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Gulu Thadani Vs. Inspecting Assistant - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Allahabad
Decided On
Judge
Reported in(1983)6ITD77(All.)
AppellantGulu Thadani
Respondentinspecting Assistant
Excerpt:
.....partnership to his brother's wife, smt. padmi thadani and one-third of his share to his brother, shri gulu thadani (the assessee). (e) on 17-9-1973, shri moti g. thadani expired.(f) on 19-9-1973, the assesee and the two ladies, namely, smt. padma thadani and smt. padmi thadani, entered into a fresh deed of partnership to carry on the cinema business as was carried on earlier by shri moti. g. thadani and smt. padma thadani. under the fresh deed of partnership, shri gulu thadani and smt. padma thadani had 25 per cent share each, while smt. padmi thadani had 50 per cent share in the partnership. here also as per clause (3) of the deed of partnership, the building, machinery, furniture, fittings, air-conditioning and generating plants, etc., installed in the basant cinema building were.....
Judgment:
1. These two appeals involving common points of dispute, are disposed of together for the sake of convenience.

2. The assessee is an individual. The assessment years are 1977-78 and 1978-79 and the relevant previous years ended on 30-6-1976 and 30-6-1977, respectively.

3. The first common point pertains to inclusion of Rs. 18,000 being the income from property. The material facts are : (a) Under a deed of partial partition dated 10-6-1953 the assessee's father, Moti G.Thadani, received Basant Cinema building situated at Hazratganj, Lucknow. (b) On 1-9-1959, Shri Moti G. Thadani sold one-fourth share in the said building to his sister Smt. Padma Thadani. (c) On 2-6-1961, Shri Moti G. Thadani and Smt. Padma Thadani entered into partnership to carry on business of exhibiting films in Basant Cinema. Their profit-sharing ratio was 75 per cent to Moti G. Thadani and 25 per cent to Smt. Padma Thadani. By Clause (3) of the said deed, the building, machinery, furniture, fittings, air-cooling plant, etc., installed in the Basant Cinema building became the assets of the firm, (d) By his will dated 5-7-1973, Shri Moti G. Thadani bequeathed two-third of his 75 per cent share in the aforesaid partnership to his brother's wife, Smt. Padmi Thadani and one-third of his share to his brother, Shri Gulu Thadani (the assessee). (e) On 17-9-1973, Shri Moti G. Thadani expired.

(f) On 19-9-1973, the assesee and the two ladies, namely, Smt. Padma Thadani and Smt. Padmi Thadani, entered into a fresh deed of partnership to carry on the cinema business as was carried on earlier by Shri Moti. G. Thadani and Smt. Padma Thadani. Under the fresh deed of partnership, Shri Gulu Thadani and Smt. Padma Thadani had 25 per cent share each, while Smt. Padmi Thadani had 50 per cent share in the partnership. Here also as per Clause (3) of the deed of partnership, the building, machinery, furniture, fittings, air-conditioning and generating plants, etc., installed in the Basant Cinema building were treated as the assets of the partnership business, (g) On 26-11-1974, the assessee gave a notice to the other partners intimating them his desire to retire from the business. In the said notice the assessee had requested the other partners to give him the moneys standing to his credit in the books of the firm, (h) On 1-3-1975 the remaining partners, namely, Smt. Padma Thadani and Smt. Padmi Thadani, entered into a fresh deed of partnership whereby Smt. Padma Thadani had taken 25 per cent share and Smt. Padmi Thadani had taken 75 per cent share in the partnership business. Here also vide Clause (3) of the deed of partnership, the earlier assets belonging to the firm continued to belong to the partnership business as constituted under a deed of partnership dated 1-3-1975. (i) After the retirement from the partnership business, the assessee became adviser to the firm on an annual remuneration of Rs. 18,000.

4. On the aforesaid facts, the IAC (Assessment) enquired of the assessee as to why the rental income from the cinema building should not be included in his total income as according to him by virtue of the will of the Late Moti G. Thadani, the assessee had one-fourth share in the said building. The assessee submitted before the IAC (Assessment) that the cinema building was not the property of individuals but it belonged to the partnership and, therefore, no part of the rental income from the said building could be included in his total income. In this connection, the assessee had invited the attention of the IAC (Assessment) to the aforesaid various documents.

