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P. Ramachandra Reddiar and P. Arjuna Reddiar Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberI.T.R. Nos. 108 to 111 of 1982
Judge
Reported in[1993]200ITR161(Ker)
ActsIncome Tax Act, 1961 - Sections 64(1); Indian Partnership Act, 1932
AppellantP. Ramachandra Reddiar and P. Arjuna Reddiar
RespondentCommissioner of Income-tax
Appellant Advocate B.S. Krishnan, Adv.
Respondent Advocate P.K.R. Menon and N.R.K. Nair, Advs.
Cases ReferredAddanki Narayanappa v. Bhaskara Krishnappa
Excerpt:
direct taxation - assessment - section 64 (1) of income tax act, 1961 and indian partnership act, 1932 - assessees partners of firm carried on business in textiles - other kinds of business commenced by firm transferred to wives of assessees by agreement - income tax officer (ito) clubbed income of assessees with that of income derived by respective wives - whether tribunal right in law in holding that requirements of section 64 (1) (iii) satisfied - provisions of act for purpose of assessment income of another person may be included in income of assessee - object of legislature is to ignore transfer of assets in certain circumstances - although transfer valid in law and include income arising from transferred assets in total income of transferor - sections must be read to give full.....t. kochu thommen, j.3-11-19871. the following questions have been, at the instance of the assessee, referred to us by the income-tax appellate tribunal, cochin bench :'1. whether, on the facts and in the circumstances of the case, the tribunal is right in law in holding that the assessee individual had transferred the assets to his spouse ? 2. whether, on the facts and in the circumstances of the case, the tribunal is right in law in holding that the income arose to the spouse from the assets transferred by the assessee ? 3. whether, on the facts and in the circumstances of the case, the tribunal is right in law in holding that the requirements of section 64(1)(iii) of the income-tax act are satisfied ?' 2. the assessees are partners of a firm carrying on business in textiles under the.....
Judgment:

T. Kochu Thommen, J.

3-11-1987

1. The following questions have been, at the instance of the assessee, referred to us by the Income-tax Appellate Tribunal, Cochin Bench :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee individual had transferred the assets to his spouse ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the income arose to the spouse from the assets transferred by the assessee ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the requirements of Section 64(1)(iii) of the Income-tax Act are satisfied ?'

2. The assessees are partners of a firm carrying on business in textiles under the name and style of 'Good Morning Stores'. Apart from the two assessees (Ramachandra Reddiar and Arjuna Reddiar), the firm had, during the relevant years, no other partner. Besides the textile business, the assessees' firm also conducted a business in dry-cleaning and tailoring. That part of the business of the firm was actually styled as 'Bright Dry Cleaners'. An agreement dated August 18, 1969, was entered into between the assessees' firm, 'Good Morning Stores', on the one part and the wives of the two partners of the firm on the other part. By the agreement, the assessees' firm sold the dry-cleaning and tailoring business to the wives of the two partners. The wives of the two partners entered into a partnership agreement with each other to carry on the business which was transferred to them under the agreement dated August 18, 1969 (see paragraph 4 of the statement of the case and paragraph 34 of the Tribunal's order).

3. In respect of the assessment years 1970-71 and 1971-72, the Income-tax Officer found that the consideration for which part of the business of the assessees' firm was transferred to the respective spouses was inadequate and, consequently, Section 64(1)(iii) of the Income-tax Act, 1961 ('the Act'), as it then stood, was attracted. Accordingly, the Officer computed the income of each of the two partners for each of these two years by clubbing his income with the income derived by the respective wives as partners of the new firm which the wives constituted to carry on the transferred business. That finding was affirmed by the Appellate Assistant Commissioner and finally by the Tribunal by its order dated March 20, 1981.

4. The finding of the Tribunal that the transfer of the business was for inadequate consideration has not been challenged by the assessees and it is, therefore, final. The sole contention of the assessees is thatSection 64(1)(iii) of the Act is not attracted because the transfer of the business was not effected by an individual to his spouse, but by the firm of two persons who are strangers to it. Counsel for the assessees, Shri Anantha Narayanan, submits that the firm, for the purpose of assessment, is an entity apart from the individual partners and, therefore, the transfer of the business was not by any individual to his spouse, but by the firm to the spouses of its partners. Counsel, therefore, contends that there is no transfer by an individual so as to attract the sub-section. This argument is sought to be fortified by reference to various decisions stating that no partner has any exclusive right in any specific asset of the firm and that he cannot independently deal with it or assign it as his own. Counsel for the Revenue, on the other hand, contends that a firm is not a legal entity apart from its partners, although it is a unit of assessment for the purpose of the Act, and, therefore, transfer by the firm really and in substance means transfer by the partners acting collectively, thereby each individual directly or indirectly making a transfer of his interest in the firm. Such transfer, counsel points out, is a transfer of an asset by an individual and, when such transfer is made to that individual's spouse otherwise than for adequate consideration, Section 64(1)(iii) is attracted.

5. We shall now read the sub-section, as it stood at the relevant time, in so far as it is material :

'64. Income of individual to include income of spouse, minor child, etc.--(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly--...

(iii) . . to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration ...;'(emphasis supplied).

6. Section 64 appears in Chapter V which deals with 'income of other persons included in the assessee's total income'. The provisions of this Chapter treat, for the purpose of assessment, the income of another person, in certain circumstances, as the income of the assessee. The object of the Legislature is to ignore a transfer of assets in certain circumstances, although the transfer itself is valid in law, and include the income arising from the transferred assets in the total income of the transferor. The sections must, therefore, be read with a view to giving full effect to the legislative intent, wherever the circumstances postulated under the sections are attracted.

7. Section 64(1)(iii) refers to income arising directly or indirectly to the spouse of an individual from assets transferred directly or indirectly to the spouse by the individual otherwise than for adequate consideration. Although the transfer of the assets is valid in law even when the consideration is inadequate, in so far as the consideration is inadequate, Clause (iii) of the sub-section says that all such income as arises directly or indirectly from such assets must be treated as the income of the transferor. The position is the same whether the assets are transferred by the individual directly or indirectly to his spouse. It is not in proportion to the inadequacy of the consideration that the income arising from the assets is included in the total income of the transferor, but the whole income yielded by such assets in the relevant year. In other words, the entirety of the income arising directly or indirectly from the assets directly or indirectly transferred by an individual to his spouse otherwise than for adequate consideration is included in the total income of the transferor.

8. Having thus understood Clause (iii) of the sub-section, we must now consider the question whether the clause is attracted when, as in the instant case, the transfer is effected by a firm in favour of the persons who are none other than the spouses of the individual partners constituting the firm.

9. A firm under the Indian Partnership Act, 1932, has no distinct legal entity apart from the partners constituting it. It has no separate rights of its own in the partnership assets. What is generally referred to as the firm's property or firm's assets is only the property or assets in which all the partners have a joint or common interest : see Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) . As stated by Shah J. in CIT v. Ramniklal Kothari : [1969]74ITR57(SC) :

'Business carried on by a firm is business carried on by the partners. Profits of the firm are profits earned by all the partners in carrying on the business. ...'

