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Commissioner of Income-tax, Gujarat Vs. Mahendrasingh Mohansingh - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference Nos. 18 of 1975 and 141 and 146 of 1976
Judge
Reported in[1980]123ITR938(Guj)
ActsIncome Tax Act, 1961 - Sections 64
AppellantCommissioner of Income-tax, Gujarat
RespondentMahendrasingh Mohansingh
Appellant Advocate G.N. Desai, Adv.
Respondent Advocate B.R. Shah, Adv.
Cases ReferredIn Champaran Cane Concern v. State of Bihar
Excerpt:
(i) direct taxation - sub-partnership - section 64 of income tax act, 1961 - agreement as well as deed of partnership established that assessee, his wife and minor son agreed to share profits earned by assessee who continued to act as partner in old firm not only on behalf of himself but also on behalf of abovesaid two family members - relationship of principal and agent subsisted between them - agreement and corresponding provision in new partnership deed satisfied constituents of partnership - sub-partnership between assessee and other two family members came into existence. (ii) partnership - amount belonging to wife and son of assessee did not form part of capital of main firm or it was not at risk of business - in circumstances persons represented by partner had right only to share.....b.k. mehta, j. 1. since these three references raise common questions of law for our opinion, though in respect of different assessment years, namely, 1969-70, 1970-71 and 1971-72, pertaining to the assessment of the same assessee, we intend to dispose of them by this common judgment. 2. in order to appreciate the rival contentions urged on behalf of the revenue and the assessee in these three reference, it would be useful to set out the facts leading to these references. the assessee, mahendrasingh mohansingh (now deceased), in his capacity as karta of his huf, was a partner in the firm of m/s. mohansingh sahebsingh. the said huf consisted of the assessee, late mahendrasingh, his wife, devendra kaur, and his son, shailendrasingh. a partial partition was effected amongst the members of.....
Judgment:

B.K. Mehta, J.

1. Since these three references raise common questions of law for our opinion, though in respect of different assessment years, namely, 1969-70, 1970-71 and 1971-72, pertaining to the assessment of the same assessee, we intend to dispose of them by this common judgment.

2. In order to appreciate the rival contentions urged on behalf of the revenue and the assessee in these three reference, it would be useful to set out the facts leading to these references. the assessee, Mahendrasingh Mohansingh (now deceased), in his capacity as karta of his HUF, was a partner in the firm of M/s. Mohansingh Sahebsingh. The said HUF consisted of the assessee, late Mahendrasingh, his wife, Devendra Kaur, and his son, Shailendrasingh. A partial partition was effected amongst the members of the said family on November 2, 1967, dividing the capital invested by the said family in the aforesaid firm as well as its share in the profits of the said firm equally amongst the said three members of the family. An agreement was effected on December, 7, 1967, between the assessee on the one hand and his wife, Devendra Kaur, and son, Shailendrasingh, on the other with regard to the invested capital in the said firm and the share of the family therein. Broadly stated, it was agreed by and between the parties under the said agreement that according to the partition effected between the parties on November 2, 1967, the capital and share of the family in the said firm were divided equally amongst the three members of the said family, and that each one of them had become owner to the extent of 1/2rd share in the capital and the share of the family in the firm. It was further agreed between the parties under the said agreement that Devendra Kaur and Shailendrasingh permitted the assessee to use the amounts representing their shares in the capital and the share of the family in the firm and also required the assessee to continue as a partner in the said firm for himself and as representative of Devendra Kaur and Shailendrasingh. In consideration of this permission to use the amounts representing their shares (1/3rd each) in the capital and the interest of the family in the firm, the assessee agreed and undertook to pay annually to each of the said two members 1/3rd share of the profits coming to the share of the assessee from the said partnership business subject to a minimum of Rs. 1,000 to each per annum. It was also agreed between the assessee and the said two members of his family to make an arrangement with the firm so that the said members would withdraw their 1/3rd share in the profits allotted to the assessee as stated above directly from the firm. It was, however, clarified that the assessee did not become the owner of the amounts representing 1/2rd share of Devendra Kaur and 1/3rd share of Shailendrasingh as aforesaid and he was merely granted licence to use their capital and shares in the said firm. The factum of partial partition and the agreement stated above was also recorded in the declaration made by the assessee on September 20, 1968. The aforesaid arrangement was also recorded in the deed of partnership of the firm executed on December 7, 1967, after the partial partition. In the course of the assessment for the assessment year 1968-69, the HUF of Mahendrasingh claimed that there was a partial partition in respect of the capital invested by the family and its share in M/s. Mohansingh Sahebsingh.