The IAC (Assessment), however, included Rs. 18,000 in the total income of the assessee for the reasons stated in his order for the assessment year 1977-78. The relevant portion of which reads as under : As per will of Late Shri M.G. Thadani, dated 5-7-1973, 75 per cent share in the building and cinema business of Basant was to devolve, two-third on Mrs. Padmi Thadani and one-third on his brother Shri Gulu G. Thadani. According to this will, Shri G.G. Thadani became the owner of 25 per cent to the share in the firm. When he retired from this business, he has choices to transfer this building by sales, mortgage, lease or gift as per law to the continuing partners of any other person. As per deed it appears that he transferred it to the continuing partners but such transfer of the immovable property can only be effected by a registered deed as provided under the Transfer of Property Act except in the case of succession whether intestate or by way of probate. In this case, no evidence of any such transfer has come forward, therefore, the assessee continues to remain the owner of 25 per cent share of Basant Cinema building, the rent from which has not been shown by him. As per provisions of sections 22 and 23 of the Income-tax Act, it has to be now estimated, As per will, this property was fully furnished and well equippe d on the date when the assessee became owner of 25 per cent share. The furniture, fixture and plant and machinery fixed with the building has become the part of immovable property. If the hire charges shown at Rs. 3,69,000 by the assessee in the Basant Cinema is of any indication of the market value of this building and its locality then the fair market rent of this can be estimated on this basis. It is of no doubt that in earning this hire, the Basant Cinema has to incur various expenses in the maintenance, establishment, etc. Therefore, considering all this aspect, the total rent of the Basant Cinema is estimated at the rate of Rs. 6,000 per month which will mean Rs. 72,000 per year. The assessee's own share from the above A.L.V. is one-fourth which would be Rs. 18,000. No expenses on this can be allowed for repair, collection charges and taxes, etc., as all these expenses are actually debited in the Basant Cinema firm and have been allowed on actual basis.

Therefore, a rental income of Rs. 18,000 in his individual capacity, as he received this house by way of will, is added. This addition is being made without prejudice to the action to be taken in gift-tax proceedings which have been initiated in this case separately.

Following his order for the assessment year 1977-78, the IAC (Assessment) included Rs. 18,000 in the total income of the assessee in respect of the assessment year 1978-79 also.

5. In appeal before the Commissioner (Appeals), the assessee reiterated the submissions which were made before the IAC (Assessment) and urged that Rs. 18,000 included in each of the years under appeal should be deleted. The Commissioner (Appeals) upheld the action of the IAC (Assessment) in the following manner : Shri Gulu G. Thadani was asked by me to indicate as to in whose name the building Basant Cinema stands registered in the corporation record and to this a reply has been received, stating that the cinema premises still remains registered in the name of Shri Moti G. Thadani. In spite of repeated requests, the Nagar Mahapalika has not mutated the building in the name of the present owners. A copy of the civil suit filed in the Court of Additional Judge, Small Causes, has been filed before me to show that the corporation is being asked to register the building in the names of only Mrs. Padma Thadani and Mrs. Padmi Thadani (wife of Shri Gulu G. Thadani) and this indicates that Shri Gulu G. Thadani has no share in this building. I am unable to accept this contention. Shri Gulu G. Thadani became the owner of one-fourth share in Basant Cinema building consequent to the document executed by Late Shri Moti G. Thadani on 5-7-1973 and unless he disposes of his share by will, gift or otherwise, he will continue to be the owner of the same. Therefore, in terms of Part C of Chapter IV of the Income-tax Act, 1961, Shri Gulu G. Thadani is liable to be taxed on this share. The property in question passed on to him after the death of Late Shri Moti G. Thadani as capital and continued to be so because it has not been disposed of so far in any of the ways by which immovable property gets transferred.