10. It is true that the firm is treated as a unit for the purpose of assessment under the Act. It can be charged as an assessable entity distinct from its partners who can also be assessed individually : see CIT v. A.W. Figgies and Co. : [1953]24ITR405(SC) . The firm is nevertheless not a full person. As stated by Krishna Iyer J. in CIT v. R.M. Chidambaram Pillai : [1977]10ITR292(SC) :

'In income-tax law a firm is a unit of assessment, by special provisions, but is not a full person ...'

11. See also State of Punjab v. Jullundur Vegetables Syndicate : [1966]2SCR457 ,

12. Persons who have entered into partnership with one another are called collectively a firm and individually 'partners', and the name under which the business is carried on is called the 'firm-name'. '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 (Section 4 of the Indian Partnership Act, 1932). For this joint venture, they contribute capital which may be either money, or movable or immovable properties having a value in money set on them. Whatever is contributed by a partner ceases to be his exclusive property. The asset which was once in his total ownership is, when contributed to the firm, subjected to the rights of other partners. His exclusive interest in that asset is thus reduced to a shared interest. It becomes the trading asset of the partnership and it is vested in all the partners. Each partner has an interest in the property in proportion to his share in the joint venture of the business. No partner can claim or exercise, even to the extent of his share in the business of the partnership, an exclusive right over any partnership property. His right during the subsistence of the partnership is confined to his share of the profit as agreed upon among the partners, and, upon dissolution of the partnership or upon his retirement from the partnership, to the value of the share in the net partnership assets as on the date of the dissolution or retirement, as the case may be, after deducting the liabilities and prior charges : see Addanki Narayanappa v. Bhaskara Krishnappa : [1966]3SCR400 . The share of a partner is thus his present right to a share in the profits or gains of the firm in accordance with the partnership agreement, as and when they arise, as well as to a proportionate share in the value of the net assets of the firm, determinable upon dissolution of the firm or his retirement therefrom. While both these rights exist in praesenti, the latter is exercisable only in future. During the subsistence of the partnership, a partner is entitled to assign his share to another, but the assignee would get only such rights as are permitted under Section 29 of the Partnership Act. What the partner gets upon dissolution or upon his retirement is realisation of a pre-existing right or interest which does not amount to a transfer of the assets themselves. It is erroneous to say that such a right arises only upon dissolution of the firm or upon the retirement of the partner. In the words of Pathak J., as he men was, in Sunil Siddharthbhai v. CIT : [1985]156ITR509(SC) .

'... It has sometimes been said, and we think erroneously, that the right of a partner to a share in the assets of the partnership firm arises upon dissolution of the firm or upon the partner retiring from the firm. We think it necessary to state that what is envisaged here is merely the right to realise the interest and receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership firm by virtue of his status as a partner and in accordance with the terms of the partnership agreement. It is because that interest exists already before dissolution, as was held by this court in Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) , that the distribution of the assets on dissolution does not amount to a transfer to the erstwhile partners. What the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest. It is nothing strange in the law that a right or interest should exist in praesenti, but its realisation or exercise should be postponed. Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into an interest shared with the other partners in that asset. Qua that asset, there is a shared interest. During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership assets. And in regard to the latter, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partner's retirement. . . .

When a partner retires or the partnership is dissolved, what the partner receives is his share in the partnership. What is contemplated here is a share of the partner qua the net assets of the partnership firm. On evaluation, that share in a particular case may be realised by the receipt of only one of all the assets. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is no transfer. It is the realisation of a pre-existing right . . .'

13. See also the principle stated in Addanki Narayanappa v. Bhaskara Krishnappa : [1966]3SCR400 .

14. When a transfer of assets is made by the partnership (that is all the partners acting together) either gratuitously or otherwise than for adequate consideration, such transfer results in the reduction of the value of eachpartner's share, although the beneficial interest of a partner in the assets transferred, unlike in the case of the current profits, is not immediately ascertainable. He nevertheless has a present right (in addition to his right to a share of the profits from time to time) to a future payment of the proportionate part of the surplus remaining after realisation of the partnership assets and payment of all the partnership debts and liabilities. Therefore, when an asset owned by the partnership is transferred either gratuitously or otherwise than for adequate consideration, the transfer being a transfer to which each partner is a party, the value transferred by each partner is the amount of the devaluation of his share : see Lindley on Partnership, 15th Edition at page 1040.

15. The word 'assets' includes any property, real or personal, tangible or intangible, legal or equitable : see 6 Corpus Juris Secundum at page 1031. 'Property' is a term of the widest import and, subject to any limitation which the context may require, it signifies every possible interest which a person can clearly hold and enjoy : see Ahmed G.H. Ariff v. CWT : [1970]76ITR471(SC) . In the present case, the two partners constituting the firm together transferred certain assets of the firm to their respective spouses for an inadequate consideration, thereby each of the partners suffering a reduction in the value of his share, amounting to a transfer by each of them to the extent of the devaluation of his share. It is such devaluation, resulting in transfer of his proportionate beneficial interest which, in law, is an asset that attracts, on the facts found in this case, the provisions of Section 64(1)(iii) of the Act. The expression 'individual' in the section must, therefore, include a partner of a firm. Each partner, in the circumstances, such as those which arise in the present case, is an individual whose total income is liable to be computed in the manner prescribed by the section. If this construction is not adopted, the legislative object in enacting the section can easily be defeated by adopting the device of partnership to make transfers either gratuitously or for inadequate consideration to the spouses of the transferors, and thereby evade the taxes. Such verbal, technical and artificial construction, the law does not countenance : see CIT v. C.M. Kothari : [1963]49ITR107(Bom) and Sunil Siddharthbhai v. CIT : [1985]156ITR509(SC) . It is the legislative intent that, whatever be the device adopted by the assessee, the consequences of the statutory provisions must follow in all cases where an individual, whether a partner or otherwise, has directly or indirectly transferred assets to his wife otherwise than for adequate consideration and income directly or indirectly arises therefrom. In the present case, what is directly transferred by the firm is anindirect transfer by each of the partners of his beneficial interest to the extent of the devaluation caused by the inadequate consideration, and the income which directly arises from the assets transferred by the firm is the income which indirectly arises from the assets indirectly transferred by the partner, namely, the devalued portion of his beneficial interest.

16. I would in this connection recall the words of Lord Reid in Greenberg v. IRC [1971] 3 All ER 136 ; [1971] 3 WLR 386 :

'We seem to have travelled a long way from the general and salutary rule that the subject is not to be taxed except by plain words. But I must recognise that plain words are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes which are constantly being devised to evade taxation. Parliament is very properly determined to prevent this kind of tax evasion and, if the courts find it impossible to give very wide meanings to general phrases, the only alternative may be for Parliament to do as some other countries have done, and introduce legislation of a more sweeping character which will put the ordinary well-intentioned person at much greater risk than is created by a wide interpretation of such provisions as those which we are now considering ...