3. The ITO, after holding necessary inquiry, by his order of January 21, 1972, found that there was a partial partition as claimed by the family and accepted it. In the course of the assessment for the assessment year under reference, that is, 1969-70, the assessee, late Mahendrasingh, claimed that only his 1/3rd share in the firm of M/s. Mohansingh Sahebsingh was liable to be included in his total income. The share in the firm of M/s. Mohansingh Sahebsingh was computed Rs. 60,360. It was, therefore, claimed by the assessee that only Rs. 20,120, representing his 1/3rd share in the profits, was liable to be included in the assessee's total income. This claim of the assessee did not find favour with the ITO, who was of the opinion that the assessee had become a partner in the firm for himself and on behalf of his wife and son under the aforesaid partial partition and, therefore, the wife and son had also become partners in the firm and the entire profits computed at Rs. 60,360 which included the shares of the wife and son were liable to be taxed in the hands of the assessee under s. 64 of the I.T. Act, 1961.

4. The assessee, therefore, carried the matter in appeal before the AAC, Ahmedabad, who, following the decision of the Supreme Court in Charandas Haridas v. CIT : [1960]39ITR202(SC) , held that the provisions of s. 64 of the Act had no application in the facts of the present case and having regard to the agreement effected on December 7, 1967, pursuant to the partial partition between the members of the family, the assessee had merely utilised the amounts representing the shares of his wife and son in the firm and the respective amount of profits coming the their shares cannot be taxed in the hands of the assessee and should, therefore, be deleted from his income.

5. The revenue, therefore, carried the matter in appeal before the Income-tax Appellate Tribunal at Ahmedabad. It was contended, inter alia, on behalf of the revenue before the Tribunal, that according to the agreement executed between the parties, a sub-partnership consisting of the assessee, his wife and son had come into existence and that under s. 64 of the Act, the shares of the wife. Devendra Kaur, and son, Shailendrasingh, in the income from the main firm were liable to be included in his total income. The Tribunal upheld the order of the AAC following the decision of the Supreme Court in Charandas Haridas's case : [1960]39ITR202(SC) , as it was found that there was a partial partition in respect of the capital and shares of the HUF in the firm with effect from November 2, 1967, and from the date of the partition, the assessee, his wife and son, each became owner of 1/3rd share and, therefore, the profits coming to the share of each of the said two members could not be treated as income of the assessee and, therefore, could not be taxed in his hands. The Tribunal found itself unable to agree with the contention of the revenue that any sub-partnership consisting of the assessee, his wife and son had come into existence pursuant to the partial partition between them. At the instance of the CIT, therefore, the following two questions have been referred to us :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the assessee's wife and his son have not become partners through him in M/s. Mohansingh Sahebsingh or that no sub-partnership consisting of the assessee, his wife and his son came into existence on partial partition by the virtue of an agreement dated December 7, 1967

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the shares of the assessee's wife and his son were not liable to be included in the total income of the assessee under section 64 of the Act ?'

6. The facts of the remaining two references are also similar and the questions referred to us are in the same terms and, therefore, we need not repeat them.

7. At the time of hearing of this reference, the learned Government Pleader, appearing on behalf of the revenue, raised the following three contention :

1. On the true construction and effect of the agreement of December 7, 1967, the Tribunal committed an error of law in holding that Devendra Kaur and Shailendrasingh did not become partners in the main firm of M/s. Mohansingh Sahebsingh inasmuch as it failed to appreciate that the amounts representing 1/3rd share each of the two members in the capital and interest of the family in the firm formed part of the capital of the new partnership firm.

2. In the alternative, on the true construction of the aforesaid, agreement, the effect of the arrangement was that a sub-partnership between the assessee, his wife and son came into existence each having 1/3rd share, since there was an agreement between them to share the profits from the main firm coming to the share of the assessee.

