question as to whether there was a sub-partnership between the assessee and his wife. From the facts recited earlier, it is apparent that Sri Shiv Narain Agarwal, the assessee was a partner of the firm M/s. Shiv Narain Karmendra Narain as karta of the HUF, consisting of himself and his wife. The firm recognised Sri Shiv Narain Agarwal alone as its partner, but as he had become a partner of the firm as the karta of the HUF, he was liable to account for the profits received from the firm, which was liable to be assessed in the hands of the HUF consisting of the assessee and his wife. On January 1, 1963, there was a partition between the assessee and his wife, inter alia, in respect of the business carried on by Sri Shiv Narain Agarwal in the firm, as karta of the HUF. This is apparent from the declaration made on January 1, 1963. The result of the partition was that the business asset, viz., the share in the firm no longer belonged to the HUF, but came to be owned in equal shares by the assessee and his wife. See Appovier v. Ramasubba Aiyan [1866] 11 MIA 75 (PC). The fact that no partition by metes and bounds took place of the capital invested by the HUF in the firm through its karta, was immaterial, for, the nature ofthe investment was such a partition by metes and bounds of this investment could not be made immediately. The wife could not make a claim against the firm, as she was not a partner, and likewise the assessee could not withdraw the investments in the firm unless he either retired from the partnership, or claimed a dissolution of the partnership, and took his share after accounts, and divided the profits between himself and his wife. Thus, the business assets came to be owned by the assessee and his wife as tenantsin-common and the HUF no longer owned the assets. See Charandas Haridas v. CIT : [1960]39ITR202(SC) . We have also extracted the declaration made by the assessee on January 1, 1963, in respect of the capital invested in the firm. Paragraph 12 of the declaration states that the share of the wife in the firm no longer remained joint with her husband, and paras. 14 and 15 recited that as for the future the assessee will pay 2 annas share of profits to his wife on account of her separate share in the capital investment in the said business. This payment was to continue so long as her capital remained invested in the business through Sri Shiv Narain Agarwal. Paragraph 16 recites that the profits referred included losses, and makes the wife liable to pay losses, if incurred by the firm to the extent of her 2 annas share. It is contended, on behalf of the Revenue, that these stipulations in the deed create a sub-partnership between the assessee and his wife.

4. Now it is open to a partner of a firm to create a sub-partnership in respect of his share in a firm. Lindley on Partnership, 13th Edition, says on page 111.

'A sub-partnership is, as it were, a partnership within a partnership ; it presupposes the existence of a partnership to which it is itself subordinate. An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, several persons are partners and one of them agrees to share the profits derived by him with a stranger, this agreement does not make the stranger, a partner in the original firm. The result of such an agreement is to constitute what is called as sub-partnership, that is to say, it makes the parties to it partners inter se ; but it in no way affects the other members of the principal firm. In the language of the civilians, socius met socii, socius meus non est. '

But before a particular relationship leads to the creation of a partnership, one has to see whether the requirements of Sections 4 and 6 of the Partnership Act are satisfied. It is better to extract the relevant part of these two sections:

'Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.

'Explanation 1.--The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners,

Explanation 2.--The receipt by a person of a share of the profits of a business or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business.'

It will be seen that a mere agreement to share the profits of a business carried on by all or any of them acting for all is not sufficient, for Section 6 lays down that in determining whether a group of persons constitutes a partnership, one has to take into account the real relationship between the parties as shown by all the relevant facts taken together. Explanation 1 to it states that mere sharing of profits of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. Explanation 2 lays down that the receipt by a person of a share of the profits of a business or of a payment contingent upon the earning of profits or varying with the profits earned by business does not of itself make him a partner with the persons carrying on the business. Thus the entire circumstances have to be seen in order to determine as to whether a partnership has come into existence.

5. Now, in the present case, the existence of partnership is sought to be proved on account of the following facts :

(i) that the share of the capital of the wife was kept invested in the firm through the assessee ;

(ii) that the wife was entitled to two annas share in the profit of the firm and also liable for losses.

The question is as to whether this is sufficient to constitute a partnership. An agreement to share the profits and losses of a business may be said to be characteristic, but not the essence of a partnership contract (Lindley on Partnership, 13th Edition p. 80). Section 60 of the Partnership Act also points in this direction. Thus, in a case where there is an agreement to share the profits and losses, it is prima facie evidence of the existence of a partnership but the inquiry must not stop there. The entire circumstances and relations between the parties have to be examined in order to determine as to whether the persons constitute a partnership as contemplated by Section 4.