I am inclined to think that the real explanation of these verbal difficulties may be that, in legislation of such extreme complexity as we have here, it is not humanly possible for a draftsman to preserve that consistency in the use of language which we generally look for. Indeed, I sometimes suspect that our normal meticulous methods of statutory construction tend to lead us astray by concentrating too much on verbal niceties and paying too little attention to the provisions read as a whole . . .' (emphasis supplied ).

17. Quoting this passage with approval, Chinnappa Reddy J. in McDowell and Co. Ltd. v. CTO : [1985]154ITR148(SC) observed :

'We think that the time has come for us to depart from the Westminster (IRC v. Duke of Westminster [1936] AC 1 : 19 TC 490) principle as emphatically as the British courts have done and to dissociate ourselves from the observations of Shah J. (CIT v. A. Raman and Co. : [1968]67ITR11(SC) ) and similar observations made elsewhere. The evil consequences of tax avoidance are manifold ...'

18. See also the decision of this court in Neroth Oil Mills Co. Ltd. v. CIT : [1987]166ITR418(Ker) .

19. For the reasons stated by me, I answer question No. 3 in the affirmative, that is, in favour of the Revenue and against the assessees. In the light of my answer to question No. 3, it is unnecessary for me to answer questions Nos. 1 and 2. Accordingly, I decline to answer those two questions.

20. The parties shall bear their respective costs in these tax referred cases.

Radhakrishna Menon, J.

3-11-1987

21. The assessment years under consideration are 1970-71 and 1971-72, the corresponding previous years respectively being the accounting periods ended on August 16, 1969 and August 16, 1970.

22. There are two assessees. They are the partners of the firm, by name, M/s. Good Morning Stores, Alleppey (hereinafter referred to as the 'old firm'), which carried on businesses in textiles and also dry cleaning and tailoring under the name and style of Bright Dry Cleaners. While so, as per an agreement dated August 18, 1969, the business carried on under the name and style 'Bright Dry Cleaners' was sold by the old firm, M/s. Good Morning Stores to the wives of the assessees who constituted a new firm. The old firm thus discontinued this line of business activity ; and the said business, after the transfer, was carried on by the new firm. The consideration for the transfer, as seen from the agreement, was the written down value of the machinery and equipment the transferor firm was using to carry on the dry cleaning and tailoring business under the name and style 'Bright Dry Cleaners'. This consideration was found to be inadequate by the assessing authority. This resulted in the assessing authority applying Section 64(1)(iii) of the Income-tax Act as it stood then, and computing the incomes of the assessees by clubbing the same with the respective share incomes of the wives from the new firm.

23. On appeal, the Appellate Assistant Commissioner sustained the assessments. Copies of the assessments are annexures A-1 to A-4 and the copies of the orders of the Appellate Assistant Commissioner are annexures B-1 to B-4.

24. The Appellate Tribunal, in the first instance, allowed the appeals. On a reference at the instance of the Revenue, this court sent back the appeals for fresh disposal, holding that the Tribunal had not approachedthe issue from the correct standpoint. After rehearing, the Tribunal dismissed the appeals by order dated March 20, 1981.

25. At the instance of the assessees, the Appellate Tribunal has referred the following questions for the opinion of this court under Section 256(1) of the Income-tax Act :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee individual had transferred the assets to his spouse ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the income arose to the spouse from the assets transferred by the assessee ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the requirements of Section 64(iii) of the Income-tax Act are satisfied ?'

26. The facts found by the Tribunal are : the assessees are the only partners of the old firm, M/s. Good Morning Stores, Alleppey ; the old firm, in addition to the textile business, was also carrying on business in tailoring and dry cleaning under the name and style 'Bright Dry Cleaners' ; under an agreement dated August 18, 1969, the old firm transferred this business activity to the wives of the assessees who treated this business as the business of the new firm ; the consideration for the transfer was only the written down value of the machinery and equipment and hence the same was inadequate ; five employees working in the old firm left that employment and joined the new firm ; the old firm discontinued this line of business activity and the new firm carried on the said business in the same premises.

27. These are the facts which prompted the authorities below to apply Section 64(1)(iii) of the Income-tax Act and compute the income of the assessees by' clubbing the same with the share incomes derived by their wives as partners of the new firm.

28. Before I deal with these points, I shall first state the law. 'Though, under the partnership law, a firm is not a legal entity but only consists of individual partners for the time being, for tax law, income-tax as well as sales tax, it is a legal entity' has been declared by the Supreme Court in State of Punjab v. Jullundur Vegetables Syndicate : [1966]2SCR457 . In the same strain are the subsequent decisions of the Supreme Court, namely, CIT v. R.M. Chidambaram Pillai : [1977]10ITR292(SC) ; SunilSiddharthbhai v. CIT : [1985]156ITR509(SC) and also the rulings of this court ITO v. C.V. George 0065/1976 : [1976]105ITR144(Ker) . A Abdul Rahim, Travancore Confectionery Works v. CIT : [1977]110ITR595(Ker) . It is also well-established that (at page 49 of 120 ITR) 'a partnership firm, under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest'. (See CIT v. R.M. Chidambaram Pillai : [1977]10ITR292(SC) and Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) . Following this dictum, this court in C. V. Mulk v. Commr. of Agrl. I. T. : [1979]120ITR670(Ker) , held that a partnership is a certain relationship between persons created by an agreement to share the profits of a business and that it is not a legal person though it has some attributes of personality. The ratio discernible from these judicial pronouncements is that, for the purpose of assessment, the partnership will be treated as an entity and, under the general law, it is nothing but a compendious expression denoting the partners constituting it.

29. These rulings, however, have not pointedly considered the position the partners occupy in relation to the property of the firm. The basic ruling in this regard is the decision of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa : [1966]3SCR400 . Considering the scheme of the Indian Partnership Act, Mudholkar J., who delivered the judgment, observed that no partner can claim any exclusive right over the the properties which become the assets of the firm from whatever source they may have come ; that, during the subsistence of the partnership, his right is only to claim his share of profits, if any, accruing to the partnership from the realisation of the properties and that, upon dissolution, to a share in the proceeds of sale of the partnership assets, after all such payments contemplated under Section 48 of the Indian Partnership Act have been met. Section 29 of the Indian Partnership Act, however, provides that, even during the subsistence of the partnership, a partner may assign his share to another but the right of the assignee is only to receive the share of the profits of the transferor and accept the account of profits agreed to by the partners. The observations of the Supreme Court in Narayanappa's case : [1966]3SCR400 read :

'The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even propertyincluding immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated 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 the value of his share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges. It is true that even during the subsistence of the partnership a partner may assign his share to another. In that case what the assignee would get would be only that which is permitted by Section 29(1), that is to say, the right to receive the share of profits of the assignor and accept the account of profits agreed to by the partners.'