3. In any case, the income of Devendra Kaur and Shailendrasingh was liable to be included in the income of the assessee of the assessee and be taxed in his hands.

8. Two questions, therefore, arise for our determination of these references. Firstly, what is the effect of the agreement of December 7, 1967 Whether Devendra Kaur and Shailendrasingh-the wife and son, respectively, of the assessee-became partners in the main firm, or, as contended in the alternative, whether a sub-partnership consisting of the assessee, his wife and son came into existence for purposes of sharing the profits coming to the share of the assessee from the main firm. Secondly, if the answer to either of the alternative questions is in the affirmative, whether the profits from the main firm coming to the share of the assessee would be income of the sub-partnership or of the partners thereof and, therefore, liable to be included in the hands of the assessee. We should recall, before we attempt to answer the question arising for our determination, that the arrangement effected between the assessee, his wife and son under the agreement of December 7, 1967, was shortly as under :

There was a partnership firm carrying on business in the name and style of M/s. Mohansingh Sahebsingh in which the assessee, late Mahendrasingh. Mohansingh, had 45% share in the profits and losses along with two other partners, Jogendrasingh and Surjitsingh, having 20% and 35% shares, respectively. The assessee, late Mahendrasingh, was a partner in the said firm in his capacity as a karta of his HUF consisting of himself, his wife and his minor son, Shailendrasingh. It is claimed by the assessee that a partial partition was effected amongst the members of the said HUF on November 2, 1967, whereby it was decided to partition the amount of capital invested by the HUF in the said firm and also its interest therein. The amount standing to the credit of the HUF in the trading books of the firm was Rs. 55,045.59 as on November 2, 1969, corresponding to Aso Vad Amas of S.Y. 2023. The said amount was divided in equal shares amongst the assessee, his wife and son so that each one of them became separate owner of a sum of Rs. 18,348-86 being 1/3rd share in the aforesaid amount. Pursuant to the partition, an agreement was effected between the assessee, his wife and son on December 7, 1967, agreeing that the assessee should be allowed and permitted by his wife and son to use the aforesaid amounts representing 1/3rd share each belonging to the wife and son of the assessee, and the assessee could, on and from November 3, 1967, continue as a partner in the main firm for himself and as representative of his wife son. The assessee, in consideration of the use of these amounts, agreed to share equally with his wife and son the profits coming to his share from the main firm, subject, however, to the obligation of making a minimum payment of Rs. 1,000 per annum to each of them. It is in this context that we have to determine whether the wife and minor son became partners in the main firm, or, in the alternative, a sub-partnership came into existence between them and the assessee.

9. We will now read the relevant clauses, having a bearing on the question raised before us, from the agreement of December 7, 1967, between the assessee, his wife Devendra Kaur, and his minor son, Shailendrasingh (who are described as parties of 1st, 2nd and 3rd parts, respectively, in the agreement) and the corresponding reference to the arrangement in the new deed of partnership of the same date executed by the partners of the main firm. Clause (1) of the agreement provides as under :

'(1) The parties of the second the third parts have permitted and allowed the party of the first part the use of their one-third share in the share in the partnership business run under the name and style of M/s. Mohansingh Sahebsingh so far held in the name of the party of the first part including goodwill for a period of one Samvat year, i.e., for S.Y. 2024 and have agreed to continue to keep their share of capital in the said partnership AND THE PARTY OF the first part shall become on and from 3-11-67 and continue as a partner in the said firm as for himself and as representative of the parties of the second and third parts.'

10. Clauses (2) and (3) of the agreement provide as under :

'(2) In consideration of the parties of the second and third parts having permitted the party of the first part as aforesaid the said user, the party of the first part agreed to pay annually to each of the parties of the second and third parts 1/3rd each of the earning from the said share in the said partnership business subject to a minimum of Rs. 1,000 to each. The said earning shall be the amount credited to the account of the party of the first part in the books of the partnership as his share in the said partnership. The parties hereto agree to make an arrangement with the firm so that the parties of the second and third parts shall be entitled to withdrew their 1/3rd share in the profits as aforesaid directly from the firm.