6. Counsel for the assessee urged that the fact that the share of the wife remained invested in the partnership is a neutral circumstance in this case, for, in the circumstances, that was the only mode of partition. It was also contended that the circumstances of both the parties sharing profits and losses did not create the relationship of a partnership, inasmuch as the wife was free to withdraw her share of the invested capital, and the liability of Shiv Narain Agarwal, to pay the profits and losses to her, ended with the withdrawal of her share in the business. This, according to counsel, went against the fundamental conception of a partnership which is to the effect that so long as the partnership exists, no partner can claim a definite share in the partnership property. It is only on dissolution of the firm, he can get whatever is due to him on accounting.

7. We will give consideration to these contentions a little later, as we feel that before embarking on this, it would be worthwhile noticing the decision of various courts, including that of the Supreme Court, on which parties have relied to support their contentions.

8. In Addl. CIT v. Chandulal C. Shah : [1977]107ITR91(Guj) , the three brothers were partners in a firm, each of them was representing an HUF. On January 10, 1961, there was a partial partition as regards investment made by the respective families of each of the assessee in the firm, as well as regards the business carried on by the firm. The family of the assessee had to its credit a total amount of Rs. 92,978.41 as deposit in the firm. This amount stood distributed to the credit of all members of the family. As a result of the partition, it was agreed that the assessee, his wife, his major son and three minor sons would each get 1/6th share in the profits of the firm. The assessee agreed to receive the share of the family, and agreed to distribute and hand over their respective share of profits as stipulated. The question was as to whether a sub-partnership had come into existence between the assessee, his wife, his major son and three minor sons. It was held that a sub-partnership did not come into existence, for some of the parties to the arrangement were minors, and further that these minors shared losses of the firm, which could not be validly done under the partnership Act. The court also took into account, while reaching this conclusion, the fact that the agreement did not talk of creating a partnership between the members of the family. This case does not help, for, the decision turned in favour of the assessee mainly on the consideration that the minors could not validly enter into a partnership agreement.

9. In CWT v. J.K.K. Angappa Chettiar : [1979]116ITR456(Mad) , the HUF consisted of the assessee and his two minor sons. The assessee was a partner in various partnership firms as karta of the HUF. A partition took place in the family on March 31, 1961, as a result of which the capital of the HUF was divided between the assessee and his two sons. During wealth-tax assessments, the assessee claimed that as 2/3rds of the capital in the various partnerships belonged to the minor sons 2/3rds of the share ofprofits from the various firms also belonged to them, and could not be included in his net wealth. This claim was, however, not accepted by the WTO on the footing that after the partition, according to the partition deed, the sons had no further interest in the partnership business, and, hence, the entire shares of profits belonged exclusively to the assessee. The Madras High Court held that the assessee had been receiving his share of profits on behalf of an HUF and when the partition took place, the HUF ceased to exist and the parties held the investment as tenants-in-common, and were entitled to the profits arising therefrom in accordance with their share. The assessee became liable to realise amounts of the profits as a trustee or an agent. On this view, it was held that as from the date of the partition the assessee was not entitled to the profits in their entirety, and as such the total capital invested in the firm could not be treated as the asset of the assessee. This case also does not throw light on the controversy involved.

10. In Pension v. Johnstone (H.M. Inspector of Taxes) [1940] 23 TC 29 , the appellant wished to buy and develop some land but lacked the necessary finances. The land was purchased by 'S' who found the money in accordance with an agreement with the appellant, which further provided that, the appellant should be paid one-half of any profit in consideration of this introducing the property to 'S' and agreeing to assist in the development and sale of the land ; the appellant was to be responsible for one-half of any losses and that the arrangement set out in the agreement did not constitute any partnership between 'S' and the appellant. The appellant's contention was that the sums received were not remuneration for services, that the true relationship between him and 'S' was that of partners, and that the profits were assessable, if at all, only under Rule 10 of the Rules applicable to Cases I and II of Schedule D. The recital in the deed that it was not to be taken to be a partnership, was rejected (at p. 33 of 23 TC) following the decision in Adam v. Newbigging [1888] 13 AC 308 (HL). Reliance was placed upon the following observation of Lord Halsbury L.G. (at p. 315 of 13 AC):

'If a partnership in fact exists, a community of interest in the adventure being carried on in fact, no concealment of name, no verbal equivalent for the ordinary phrases of profit or loss, no indirect expedient for enforcing control over the adventure will prevent the substance and reality of the transaction being adjudged to be a partnership; and I think I should add, as applicable to this case, that the separation of different stipulations of one arrangement into different deeds will not alter the real arrangement, whatever in fact that arrangement is proved to be.

And no 'phrasing of it' by dexterous draftsmen, to quote one of the letters, will avail to avert the legal consequences of the contract.'