30. The Supreme Court in a recent decision in Sunil Siddharthbhai's case : [1985]156ITR509(SC) , after reviewing the case-law, has restated the above principle in unmistakable terms. The principle has been stated thus (at page 518) :

'It is apparent, therefore, that when a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now subject to the rights of other partners in it. It is not an interest which can be evaluated immediately, it is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner's interest takes place only when there is a dissolution of the firm or upon his retirement from it. It has sometimes been said, and we think erroneously, that the right of a partner to a share in the assets of the partnership firm arises upon dissolution of the firm or upon the partner retiring from the firm. We think it necessary to state that what is envisaged here is merely the right to realise the interest and receiveits value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership firm by virtue of his status as a partner and in accordance with the terms of the partnership agreement . . . Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into an interest shared with the other partners in that asset. Qua that asset, there is a shared interest. During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership assets. And in regard to the latter, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partner's retirement.' (emphasis supplied)

31. A reference in this connection to the following passage from Lindley on Partnership, fourteenth edition, page 462, is also relevant.

'In the absence of a special agreement to that effect, all the members of an ordinary partnership are interested in the whole of the partnership property on the basis of equality between them, but it is not always clear in relation to any particular item of partnership property whether they are interested therein as tenants-in-common, or as joint tenants without benefit of survivorship, so far as a beneficial interest is concerned. It follows from this community of interest that no partner has a right to take any portion of the partnership property and to say that it is his exclusively. No partner has any such right, either during the existence of the partnership or (in the absence of agreement) after it has been dissolved.' (emphasis supplied)

32. Regarding the share of a continuing partner in an on-going partnership, the learned author Lindley has stated thus (at page 463) :

'The reason is that during the continuance of the partnership, each partner is entitled to require the partnership property to be applied for the purposes of the partnership and no partner is entitled to the several enjoyment of his share. Secondly, when, on the determination of the partnership, the beneficial interest falls into possession, it takes effect subject to the right of the other partners to have the property of the partnership applied in payment of the debts and liabilities of the firm and otherwise in accordance with the provisions of Sections 39 and 44 of the Partnership Act, 1890. In the absence of agreement to the contrary, this will mean that the share of a partner will take the form of hisproportionate share in the net proceeds of the sale of the partnership property after all such payments have been met, although it is possible (except in the case of partnership land to which either an express or statutory trust for sale must apply) for the partnership agreement to provide in advance for the ultimate distribution of the partnership assets (after all debts and liabilities have been provided for) to be made in specie among the partners.'

33. It is, therefore, clear that the interest of the partner in the partnership property/asset is not one which can be evaluated during the subsistence of the partnership. On the other hand, it is one subject to the operation of future transactions of the partnership and it is likely to diminish in value depending upon the accumulated liability and loss with 'a fall in the prosperity of the partnership firm'. It is also clear that the evaluation of a partner's interest in the assets of the firm could take place only on the dissolution of the firm or upon his retirement from it. To say that a partner is entitled to a share simpliciter in the assets of the partnership and that it is capable of being transacted upon during the subsistence of the partnership is erroneous. It is so, because, during the subsistence of the partnership, what can be assigned/transferred by a partner is only that which is permitted under Section 29(1) of the Partnership Act ; and that, under such transfer, what the assignee gets is only the right to receive the share of profits of the assignor and, on dissolution of the firm or on his retirement, to the value of his share in the partnership assets after meeting the liabilities of the firm. It has also been declared by the Supreme Court that 'during the subsistence of the partnership, the value of the interest of each partner qua that asset of the partnership cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership assets'.

34. Evaluating the principles enunciated by the Supreme Court in the decisions in CIT v. Dewas Cine Corporation : [1968]68ITR240(SC) ; CIT v. Bankey Lal Vaidya : [1971]79ITR594(SC) ; Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) ; by the Punjab and Haryana High Court in Kay Engineering Co. v. CIT ; by the Kerala High Court in CIT v. Nataraj Motor Service : [1972]86ITR109(Ker) and by the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393, the Supreme Court in Sunil Siddharthbhai's case : [1985]156ITR509(SC) has held ' that when a partner retires or the partnership is dissolved, what the partner receives is his share in the partnership. What is contemplated here is a share of the partner qua the net assets of the partnership firm'.

35. Having understood the position (regarding the nature of the partner's interest in the assets of the partnership) thus, let us consider whether the taxing authorities were right in applying Section 64(1)(iii), as it stood then, and clubbing the assessee's income with the share incomes derived by the wives as partners of the new firm carrying on the business, which the old firm had originally transferred to the wives of the assessees, in computing the assessable income of the assessees. Section 64(1)(iii) as it stood then (omitting unnecessary parts thereof) reads :

'64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly--to the spouse of such 'individual' from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.'

36. The conditions that should be satisfied in order to attract this provision are : the income which can be clubbed with the income of the individual must be the income of the spouse ; the said income of the spouse must be the income derived from the assets the individual had transferred directly or indirectly to her ; the asset at the time of the transfer must, therefore, belong to the 'individual' exclusively in that he must be the absolute owner and the transfer was for inadequate consideration or in connection with an agreement to live apart. All these conditions must be satisfied before the income of the spouse from the asset in question is clubbed with the income of the individual. Construing the word 'individual' in Section 16(3)(a)(ii) of the Indian Income-tax Act of 1922 corresponding to Section 64(1)(iii) of the Income-tax Act, the Supreme Court has held (at page 620) :

'... when Section 16(3)(a)(ii) talks of an 'individual' it is only in a restricted sense that the word has been used. The section only talks of 'individual' capable of having a wife or minor child or both. It, therefore, necessarily excludes from its purview a group of persons forming a unit or a corporation created by a statute and is confined only to human beings who in the context would be comprised within that category.' (emphasis supplied)

37. (See CIT v. Sodra Devi : [1957]32ITR615(SC) ).

38. Following this observation, the Gujarat High Court in Dinubhai Ishvarlal Paid v. K. D. Dixit, ITO : [1979]118ITR122(Guj) , has held thus while construing the expression 'such individual' in Section 16(3)(a)(ii) of the 1922 Act (at page 129 of 118 ITR) :

'the majority view makes it clear that the words 'such individual' occurring in Section 16(3)(a)(ii) of the 1922 Act refer only to a person who was capable of having a wife or who was capable of having a minor child.'

39. Regarding the nature of the right of the individual over the asset transferred to his wife : the collocation of words in the section would make it clear that the assets transferred should belong to the individual exclusively. Here it is relevant to note that legislation like this is designed to circumvent the growing tendency seen among the taxpayers to avoid or reduce tax liability by transfer of income-fetching assets directly or indirectly to their spouses. Even after such transfers, the taxpayer would continue to have control over the assets and the income therefrom. Only on establishing that the asset transferred exclusively belonged to the individual the income derived therefrom by the spouse can be clubbed with the income of such individual. I am fortified in this view by the judicial pronouncements mentioned hereunder.