(3) That the party of the first part shall not and does not become the owner of the one-third share of the party of the second and third parts each in the share held in the name of the party of first part in the aforesaid partnership business including goodwill and that the parties of the second and third parts are and continue to remain the owners of the said one-third share each in the share held as aforesaid in the said partnership business and that the party of the first part is merely granted a licence to use the said one-third share in the share held by the party of the first part in the said partnership business of each of the parties of the second and third parts as provided in this agreement.'

11. Clause (7) of the new need of partnership executed on December 7, 1967, refers to the arrangement effected between the parties under the above agreement of December 7, 1967. It provides as under :

'(7) Partner Mahendrasingh continues on and from Kartak Sud 1, S.Y. 2024, as a partner in this concern for self and as representative of his minor son Shailendrasingh and wife Devendra Kaur so that as between himself and the other partners he is and continues to be a partner and to exercise all rights as such, but as between himself and the members of his family, his share as a partner shall belong to and deem to accrue or arise to the three members of the family in equal shares and in severalty.'

12. In the recitals of the said partnership deed, there is a reference to the partition effected between the assessee, his wife and minor son. The recital reads as under :

'AND WHEREAS PARTNER Mahendrasingh Mohansingh was a partner in the said concern as karta of the HUF consisting of himself, his wife Devendra Kaur and minor son Shailendrasingh.

AND WHEREAS on and from Kartak Sud 1, S.Y. 2024, the amount standing to the credit of the said Mahendrasingh with the said firm has been equally divided amongst the aforesaid three members of the HUF, and whereas it is further agreed between the said three members of the HUF that the share as a partner in the said concern and all benefits accruing thereto shall on and from Kartak Sud 1, S.Y. 2024, be enjoyed by and belong to the said three members equally and in severalty.'

13. We have, therefore, to find out in the context of the relevant clauses of the agreement and the deed of partnership, whether the first contention advanced on behalf of the revenue is well-founded. A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. The contract of partnership regulates the rights and liabilities of partners. A person can be a partner in his capacity as a karta, trustee, representative of his sub-partners or of a group of persons or a benamidar for another. In all such cases his is a dual position. He functions in his personal capacity in relation to partners while in his representative capacity in relation to the persons whom he represents he is a representative. The persons who are represented by a partner cannot enforce their rights against the other partners and vice versa. Their right is only to a share in the profits of their partner-representative in accordance with law or in accordance with the terms of the agreement, as the case may be (vide CIT v. Bagyalakshmi & Co. : [1965]55ITR660(SC) ). The contention of the learned Government Pleader, on behalf of the revenue, that inasmuch as the amounts of the assessee, his wife and son credited to their respective accounts in the trading books of the main firm formed part of the capital having regard to the provisions which we have set out above, does not appear to be well-founded. It has been stated by the assessee in the declaration of September 20, 1968, filed before the ITO concerned that an amount of Rs. 55,045.59 was standing to the credit of his HUF in the account books of the firm as on November 2, 1967, corresponding to Aso Amas of S.Y. 2023, and that with effect from November 3rd, 1967, the assessee, in exercise of his rights as father, has divided in equal shares himself, his wife sand his minor son so that each one of them became separate owner to the tune of Rs. 18,348.86, being 1/3rd share of each in the aggregate amount. It has been further stated that the amount of Rs. 36,697.72 coming to the shares of two other members (i.e., his wife and minor son) were to be credited or deposited with the said firm so long as he continued to act as a partner in his representative capacity, and the aforesaid arrangement was made as a physical division of his partnership share was not feasible and also the rights in the goodwill of the said firm belonging to the three members of the HUF was to be made use of for the purpose of carrying on the business of the said concern. We are, therefore, not in a position to agree with the learned Government Pleader that this amount of Rs. 36,697.72, being the total of the amounts belonging to the wife and son of the assessee, formed part of the capital of the main firm or it was at risk in the business. In the circumstances, therefore, the contention cannot be upheld that the wife and minor son of the assessee became partners in the main firm. There is an added reason for our view. The son was a minor and he, therefore, could not be a full-fledged partner in the main firm. The first contention, therefore, should be rejected.