(Shri Gulu G. Thadani (Ind.), Mayfair Building) Assessment year: 1977-78 As regards the quantum, the IAC (Assessment) seems to have worked out the sum of Rs. 18,000 in a logical manner and I do not find it to be unreasonable or excessive. Therefore, in my view, the sum of Rs. 18,000 has rightly been assessed as income of the appellant relatable to his one-fourth share in Basant Cinema and no relief is due to him on this account.

6. Being aggrieved by the order of the Commissioner (Appeals), the asses-see has come up in appeal before the Tribunal. The learned counsel for the assessee once again reiterated the submissions which were made before the income-tax authorities and contended that the income-tax authorities have failed to appreciate the assessee's case in proper perspective. He further submitted that in the case of partners bringing immovable properties into the partnership business, there was no question of any registered document which the income-tax authorities have failed to appreciate. For this proposition, reliance was placed on the decision of the Hon'ble Allahabad High Court in the case of K.D.Pandey v. CWT [1977] 108 ITR 214. Inviting our attention to various documents mentioned above, more particularly Clause (3) of each of the deeds of partnership, the learned counsel for the assessee submitted that once a partner brings in his immovable property in the partnership business, he no longer enjoys separate right, title or interest on the said property and he will be only entitled to receive a share of profit from the partnership concern. Even on the dissolution of a partnership concern such partner would be entitled to receive his share of interest in the property of the partnership business and nothing else. In this connection, the learned counsel for the assessee also invited our attention to pages 24 to 26 of the paper book containing accounting treatment given in the books when the assessee and his wife got thier shares in the capital of Late Shri Moti G. Thadani and the subsequent development in the capital account of the assessee. Till the assessee had maintained his capital in the firm, the assessee was given interest. Finally, on 27-5-1977, the assessee withdrew the balance amount of Rs. 30,335 standing in his name from the said firm, by a cheque. In this view of the matter, he submitted that the income-tax authorities were not justified in including Rs. 18,000 in the total income of the assessee in the manner they did, The learned representative for the department, on the other hand, strongly relied on the orders of the income-tax authorities and justified their action.

7. We have carefully considered the rival submissions of the parties and we find considerable force in the submissions made on behalf of the assessee. It is a trite law that in a partnership business a partner is entitled to receive a share of profit during the existence of the business and on the dissolution of the business, he is entitled to receive the money on the realization on the partnership assets. In other words, during the subsistence of the partnership business, a partner has no right, title or interest in any of the assets which belong to the partnership. In our opinion, the point at issue is no longer res Integra in view of the decision of the Hon'ble Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishan-appa AIR 1966 SC 1300. In that case, after referring to the relevant provisions of the Partnership Act, the Hon'ble Supreme Court made the following observation, which is very eliminating : From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in Clause (a) and sub-clauses (i), (ii) and (iii) of Clause (b) of Section 48.

. . .

. . . his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges. . . .

8. It appears to us that the income-tax authorities have failed to take notice of the aforesaid decision of the Hon'ble Supreme Court which is a leading case on this issue. In the instant case, Late Moti G. Thadani had brought in the Basant Cinema building along with other assets of the said building into the partnership business and thereafter he had only right to receive a share from the partnership business. Therefore, in our view, we have to read the will executed by Shri Moti G. Thadani in the context of the deed of partnership dated 2-6-1971. In the subsequent deeds of partnership it is clearly mentioned that the Basant Cinema building along with other assets continued to remain the assets of the partnership business. Further, we find from the assessment orders in the case of the firm that the assessing officer had allowed depreciation on the assets so brought in by the partners. In this view of the matter, we fail to appreciate how Rs. 18,000 worked out by the 1AC (Assessment) could at all be included in the total income of the assessee. It is also pertinent to note that with effect from 28-2-1975, the assessee ceased to be a partner in the firm. Therefore, it is not possible to sustain the action of the income-tax authorities since after the retirement the assessee ceased to have any right, title or interest in the cinema building and other assets. Keeping in mind the aforesaid observations of the Hon'ble Supreme Court as well as various documents already brought on record, we have no doubt in our mind that Rs. 18,000 being the income from property worked out by the IAC (Assessment) cannot be included in the total income of the assessee. We would, therefore, delete the same in each of the years under appeal.

9 to 12. [These paras are not reproduced here as they involve minor issues.]


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