40. CIT v. C.M. Kothari : [1963]49ITR107(SC) .

'It is argued that the first requisite of the section is that the assets must be those of the husband and that is not the case here. It is true that the section says that the assets must be those of the husband ....'(emphasis supplied )

41. Considering an identical provision in the English Act, Lord Macmillan in A.G. Chamberlain v. Inland Revenue Commissioners [1943] 25 TC 317 (HL), has observed thus (at page 329) :

'This legislation . . . (is) designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to ovoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in the disposal by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers over, or interests in, the property or its income. The Legislature's counter was to declare that the income of which the taxpayer had thus sought to disembarrass himself should, notwithstanding, be treated as still his income and taxed in his hands accordingly.'

42. It is, therefore, clear that the income-fetching assets transferred to the spouse must be the assets that exclusively belonged to the husband who is assessed under the Income-tax Act as an 'individual'. Only whenthese basic requirements are fulfilled, would the further question whether the income sought to be clubbed with the income of the individual, is directly or indirectly received by the spouse, arise. From the facts found by the Tribunal, it is clear that the assets transferred to the spouses are assets over which the assessees had no manner of right except a 'shared interest', the value of which can be determined only on the dissolution of the partnership or on his retirement from the partnership. For that matter, it is not the case of the Revenue that the assets transferred exclusively belonged to the assessees at the time of the transfer. These assets admittedly belonged to the partnership. Again, it is not the case of the Revenue that the partners had transferred their interest in the partnership property. In other words, the Revenue has no case that the transfer in question falls under Section 29 of the Indian Partnership Act. For that matter, such a case cannot be put forward because, admittedly, the assessees continued to be the partners of the old firm even after the transfer of the business aforesaid by the firm. A reference in this connection to the finding of the Tribunal is profitable. 'We have said that what was transferred was the business itself as a going concern. It is this business, the apparatus, which produced the income to the assessees' spouses.'

43. In the light of the principles stated above, it should be held that the finding of the Tribunal, namely, 'in reality, it is an indirect transfer by the individual partners of their respective shares in the assets to their spouses' is unsustainable. The assessment clubbing the incomes of the spouses with the total income of the assessees, therefore, is not sustain-able in law.

44. Notwithstanding the decision of the Supreme Court in Sunil Siddharthbhai's case : [1985]156ITR509(SC) restating the principle highlighted in Narayanappa's case : [1966]3SCR400 , counsel for the Revenue submitted that, whatever be the position regarding the nature of a partner's interest in the assets of the firm, the fact remains that the assessees who are the partners of the old firm transferred the business of dry-cleaning and tailoring, by name Bright Dry Cleaners, as a running business, to the new firm constituted by the wives of these partners with a view to avoid payment of tax. Dilating on this point, he submitted that the business which was transferred to the spouses must be treated as business carried on by the assessees as they are the only partners of the firm and, under law, the business carried on by a firm is business carried on by its partners. In support of this argument, he relied on the decision of the SupremeCourt in CIT v. Ramniklal Kothari : [1969]74ITR57(SC) . The observation is this (headnote) :

'Business carried on by a firm is business carried on by the partners. Profits of the firm are profits earned by all the partners in carrying on the business.'

45. The Supreme Court, in the said ruling, was considering the question (at page 59) : 'Whether the expenses incurred by the assessee (who was not carrying on any independent business of his own), in earning income from various firms in which he was a partner, are allowable in law as deductions ?' It is clear from the question that the Supreme Court had no occasion to consider the point couched in the question considered in Sunil Siddharthbhai's case : [1985]156ITR509(SC) , namely, what position does a partner occupy in relation to the property/asset of the firm. As already noted, during the subsistence of the firm, even in regard to the property he had brought into the partnership as his contribution to its capital, the partner has no exclusive right. His absolute right becomes subject to the rights of the other partners. Regarding his interest in that property, it has been stated by the Supreme Court in Sunil Siddharthbhai's case : [1985]156ITR509(SC) thus (at page 518) :

'It is not an interest which can be evaluated immediately, it is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner's interest takes place only when there is a dissolution of the firm or upon his retirement from it.'

46. The only point considered by the Supreme Court in the cited decision (Ramniklal Kothari's case : [1969]74ITR57(SC) ) was whether a partner was entitled to treat his share of profits from the firms as his 'profits and gains of business' for the purpose of getting the allowances enumerated under Section 10(2) of the Indian Income-tax Act, 1922. After considering the various aspects of the case, the Supreme Court held thus (at page 60) ;

'Section 23(5)(a)(ii) provides that the share of the partner in the profits and gains of a registered firm shall be included in the total income of the partner ; and Section 16(1)(b) requires that salary, interest, commission or other remuneration payable by the firm besides the share in the balance of profit is to be taken into account in determining the total income. But it is not thereby implied that expenditure properly allowable in earning the profits, salary, interest, commission or other remunerationis not to be allowed in determining the taxable total income of the partner. The receipt by the partner is business income for the purpose of Section 10(1), and being business income, expenditure necessary for the purpose of earning that income and appropriate allowances are deductible therefrom in determining the taxable income of the partner.'

47. The observation extracted above is not in any way inconsistent with the principle enunciated by the Supreme Court in Narayanappa's case : [1966]3SCR400 , and restated in Sunil Siddharthbhai's case : [1985]156ITR509(SC) while considering the position the partners occupy in relation to the property/asset of the firm. This ruling, therefore, will not apply to the case in hand.

48. When a partnership transfers some of its assets during the subsistence of the partnership either gratuitously or otherwise than for adequate consideration, such transfer would result in the reduction of the value of each partner's share. To the extent there is reduction in the value of the partner's share in the partnership assets, there is a transfer of the rights of the partner in the partnership assets. If the transferee under such a transaction happens to be the spouse of the partner who, along with other partners, has effected the transfer, although the transfer is for and on behalf of the partnership, then, it was contended, there is a transfer by an individual of his asset in favour of his spouse within the meaning of Section 64(1)(iii). This is a colourable device adopted by the assessees to avoid payment of tax. The assessing authority, therefore, was justified in applying Section 64(1)(iii) and clubbing the assessee's incomes with the 'incomes of their spouses earned or derived from the business carried on by the new firm, counsel submits. In support of this argument, the decision of the Supreme Court in McDowell and Co. Ltd. v. CTO : [1985]154ITR148(SC) has been pressed into service by the Revenue.

49. The Supreme Court, speaking through Ranganath Misra J., clarifying the position regarding dubious transactions adopted by taxpayers to avoid payment of tax, has stated thus (at page 171) :

'Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.'

50. It, therefore, follows that tax planning will be declared not legitimate only if the same falls outside the framework of the law. The abovedictum of the Supreme Court thus makes it clear that any tax planning within the framework of law is legitimate and it cannot be termed as a subterfuge or a dubious method adopted by an assessee to avoid payment of tax.