The case of Re Jane: Ex parte, The Trustee [1914] 110 LT 556, wherein it was held that the mere agreement to share profits and losses does not constitute a partnership, and the decision in Walker v. Hirsch [1884] 27 Ch D 460 was distinguished. The case was found to be close to the case of Moore v. Davis [1879] 11 Ch D 261 wherein at page 265, it was held that there was nothing in the agreement or in the circumstances in which it was entered into or the manner in which it was performed or carried out to displace the presumption of partnership which flowed from sharing of both profits and losses. Reliance was placed on Lindley on Partnership 10th Edn., which contained the following statement of law :

'An agreement to share profits and losses, in the sense of making good losses if any are sustained, may be said to be the type of a partnership contract. Whatever difference of opinion there may be as to other matters, persons engaged in any trade, business, or adventure upon the terms of sharing the profits and making good all losses arising therefrom, are necessarily, to some extent, partners in that trade, business or adventure.'

The Judicial Commissioner, Upper Burma, in the case of Manik Chand v. Rat Bahadur Giridharilal [1918] 46 IC 342 (Upper Burma), has taken the view that where two persons agree to contribute money towards an undertaking and to share the profits and losses accruing therefrom, the agreement amounts to a partnership. This case turned on the terms of the agreement, They relied on Lindley on Partnership, 8th Edn., where it was stated that an agreement to share profits and loss in the sense of making good the losses if any sustained, may be said to be a type of partnership contract, and again, that unless the word 'partner' is to be deprived of all definite meaning, its proper application to persons who share profits and losses in the sense referred to can hardly be questioned. So far as this case is concerned, the decision turned on the interpretation of the agreement between the parties. As for the statement contained in Lindley on Partnership, 13th Edn., the learned author has expressed the view that where there is an agreement to share profits and losses, it is characteristic of a partnership, but not the essence of a partnership contract. Section 6 of our Partnership Act, requires the court to look into the real relationship between the parties as shown by all the relevant facts, and the mere fact that persons are holding a joint and common interest in a property sharing the profits of the gross income accruing from the firm, does not make them partners. In view of these considerations, we are unable to subscribe to the view of the Judicial Commissioner that once it is found that persons are sharing profits and losses of the business, that concludes the matter, and no further enquiry is required, in case an issue is raised as to the existence of a partnership. The Full Bench of the Lahore High Court in the case of M/s. B.C.G.A. (Punjab) Ltd. v. CIT , is also not much of help for all that it lays down is that the mere circumstance that a person is to share profits only, and not losses, does not by itself militate against the presumption of partnership. The decision in Champaran Cane Concern v. State of Bihar : [1963]49ITR152(SC) , on which the assessee strongly relied, in our considered view, does not clinch the issue. In that case, two persons had purchased certain farms jointly and had appointed a common manager for the agricultural operations. The Agrl. I.T. authorities, assessed the assessee on the footing that it was a partnership on the consideration that the name of the assessee was 'Champaran Cane Concern', that two individuals joined together in appointing a common manager for the supervision of cultivation, and the cultivation was made jointly on behalf of them, and the profits arising therefrom were distributed in proportion to their respective share. It was held that, in order to determine as to whether the relationship of a co-owner or partnership existed, both the form and substance of the matter had to be considered. The circumstances relied upon were not circumstances from which an inference, that the assessee was a partnership, necessarily followed. The facts and circumstances found by the taxing authorities were all consistent with the claim of the assessee that it was a co-ownership. Pointing out the difference between co-ownership and partnership, their Lordships of the Supreme Court laid down that one of the principal differences was that a co-ownership was not necessarily the result of an agreement, whereas a partnership was. It was also laid down that co-ownership did not necessarily involve a community of profit or loss, but a partnership did, the third difference being that one co-owner could, without the consent of the other, transfer his interest to a stranger. A partner could not do this. The last circumstance found in favour of the assessee was that it was not established that the assessee was an agent for the other person, who had purchased the farm jointly. In the present case, there is an agreement between the parties to share the profits and losses of the firm, Shiv Narain Karmendra Narain, so long as the wife kept her funds invested. As regards the right to transfer the interest to a stranger is concerned, once on the agreement a partnership is made out, Section 15 of the Partnership Act would become applicable, and the money would become the firm's property, and could not be transferred to a stranger. Similarly, if the agreement, as it stands, creates the relationship of partners between the husband and the wife, the two persons would become mutual agents of each other in view of Sections 19, 20, 21 and 23 of the Act.

11. Similarly, the decision in K.D. Kamath and Co. v. CIT : [1971]82ITR680(SC) does not also conclude the matter in favour of the Revenue. Inthat case, it was held that the two essential conditions for constituting a partnership are, (i) that there should be an agreement to share profits and losses of the business of the firm, and (ii) that the business must be carried on by all the partners or any of them acting for all. But this decision does not anywhere lay down that once these conditions are satisfied, the real relationship between the parties is not to be looked into. In fact, on page 689, their Lordships of the Supreme Court have specifically referred to Section 6 of the Partnership Act, and pointed out that in order to determine whether a group of persons is or is not a firm or whether a person is or is not a partner in a firm, the real relationship between the parties has to be seen. In this very case, the Supreme Court looked into the real relationship between the parties and negatived the contention on the ground that inasmuch as the complete control of the business had been given to one person, a partnership had not come into existence.

