1. This appeal is by the assessee J.K.S. Manickam and it relates to his income-tax assessment for the year 1978-79. The sole dispute that arises for consideration in this appeal is with regard to the claim of the assessee for carry forward and set off of loss of the past years which represents half share of the profit or loss arising to the assessee's father, Shri J.K.K. Sundaraja, in various firms, in which he was a partner and to which the assessee is entitled to by virtue of overriding title. The short background of facts pertaining to this claim is as follows. The assessee's father Shri J.K.K. Sundaraja was originally partner in certain firms in his capacity as karta of his HUF. Subsequently, there was a partition in respect of his share of interest in various firms, which has been recognised. As a result of such partition, the assessee became entitled to half the share of interest in respect of the share ostensibly standing in the name of the assessee's father in those firms. It is common ground that this point as to the assessee being entitled to half share of profit or loss in the various years of the assessee's father as a partner originally in his capacity as karta of the HUF and which Was subsequently partitioned has since been established as a result of the decisions of the Madras High Court in CWT v. J.K.K. Angappa Chettiar  116 ITR 456 who was brother of the assessee and where also there was a similar partition of the share income from firms which originally belonged to the HUF, and the decisions of the Tribunal in the assessee's own case for the assessment years 1976-77 and 1977-78. We have also been furnished with copies of the orders of the Commissioner (Appeals) for the assessment years 1976-77 and 1977-78 and of the Tribunal for the identical years.
The dispute in the appeals for the earlier years, it appears, related to the assessee's claim that its entitlement to half share is in respect of the assessee's father's share in all the firms in which he was a partner and not in one or two firms considered by the ITO in the assessment. The finding of the appellate authorities on this point is that the assessee's entitlement to half share extends to all the partnerships in which the assessee's father was a partner in HUF capacity and which was covered by the partition accepted by the department. According to the assessee, inclusion of the amounts of income or loss from various firms in respect of the assessee's entitlement to half share are as under :(1) Sundaram Spinning Mills (+) 73,063(2) Kandaswamy Weaving Factory (+) 62,058(3) Kandaswamy Spinning Mills () 3,37,649(4) J.K.K. Company Nil (1) Sundaram Spinning Mills (+) 14,332 (2) Kandasamy Spinning Mills () 3,25,932 (3) Kandasamy Weaving Factory (+) 15,799 Aggregate () 2,95,801 A copy of the assessment order in the case of the assessee's father also shows this figure of loss at Rs. 1,47,900, belonging to the assessee by virtue of overriding title. We have set out the figures only to highlight the claims of the assessee and the correctness of the figures may be verified by the ITO if necessary.
2. As we have already stated the point as to whether half the share of profit or loss belongs to the assessee, being entitled to it by overriding title as a result of partition, is no longer in dispute and the ITO also does not dispute it in the assessment. The ground on which the assessee's claim has been disallowed is that the half share of profit or loss which the assessee is entitled to by virtue of overriding title cannot be regarded as an income derived from business carried on by the assessee and, hence, half share of loss is not entitled to be carried forward and set off. The Commissioner (Appeals), in the appeal preferred by the assessee, has for the same reasons rejected the assessee's claim and hence, aggrieved by his order the assessee is in further appeal.
3. The assessee's submission before us in this connection is that the character of the share income allocated to the father in the concerned firms does not change because of the overriding title of the assessee to half of it, in the circumstances of this case. It is argued that simply because an assessee instead of carrying on the business individually or as proprietary concern, carries it on in partner ship with others, it does not cease to be business carried on by him and, consequently, share income derived has to be regarded as business income. The share income allocated to the assessee's father is business income. The partition effected in the circumstances of this case, results in a sort of sub-partnership so that, that business profit which gets allocated to the father in the firms gets divided and equally belongs to father and the son. In this connection, the learned counsel for the assessee referred to and relied on the following decisions : Murlidhar Himatsingka v. CIT  62 ITR 323 (SC), CIT v.A. Dharma Reddy  73 ITR 751 (SC), CIT v. R.M. Chidambaram Pillai  106 ITR 292 (SC) and CIT v. Rasiklal Balabhai  119 ITR 303 (Guj.).