51. Having understood the position thus, we have to consider whether the transfer of the business as a running concern by the old firm to the new firm resulting in the reduction of the value of the partners' share in the assets of the partnership is a subterfuge or device adopted by the assessees to avoid payment of tax. As is seen from the principle enunciated by the Supreme Court in Sunil Siddharthbhai's case : [1985]156ITR509(SC) , the interest of a partner even in the assets he had brought into a partnership firm 'is not an interest which can be evaluated immediately' but it is an interest which is subject to the operation of future transactions of the partnership, and 'it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm'. The Supreme Court, in the said decision, has further declared that 'the evaluation of a partner's interest takes place only when there is a dissolution of the firm or upon his retirement from it'. If that be the position in law, it will be too much for the Revenue to contend for the position that the transfer of the business by the firm (no doubt the transfer was effected by the partners, but indisputably for and on behalf of the firm), to the new firm of which the wives of the assessees are partners is a dubious method adopted by the assessees to transfer their assets to their wives to avoid payment of tax in respect of the income that is received from the said assets. It, therefore, follows that the transfer by the old firm of the running business by name 'Bright Dry Cleaners' to the new firm of which the wives of the assessees are the partners cannot be considered to be a transfer falling within the mischief of Section 64(1)(iii). In other words, the transaction (assuming it forms part of a tax planning) cannot be said to fall outside the framework of law. It is not as if the Partnership Act does not permit such transfer by the firm. In fact, the law recognises such transfer by a subsisting partnership. The above contention of the Revenue is therefore rejected.

52. For another reason also this argument cannot be countenanced. The Revenue had not set up such a case before any of the authorities below. That is the reason why the statement of case is silent about this aspect. It is a well-established principle that the High Court has to pronounce its judgment in the exercise of its advisory jurisdiction on the agreed statement of the case. The High Court would, therefore, be committingan error if it countenances the arguments of counsel which are not supported by the agreed statement of facts and gives its opinion on the questions referred to it under Section 256. I am fortified in this view by the decision of the Supreme Court in CIT v. Calcutta Agency Ltd. : [1951]19ITR191(SC) . The Supreme Court has observed thus :

'The statement of the case under the rules framed under the Income-tax Act is prepared with the knowledge of the parties concerned and they have a full opportunity to apply for any addition or deletion from that statement of the case. If they approved of that statement that is the agreed statement of facts by the parties on which the High Court has to pronounce its judgment ... It is therefore clear that it was the duty of the High Court to start with that statement of the case as the final statement of facts. Surprisingly, we find that the High Court, in its judgment, has taken the argument of Mr. Mitra as if they were facts and have based their conclusion solely on that argument. Nowhere in the statement of the case prepared by the Tribunal and filed in the High Court, the Tribunal had come to the conclusion that the payment was made by the assessee company to avoid any danger of public exposure or to save itself from scandal or in order to maintain the managing agency of the appellant company. The whole conclusion of the High Court is based on this unwarranted assumption of facts which are taken only from the argument of counsel for the present respondents before the High Court. The danger of failing to recognise that the jurisdiction of the High Court in these matters is only advisory and the conclusions of the Tribunal on facts are the conclusions on which the High Court is to exercise such advisory jurisdiction is illustrated by this case.'

53. From what is stated above, it is clear that the assessing authority was not right in treating the share incomes derived by their spouses as partners of the new firm, as the incomes of the assessees while computing their assessable income. The questions, therefore, are answered in the negative, that is, in favour of the assessees and against the Revenue.

54. We have, in our separate judgments, differed in our answers to the questions referred. Accordingly, place the papers before the Honourable the Chief Justice for orders under Section 9 of the Kerala High Court Act, 1958 (Act 5 of 1959), read with Section 23 of the Travancore-Cochin High Court Act, 1125 (M.E.) (Act V of 1125),

K.A. Nayar, J.

55. An ingenious attempt on the part of two assessees who were partners of a firm called 'Good Morning Stores, Alleppey' to get their individual tax liability reduced, attracted differingjudgments from two judges of this court constituting the Bench, and, therefore, in accordance with Section 9 of the Kerala High Court Act read with Section 23 of the Travancore High Court Act and Section 259 of the Income-tax Act, 1961, the matter comes before me for decision according to the opinion of the majority.

56. The main point to be considered is whether the income from assets transferred by the firm in the name of the wives of the two partners of the firm can be included in the individual assessment of the partners as their income. We are concerned with the assessment years 1970-71 and 1971-72, for which the accounting years ended on August 16, 1969, and August 16, 1970, respectively.

57. The assessees are partners of a firm 'Messrs. Good Morning Stores, Alleppey', which carried on business in textiles and also in dry-cleaning and tailoring under the name and style of 'Bright Dry Cleaners'. By agreement dated August 18, 1969, the machinery and equipment used in the dry-cleaning and tailoring business were sold to the wives of the two partners who constituted the firm. Apart from the two partners, viz., Messrs. P. Ramachandra Reddiar and P. Arjuna Reddiar, there are no other partners in the firm. The wives of the assessees constituted a partnership to carry on the business. The five employees who had been working in the old firm joined the new firm. The old firm discontinued the dry-cleaning business and the new firm carried on the business in the same premises. The consideration for the transfer was the written down value of the machinery and the equipment. Not only the machinery and equipment, but the very business itself was transferred. The consideration was inadequate for the transfer of the business undertaking. The Income-tax Officer applied the provisions of Section 64(1)(iii) of the Income-tax Act, 1961 (for short, 'the Act'), as it then stood and computed the income of the assessee by clubbing the assessees' income with the share income derived by the wives as partners of the new firm. On appeal, the Appellate Assistant Commissioner sustained the assessment. The assessees carried the matter in further appeal before the Tribunal and the Tribunal ultimately dismissed the appeal by a consolidated order on March 20, 1981. In dismissing the appeal, the Tribunal rejected the contention of the assessees that, because it was a direct transfer by the firm, Section 64(1)(iii) was not applicable. The further contention that the nexus between the assets transferred and the income produced was remote was also not accepted by the Tribunal. The Tribunal accepted the contention of the Revenue that there was an indirect transfer of assets bythe assessees to their respective spouses, that income arose from the assets transferred, which was the business itself, and, therefore, the profits attributable to the share of the assessees' spouses in the business arose only from the transfer of the assets by the assessees. The Tribunal held that the assets of the partnership vested in the partners collectively in proportion to their share and direct transfer by the partners representing the firm resulted in an indirect transfer by the partners of their share in such assets in favour of their spouses. Since the business itself was transferred which produced the income for the assessees' spouses, the Tribunal also found that the profit attributable to the share of the assessees' spouses in the business arose directly from the transfer of such assets. In so holding, the Tribunal relied on the decision of the Bombay High Court in Chaturbhujdas Karnani v. CIT : [1958]34ITR553(Bom) . The Tribunal was satisfied that all the requirements of Section 64(1)(iii) of the Act were satisfied and the income derived by the assessees' wives was includible in the total income of the assessees.