12. Now, let us examine as to whether, in the present case, a partnership came into existence by a look at the agreement, on the basis of which the Revenue contends that the husband and the wife constituted a sub-partnership. Both the husband and the wife were entitled to share in the profits of the firm and liable for its losses. This is the prima facie evidence of a partnership, for Section 4 of the Partnership Act says so. Then Section 6 of the Partnership Act and the cases to which we have referred earlier, require us to examine the entire circumstances of the case in order to determine as to whether the assessee and his wife were really partners. We have seen that after the partition, the assessee and his wife owned the capital invested in the firm as tenants-in-common. Counsel for the Revenue has contended that this position was altered on account of the assessee and his wife agreeing to share the profits and losses of the firm. The declaration does not say that the two were constituting themselves as a partnership in the business, but that is not conclusive, as held in Adam's case [1888] 13 AC 308 (HL). Paragraph 15 of the agreement recites that the assessee will keep on paying the profits from the firm so long as the wife keeps her capital invested in the business. This indicates that the wife could withdraw her share invested in the business or at least force the assessee to pay her share invested in the business as and when she wanted. The deed does not recite that this right of the wife to withdraw the funds invested in the business should be exercised only after seeking a dissolution of the alleged partnership. All that is required is that the wife to take such steps as are necessary to withdraw her share of the invested capital, and as soon as that is effected, her right to get the profits from the firm of M/s. Shiv Narain Karmendra Narain would come to an end and so also would her liability to pay the losses. This circumstance, in our view, is not consistent with the opinion of a partnership. It is more consistent with the rightsof co-owners in a property. Had the parties wanted to enter into a contract of partnership, they would have made a provision in the agreement consistent with the jural relationship of partners imposing fetters on the untrammelled right of the wife to withdraw her share of the capital as and when she chose. We are of the view that the initial presumption that arises from the fact that both the husband and the wife agreed to share the profits of the firm of M/s. Shiv Narain Karmendra Narain is displaced by the untrammelled right given to the wife to withdraw her share of capital as and when she wanted.

13. We, accordingly, hold that there was no sub-partnership between the assessee and his wife qua the profits of the firm, M/s. Shiv Narain Karmendra Narain.

14. Coming now to the second question, we have seen that it is possible for a partner in a firm to enter into a sub-partnership qua the business of a firm with another person. Counsel, however, urged that Section 64(1)(i) of the I.T. Act does not apply to sub-partners. Section 64(1)(i) of the said Act is to the following effect:

'64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly- (i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner.'

It has been contended that the sub-partnership does not carry on any business as it is the firm of M/s. Shiv Narain Karmendra Narain which carried on the business and all that is done is that the income received by Shiv Narain from the firm, M/s. Shiv Narain Karmendra Narain, is divided between himself and wife. It is suggested that this division of profits does not amount to carrying on a business, which is a necessary element of Section 64(1)(i) of the I.T, Act. The question then is whether the alleged sub-partnership (for we have already held in answer to question No. 1, that there was no sub-partnership which came into existence) can be said to be carrying on a business. In Narain Swadeshi Weaving Mills v. CEPT : [1954]26ITR765(SC) , it was held that the word 'business' connotes some substantial and systematic organised course of activity or conduct with a set purpose. Now if there was a sub-partnership that was formed with a view to sharing the profits of the firm, M/s. Shiv Narain Karmendra Narain, by investing capital in that firm through Shiv Narain Agarwal, and Shiv Narain Agarwal collected the profits received from the firm, M/s. Shiv Narain Karmendra Narain and divided it between himself and his wife, the act of Shiv Narain Agarwal, in continuing to act as a partner in the firm of M/s. Shiv Narain Karmendra Narain, with the purpose of collecting the profits of that firm and distributing it between himself and his wife, would constitute the business ofthe alleged sub-partnership. We are, as such, not inclined to accept the contention that Section 64(1)(i) docs not apply to a case of sub-partnership.

15. We would have refrained from answering the second question us we have held that no sub-partnership came into exitence between the assessee and his wife, but as the matter is appealable on certificate, we thought it fit to answer the second question also.

16. We, accordingly, answer the first question MI the negative, and the second question in the affirmative. In the circumstances of the case, parties shall bear their own costs.

17. This judgment shall govern I.T.R. Nos. 764 of 1975 and 511 of 1977.


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