14. It is really the alternative contention which has been the subject matter of debate between the parties. What is 'sub-partnership' has been laid down by the Supreme Court in Murlidhar Himatsingka v. CIT : [1966]62ITR323(SC) . Sikri J., as he then was, speaking for the court, referred and set out with approval the passage from Lindley on Partnership, 12th Edn., page 99 (corresponding to page 111 of 13th Edn.) dealing with sub-partnership. The passage reads as under :

'A sub-partnership is, as it were, a partnership within a partnership; it pre-supposes the existence of a partnership to which it is itself subordinate. An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, several persons are partners and one of them agrees to share the profits derived by him with a stranger, this agreement does not make the stranger a partner in the original firm. The result of such an agreement is to constitute what is called 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.'

15. Sikri J. thereafter proceeded to observe that sub-partnership have been recognised in India and registration accorded to them under the Indian I.T. Act (see CIT v. Laxmi Trading Company . It was urged on behalf of the revenue that there was a clear agreement between the assessee, his wife and minor son, Shailendrasingh, to share in the profits and, therefore, a sub-partnership, as indicated by the Supreme Court in Murlidhar's case : [1966]62ITR323(SC) had come into existence. On behalf of the assessee, this proposition was resisted by urging that in order to find out whether there was a sub-partnership or not a mere provision of sharing profits is not enough. The main element which would constitute a partnership, or for that matter a sub-partnership, is the element of mutual agency and if that important element is wanting, which is the position in the present case, the revenue cannot succeed in establishing that a sub-partnership had come into existence and the Tribunal was right in rejecting this contention of the revenue. We do not intend to embark upon the larger controversy, whether a mere provision of sharing profits between partners of the original firm and third parties would constitute a sub-partnership or not, and whether a sub-partnership is not a partnership in the strict sense of the term as understood under the Partnership Act and a quasi-partnership.

16. In M. P. Davis v. Commr. of Agrl. I.T. : [1959]35ITR803(SC) , a question arose, whether the arrangement in question before the Supreme Court amounted to a partnership or brought into existence merely a relationship of master and servant. Gajendragadkar J., as he then was, speaking for the court, held that in determining whether a group of persons is or is not a firm, regard shall be had to the real relationship between the parties, as shown by all relevant facts taken together.

17. In Champaran Cane Concern v. State of Bihar : [1963]49ITR152(SC) , a question arose before the Supreme Court, whether the assessee before it was a partnership or a co-ownership concern. S. K. Das J., speaking for the court, said that in order to decide such a question, both form and sub-stance must be considered.

18. In N. R. Wadia & Co. v. CIT : [1960]39ITR754(Bom) , the facts were that three persons, who were architects and surveyors by profession, entered into an agreement describing themselves as partners and their business as that of a partnership of architects, civil engineers and surveyors and it was to be carried on in the firm name of 'N. R. Wadia & Co'. It was agreed in the partnership deed that each partner was only to attend to the work secured by him and in respect of such work he had to keep and maintain a separate work-book, bill-book and other necessary books, and each of them had to recover bills in respect of the work done by him. At the end of every year all expenses jointly incurred were to be apportioned in proportion to the gross receipts of the three persons. The firm 'N. R. Wadia & Co.' was also registered under the Indian Partnership Act, 1932, with the Registrar of Firms, but there was no banking account in the name of the firm. Letter-heads were printed in the name of the firm, the names of the three persons with their qualifications also being given therein. No formal written contracts were entered into either in the name of the firm or in the names of the persons and the correspondence showed that some of the letters were signed by the three persons personally and some in the name of the firm. Each of the three persons secured his own work and received the bills therein and at the end of each year the total of all expenses, after providing for depreciation, was apportioned in accordance with the gross receipts of the three persons. The firm applied for registration which was refused by the ITO and each of the so-called partners was separately assessed. S. T. Desai J., as he then was, speaking for a Division Bench of the Bombay High Court, considered the facts stated in the statement of case as well as additional statement of case which was called for by the court and observed that a partnership is not a matter of opinion but a matter of intention and agreement and to constitute a partnership in law, there must be three elements, viz., (i) an agreement entered into by all the persons concerned, (ii) agreement must be to share profits of business, and (iii) the business must be carried on by all or any of the persons concerned acting for all. S. T. Desai J. posed a crucial question before the court, whether the element of agency which is a prime requirement of the existence of a partnership had been established in that case or not since there was an agreement entered into between the persons concerned to carry on the business and to share the profits. He held in that connection as under (page 773) :