58. Aggrieved by the decision of the Tribunal, the assessee sought three questions of law mentioned hereinbelow to be referred under Section 256(1) of the Act in the case of each of the assessees for each of the assessment years. It is thereafter that the Tribunal referred the following questions of law arising out of the consolidated order of the Tribunal dated March 20, 1981, disposing of the two sets of appeals filed by the two assessees for the two assessment years 1970-71 and 1971-72 :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee-individual had transferred the assets to his spouse?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the income arose to the spouse from the assets transferred by the assessee ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the requirements of Section 64(1)(iii) of the Income-tax Act, 1961, are satisfied?'

59. The income-tax references were numbered as I. T. R. Nos. 108 to 111 of 1982 and the Division Bench of this court consisting of Dr. T. Kochu Thommen J., (as he then was) and K. P. Radhakrishna Menon J., rendered separate judgments on November 3, 1987, differing in their answers to the questions referred.

60. The finding of the Tribunal that the transfer of the business was for inadequate consideration has not been challenged by the assesseesand, therefore, it became final. The fact that the firm consisted of only two partners and the firm transferred the 'Bright Dry Cleaners' business itself to the wives of the partners also was not disputed. The only contention of the assessee is that Section 64(1)(iii) is not attracted because the transfer of the business was not effected by an individual to his spouse, but by the firm to the wives of two partners and, therefore, there is no transfer by an individual to attract the sub-section. Section 64(1)(iii) as it then stood reads thus :

'64. Income of individual to include income of spouse, minor child, etc.--(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly--....

(iii) ..... to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.'

61. Kochu Thommen J. (as he then was), held that a firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and the firm's property or assets are only the property or assets of the partners and when transfer of assets is made by the partnership, there will be a reduction in the value of each partner's share and, therefore, it should be construed that the two partners constituting the firm together transferred certain assets of their firm to their respective spouses for inadequate consideration. His Lordship, therefore, held that the provision of Section 64(1)(iii) of the Act is satisfied. In that view of the matter, his Lordship answered question No. 3 in the affirmative, i.e., in favour of the Revenue and against the assessees. His Lordship felt it unnecessary to answer questions Nos. 1 and 2 in the light of his answer to question No. 3.

62. His Lordship Justice Radhakrishna Menon, on the other hand, held that a firm, though not a legal entity in partnership law, for the purpose of the Income-tax Act, 1961, is a legal entity and that means that no partner can claim exclusive right over the assets of the firm during the subsistence of the partnership and the partner can only assign his share to another, giving the assignee the right to receive the share of profits and that means, the exclusive right of a partner in his personal assets upon his introduction into the partnership firm, are transformed into an interest shared with other partners in that asset and that during the subsistence of the partnership, the value of the interest of each partner cannot be isolated or carved out from the value of the partner's interest in the totality ofthe partnership assets, which will take place only on the dissolution of the firm. His Lordship considered that to apply Section 64(1)(iii) there must be directly or indirectly a transfer by an individual to his spouse and unless it is established that the transfer of the income-fetching assets exclusively belongs to the husband, the clubbing of income cannot be permitted. As it was found that the assets admittedly belonged to the partnership, the assessment clubbing the income of the spouse with the total income of the assessee was held to be not sustainable. His Lordship, therefore, answered all the questions in the negative, that is, in favour of the assessees and against the Revenue.

63. Section 64 is part of the legislative endeavour to overtake and circumvent the taxpayers' attempt to reduce tax liability. Normally, the total income of an individual alone is taxable under the Act. But, in Chapter V of the Act, income of other persons is also included in the assessee's total income. One such income of other persons includible in the individual's total income is the income arising directly or indirectly to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration. Admittedly, in this case, the transfer was otherwise than for adequate consideration. There was a definite finding to that effect by the Tribunal and the same has not been challenged. The transfer was also to the wives of the assessees, viz., Smt. A. Nagalakshmi, Annai Illam, Mullakkal, Alleppey, and Smt. Radhamani, S. K. R. Colony, Mullakkal, Alleppey, who are the wives of Arjuna Reddiar and Ramachandra Reddiar, respectively, the assessees in this case. Thus, the transferees are the wives of the assessees and the transfer is for inadequate consideration. The assets transferred have been detailed in the assessment order. Admittedly, the firm 'Good Morning Stores, Alleppey' had only two partners, viz., Sri P. Ramachandra Reddiar and Arjuna Reddiar, and that firm was also carrying on a business in tailoring and dry-cleaning under the name and style 'Bright Dry Cleaners and Out fitters'. The firm discontinued the said business and sold the machinery and equipment used in that business as a going concern to the wives of the two partners. The business premises continued to be the same and services of the staff were also continued. Even though in the agreement of sale it has been shown that the machinery and equipment were sold, in effect the business in its entirety was sold as a going concern. If Section 64(1)(iii) is read substituting the names of the partners and their wives, it will read as 'in computing the total income of Ramachandra Reddiar and Arjuna Reddiar (the individual assessees) there shall be included all such income as arises directly or indirectly toRadhamani and Nagalakshmi (who were spouses of Ramachandra Reddiar and Arjuna Reddiar) from assets transferred directly or indirectly to Radhamani and Nagalakshmi by Ramachandra Reddiar and Arjuna Reddiar otherwise than for adequate consideration'. The transfer is in form by the firm 'Good Morning Stores'. But 'Good Morning Stores' is only a partnership. It is well-known that a firm is not a legal person. The firm name is only the name under which the partners carry on their business. It is only a conventional name implicating persons who, on particular occasions when the same is used, are members of the firm. It is a compendious expression for designating the persons comprising or constituting the partnership. Therefore, when it is said that a firm is transferred, it only means that all the partners have transferred the business. In other words, behind the firm 'Good Morning Stores' are the two partners, viz., Ramachandra Reddiar and Arjuna Reddiar, who are the sole partners of the firm on the dale of transfer, of the 'Bright Dry Cleaners' business to Messrs. Radhamani and Nagalakshmi who are none other than the wives of the two partners. Since the firm has no legal existence, the partnership property will admittedly vest in all the partners, and since there are only two partners, viz., Ramachandra Reddiar and Arjuna Reddiar, they are owners of the property. No doubt, under the Income-tax Act, 1961, for the purpose of assessment, a firm is a legal entity. But under the partnership law the firm is not a legal entity, but only consists of individual partners for the time being. In the decision CIT v. R.M. Chidambaram Pillai : [1977]10ITR292(SC) , the Supreme Court posed the question, ' is the firm a person or a mere shorthand name for a collection of persons, commercially convenient, but not legally recognised?' The Supreme Court quoted with approval from 'Lindley. on Partnership', I2th edition, page 28, as follows (at page 298) :

'The law, ignoring the firm, looks to the partners composing it ; any change amongst them destroys the identity of the firm ; what is called the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities. In point of law, a partner may be the debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for a man cannot be his own employer.'

64. Thereafter, the Supreme Court observed (at page 298) :

'In some systems of law this separate personality of a firm apart from its members has received full and formal recognition as, for instance,in Scotland. That is, however, not the English common law conception of a firm. English lawyers do not recognise a firm as an entity distinct from the members composing it. Our partnership law is based on English law and we have also adopted the notions of English lawyers as regards a partnership-firm.'