4. The learned departmental representative, Mr. Martin David, contended in reply that under Section 72(1) of the Income-tax Act, 1961 ('the Act') the loss carried forward shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year provided that the business for which the loss was originally continued to be carried on by him in the previous year relevant to the assessment year. According to him, the facts of this case show that the assessee's half share in the share of profit allocated to the father in the various firms does not represent profits and gains of any business carried on by him. The assessee's entitlement is by virtue of an overriding title arising from a partition and it does not amount to sub-partnership, as there is difference between partition and sub-partnership. In this connection, reference was made to the commentary on Income-tax Law, 2nd edition, Vol. 3, p. 1995 (by Chaturvedi and Pithisaria). It is pointed out that in the case of sub-partnership it can be regarded as a partnership within a partnership. The result of such an agreement is to constitute what is called a 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. Reliance is also placed on the decisions of Mysore High Court in the case of Dr. T.P. Kapadia v. CIT  87 ITR 511 and the Allahahad High Court in the case of Bhagwat Prasad & Co. v.CIT  99 ITR 111.
5. We have carefully considered the facts and the rival contentions of the parties. We find considerable merit in the assessee's claim. There can be no doubt that the share of profit in the various firms already mentioned, which is allocated to the father as a partner, bears the character of income from business or profession carried on by him as much as carried on by the partnership concern. This position of law is well settled by the decision of the Supreme Court in the case of CIT v.Ramniklal Kothari  74 ITR 57 where it is observed : . . . Share in the profits of a partnership received by a partner is 'profits and gains of business' carried on by him and is on that account liable to be computed under Section 10, and it is a matter of no moment that the total profits of the partnership were computed in the manner provided by Section 10 of the Income-tax Act and allowances admissible to the partnership in the computation of the profits and gains were taken into account ...
The next step in this line of reasoning to consider the dispute is the consideration of the effect of the partition in respect of such share.
In the case of Charandas Haridas v. CIT  39 ITR 202, the Supreme Court considered the effect of a partition in the share of profit in firms originally held by the karta on behalf of the HUF and after discussing the interplay of different branches of law to be applied to the circumstance of the case observed as follows : . . . The fact of a partition in Hindu law might have no effect upon the position of the partner, insofar as the law of partnership was concerned, but it had full effect upon the family insofar as the Hindu law was concerned. Just as the fact of a karta becoming a partner did not introduce the members of the undivided family into the partnership, the division of the family did not change the position of she partner, vis-a-vis, the other partner or partners.
The income-tax law before the partition took note, factually, of the position of the karta, and assessed him not as partner but as representing the Hindu undivided family. In doing so, the income-tax law looked not to the provisions of the Partnership Act, but to the provisions of Hindu law. When once the family had disrupted, the position under the partnership continued as before, but the position under the Hindu law changed. There was then no Hindu undivided family as a unit of assessment in point of fact, and the income which accrued could not be said to be that of a Hindu undivided family. There was nothing in the Indian income-tax law or the law of partnership which prevented the members of a Hindu joint family from dividing any asset ...
It is not disputed. that the share allocated to the karta originally was liable to be assessed in the hands of his HUF and not in individual capacity as income derived from business because, although the karta is nominally a partner in the firm and is in law partner so far as the relation of the partners under the Partnership law is concerned, the title to the income vested in the HUF by virtue of its overriding title. The effect of the partition, according to the decision of the Supreme Court, is that instead of the Hindu undivided family being entitled to the share of income, which was the case before the partition, the separated members became entitled to their respective shares in terms of the partition in such share income. But nonetheless the source of the income and the character of the income remained the same. The theory of overriding title is that income is diverted at the very source and is not in the nature of a charge of the income derived by the karta so that the karta is entitled to the deduction of this amount from the share income. In other words, the karta can take as his share of income only the amount representing his share according to the partition. We are satisfied that even if this partition could be held to result in a sort of sub-partnership, the share falling to the sub-partner continues to retain the character of income from business carried on by him. As we already noticed, according to the law stated by the Supreme Court, the income of a partner by way of share of profit in the business carried on by a firm is nonetheless a profit of the business carried on by him individually and so it has to be held that the share of income belonging to a partner is profit or gain derived from business carried on by him. In respect of that share, therefore, he can take a sub-partner and to the extent of the share from the firm falling to him, it will represent income or profits of the business carried on by him and the sub-partner, the relationship of the two being covered by the principles of partnership. We are, therefore, satisfied that the character of income derived even for a sub-partnership continues to be profits from business carried on by him. Applying these principles to the facts of this case, it is clear that the half share of income or loss allocated to the assessee's father in the firms to which the assessee is entitled by virtue of partition should be regarded as income from profits and gains of business carried on by himself and any loss unabsorbed in the past is entitled to be brought forward and set off in accordance to the provisions of Section 72 and other connected provisions of the Act. We, therefore, reverse the order of the departmental authorities and direct them to carry forward the loss and set off in accordance to the law.