M. S. MENON C.J. - This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66(1) of the Indian Income-tax Act, 1922. The assessment year concerned is 1961-62; and the accounting period for the income involved in the reference, the twelve months ended on March 31, 1961. The question referred is :
'Whether, in the facts and circumstances of this case, the share income of the assessees wife in the profits of the business of Johnson & Co. can be included in the income of the assessee under section 16(3)(a)(iii) of the Income-tax Act. 1922 ?'
The assessee gave his wife Rs. 5,000 on April 28, 1960. She deposited the amount in a bank on May 2, 1960. She withdrew Rs. 4,000 from that amount and contributed her share of the capital of Johnson & Company on May 9, 1960.
Johnson & Company is a partnership dealing in general merchandise including oil and oil seeds. The firm was constituted by a deed of a partnership dated May 3, 1960. The partners were (and are) the assessees wife and the assessees mother. The Rs. 4,000 contributed by the assessees wife on May 9, 1960, constituted one-half of the capital of the firm. The other half was contributed by the assessees mother in two equal installments of Rs. 2,000.
During the accounting period the assessees wife received from the partnership as her one-half share of the profits of the partnership a sum of Rs. 4,149. The controversy is now confined to this amount.
There is a clause in the partnership deed which says that any partner may advance to the partnership sums beyond the partners share of the capital and that such advances, when made, will be treated as debts due to that partner at nine per cent, interest per annum. In pursuance of this clause, the assessees wife advanced to the partnership a sum of Rs. 31,000. That amount also was a gift to her from her husband; and it is not disputed before us that the interest she received during the accounting period on the said advance of Rs. 2,790 has to be treated, as has been done, as part of the assessees income under section 16(3) of the Indian Income-tax Act, 1922. The only controversy, as already indicated, is as regards the sum of Rs. 4,149 which represents the assessees one-half share of the profits of the firm of Johnson & Company.
The relevant portion of section 16(3) of the Indian Income-tax Act, 1922, provides that in computing the total income of any individual for the purpose of assessment, there shall be included so much of the income of a wife of such individual 'as arises directly or indirectly from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart'. There can be no doubt that the Rs. 4,000 constitute an asset transferred directly by the assessee to his wife. The only question for determination is whether the share of the profits of Johnson & Company received by the assessees wife during the accounting period can be considered as arising directly or indirectly from the said sum of Rs. 4,000.
If the assessees wife had invested the Rs. 4,000 in the shares of a company incorporated under the Companies Act and the Rs. 4,149 she received represented the dividend from those shares, that dividend would certainly have to be included in the income of the assessee. Does the fact that she invested the Rs. 4,000 not as above but as a contribution to one-half of the capital of a partnership make a difference
The answer to the question will depend on whether the income derived from the partnership was entirely due to the investment of the Rs. 4,000 or whether in the making of that income other elements also were in operation. In this case no other element operated, and we must, therefore, conclude that the income that the assessees wife received from the partnership should be traced wholly and exclusively to the Rs. 4,000 given to her by her husband and contributed by her as her share of the capital of the partnership.
Annexure 'A' to the statement of the case is a letter by the assessees wife to the Income-tax Officer. It makes it abundantly clear that the assessees wife had nothing to do with the day-to-day management of the affairs of the partnership. There is also nothing on record to show that she had anything to do with the determination of the policy of the partnership or that she contributed towards its working anything other than the contribution of one-half of the capital of the firm. It is also not in evidence that she had any asset of her own which would have been endangered on the basis of her personal liability for the debts of the firm other than her contribution to the capital of the firm and the sum of Rs. 31,000 mentioned in paragraph 5 above.
Counsel for the assessee drew our attention to the decision of the Bombay High Court in Chaturbhujdas Karnani v. Commissioner of Income-tax. All that was decided in that case can be summed up as follows :
'Where what is transferred by a father to his infant son is a business as a going concern, the fact that the capital of the business is fixed in the deed of transfer at a certain sum does not mean that what is transferred is the capital sum alone, and that, in consequence, it is only the interest on that capital sum that should be included in the fathers total income. What, on the other hand, would have to be included is the entire profit accruing to the transfer from the business'. (Iyengar on Income-tax, fifth edition, volume II, page 1198).
In the light of what is stated above, we must hold that section 16(3)(a)(iii) is attracted, that the decision of the Tribunal affirming the inclusion of Rs. 4,149 in the income of the assessee under that provision is justified, and that the question referred should be answered in the affirmative, that is, against the assessee and in favour of the department. We do so, but, in the circumstances of the case, without any order as to costs.
A copy of this judgment under the seal of the High court and the signature of the Registrar will be sent to the Appellate Tribunal as required by sub-section (5) of section 66 of the Indian Income-tax Act, 1922.
Question answered in the affirmative.