65. Thus, the Supreme Court held that the firm is not an entity or person in law, but merely an association of individuals and the firm name is only a collective name of those individuals who constitute the firm. In other words, the firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership. In Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) , the different notions regarding the nature of the firm between commercial men and lawyers have been explained by the Supreme Court. The legal notion of a firm differs from the commercial notion of the same, for the firm is not recognised by English lawyers as distinct from the members composing it. The Supreme Court held (at page 57) :

'In English jurisprudence a firm is only a compendious name for certain persons who carry on business, or have authorised one or more of their number to carry it on, in such a way that they are jointly entitled to the profits and jointly liable for the debts and losses of the business. Further, it is true that partnership property is regarded as belonging to the firm, but that is only for the purpose of distinguishing the same from the separate property of the partners. But, in law, the partnership property is jointly owned by all the partners composing the firm.'

66. Thereafter, the Supreme Court held that the position as regards the nature of a firm and its property in Indian law under the Indian Partnership Act, 1932, is almost the same as in English law. Here also a partnership firm is not a distinct legal entity and the partnership property in law belongs to all the partners constituting the firm. In Addanki Narayanappa v. Bhaskara Krishnappa : [1966]3SCR400 , the Supreme Court held that as 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. Of course, during the subsistence of the partnership, no partner can deal with any portion of the property as his own, nor can he assign his interest in the property to anyone. But there cannot be any doubt that all the partners constituting the firm can transfer the assets. Therefore, when the firm 'Good Morning Stores', of which Messrs. Ramachandra Reddiar and Arjuna Reddiar arethe only partners, transferred one of its businesses with its assets, viz., 'Bright Dry Cleaners' to two ladies who are none other than the wives of the partners, it is to be held that there was a transfer indirectly by the two partners. The law looks to the partners. What is called the property of the firm is their property and what is called the liability of the firm is their debts. In Regional Director, E. S. I. C. v. Ramanuja Match Industries : (1985)ILLJ69SC , the Supreme Court held that the partnership business belongs to the partners and each one of them is owner thereof. In Dy. CST v. Kelukutty : [1985]155ITR158(SC) , the Supreme Court held that the provisions contained in taxation law does not confer a corporate personality on the firm. The Supreme Court observed (at page 163) :

'The firm is an assessable unit separate and distinct from the individual partners, who as individuals constitute assessable units separate and distinct from the firm. It is on that basis that the provisions of the tax law are structured into a scheme providing for the assessment of partnership income. We do not think the principle goes beyond the purpose of that scheme. It does not confer a corporate personality on the firm. Beyond the area within which that principle operates, the general law, that is to say, the partnership law, holds undisputed domain.'

67. Counsel for the assessees referred to a large number of decisions to show that, in tax matters, a firm is a legal entity. The decisions referred are State of Punjab v. Jullundur Vegetables Syndicate : [1966]2SCR457 , ITO v. C. V. George 0065/1976 : [1976]105ITR144(Ker) , CIT v. R.M. Chidambaram Pillai : [1977]10ITR292(SC) , Abdul Rahim, Travancore Confectionery Works v. CIT : [1977]110ITR595(Ker) and Sunil Siddharthbhai v. CIT : [1985]156ITR509(SC) . These are authorities for the proposition that a firm can be taxed as a legal entity, but they are not authorities for the proposition that the firm is a separate entity in law distinct from the partners constituting it from time to time. The separate legal status given to the firm extend only for the purpose of assessment and they do not go any further. In other words, when partners constitute a firm, in general law, the firm does not get a corporate personality and it has no corporate existence in law. The firm name is only a convenient way of referring to the names of all the partners constituting the partnership at the relevant time.

68. Counsel also referred to the decisions reported in CIT v. R.M. Chidambaram Pillai : [1977]10ITR292(SC) , Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) and C. V. Mulk v. Commr. of Agrl. I. T. : [1979]120ITR670(Ker) to show that all partners have a joint and common interest in the partnership property and no partner, at any time, can claim that a particular property is his own. This proposition of law is unobjectionable, but the application of the same to the facts in issue is not warranted, for, in this case, there were only two partners in the partnership and there cannot be any dispute that the property of 'Bright Dry Cleaners' was owned by them. Both of them together can transfer the property/ business in question to their wives. When the firm, represented by one of the partners, transfers the business, it is not a transfer by one of them, but a transfer by all the partners, viz., Ramachandra Reddiar and Arjuna Reddiar. The transferees are, admittedly, their respective wives. Therefore, the decision referred to by counsel will not apply to the facts of this case.

69. Counsel also referred to several decisions to show that no partner can claim exclusive right in the partnership property, but can claim only a share of profits. The decisions referred to are Addanki Narayanappa v. Bhaskara Krishnappa : [1966]3SCR400 , CIT v. Dewas Cine Corporation : [1968]68ITR240(SC) , CIT v. Banhey Lal Vaidya : [1971]79ITR594(SC) , Kay Engineering Co. v. CIT , CIT v. Nataraj Motor Service : [1972]86ITR109(Ker) , CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) . So long as the partnership continues, no partner can claim exclusive right over any of the partnership property. The proposition of law is well-established. Any partner can claim only a share in the profits of the business. But, in this case, the firm consisting of two partners transferred the property and the business to their wives. There is no case that apart from the two partners, there are other persons interested in the property transferred. The property transferred belongs to the two partners and the transferees are the wives of the two partners. Therefore, Section 64(1)(iii) is clearly attracted.

70. Counsel also referred to the decision reported in J.B. Greaves v. CIT : [1963]49ITR107(SC) to show that the assets transferred must be those of the transferor. In this case, the transferor is the partnership and the partnership consisted of Ramachandra Reddiar and Arjuna Reddiar, and the transferees are the respective wives of the said partners. When the assets are held by the firm, it means the assets are held by the two partners and, therefore, the transfer made is by the assessees to their wives. Hence, in computing the total income of the asscssees, the income that arose to the spouses of such individuals from the assets transferred will have to be included under Section 64(1)(iii) of the Act.

71. What was transferred was a joint business and, therefore, the profits that went to the share of the wives arose directly from the transfer of the business. The share income that accrued In the wives has, therefore, to be clubbed along with the income of the respective assessees in the light of the decision reported in Chaturbhujdas Karnani v. CIT : [1958]34ITR553(Bom) .

72. In the light of the above discussion, I agree with the judgment of my learned brother, Kochu Thommen J. (as he then was) and answer question No. 3 in the affirmative, in favour of the Revenue and against the assessee. In the light of the answer to question No. 3, I agree that it is unnecessary to answer questions Nos. 1 and 2. Therefore, I decline to answer questions Nos. 1 and 2.

73. In the result, according to the majority view, question No. 3 is answered in the affirmative, in favour of the Revenue and against the assessee, leaving questions Nos. 1 and 2 unanswered as, in the light of the answer to question No. 3, answer to questions Nos. 1 and 2 became unnecessary.

74. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.


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