'It is this element of agency which distinguishes partnership from various other legal relations and it is this element which brings out the fundamental principle that partners when carrying on the business of the firm are agents as well as principals. It also indicates that if the essential element of agency is lacking, the relation of partnership cannot be said to exist. Section 6 of the Partnership Act recites the rules for determining the existence of partnership. In determining whether in a particular case a partnership does or does not exist-which is at times a matter of some difficulty-the court will examine all the incidents of the relation between the parties and will have regard to the real relation between them. the court will consider all the relevant facts separately and together and then draw a conclusion without attaching undue importance to any of the evidentiary facts or any particular aspect of the matter...... There are no cogent facts and no circumstances to be gathered from the two statements of the case from which existence of mutual agency between the three persons can be said to be inferable. Treating this even as a case of some difficulty, we do not see how we would be justified in saying that the element of agency has been established. The true test for determining whether a person deriving income from a business in the form of profits is or is not a partner is to examine whether the business was carried on by the others acting for him; whether the relation of principal and agent subsisted between them, i.e., whether one was authorised to work on behalf of another and not merely whether there was any arrangement of sharing the profits. The question is always one of agency and authority.'

19. Similarly, in Ramniklal Sunderlal v. CIT : [1959]36ITR464(Bom) , a joint Hindu family consisting of the assessee, Ramniklal, his wife and his two sons entered into an agreement of partnership of January 25, 1949, whereby they agreed to divide in equal shares the income derived from certain properties and certain leases, after partitioning some of the joint family properties. The partnership was to derive income from certain of the partitioned properties and was given the firm name of Messrs, Ramniklal Sunderlal. It was also mentioned in the agreement that the income derived from certain properties would be divided by all the partners in equal shares and that income from leases also would be divided between the partners in equal shares. The work pertaining to courts, offices, recovery of rents, etc., was agreed to be done by the father, Ramniklal, with the consent of the other partners. There was also a clause to the effect that the firm would be entitled to carry on the partnership business and over and above this business any other business with the consent of all the partners. The firm sough registration which was not granted by the ITO and the firm was unsuccessful before the AAC as well as before the Tribunal. At the instance of the assessee, a question was referred, whether it was entitled to the benefits of registration under s. 26A of the Indian I.T. Act, 1922. In that context, a Division Bench of the Bombay High Court found that there was an agreement to share profits and that there was also an element of agency between the partners. However, the court was unable to find any agreement to carry on business and, therefore, answered the question against the assessee. S. T. Desai J., as he than was, speaking for the court, observed (at page 468) :

'It is true that the distinction between co-ownership and partnership is sometimes not easy to determine and at times is rather obscure when the co-owners employ their property with a view to profit and cases do arise where it is not easy to decide as to when the employment of the property with a view to profit constitutes 'carrying on a business'. No definite rule can be expected or laid down since the word 'business' covers a very wide field of human activity and the definition of 'business' affords very little assistance when dealing with difficult cases......... The test to determine whether co-owners sharing profits of any property are partners or not is to inquire whether there is really a common business and whether the business is being carried on by one or more of them, acting for all. In such a case the court has to ascertain the real intention and contract of the parties not merely from the writing itself but from the whole facts of the case.'

20. Applying these settled principles, we do not feel any doubt in our mind that the effect of the arrangement recorded in the agreement of December 7, 1967, read with the new partnership deed of the same date and the declaration made by the assessee on September 20, 1968, that all the three elements - (1) agreement entered into by all the persons concerned, (ii) agreement to share profits of business, and (iii) the business carried on by all or any of the persons concerned acting for all, are present in the case before us. The clauses which we have set out above from the agreement as well as the deed of partnership clearly establish that the assessee, his wife and his minor son agreed to share the profits earned by the assessee, by his continuing to act as a partner not only on behalf of himself but also on behalf of his wife and minor son in the main firm. In other words, not only was there by an agreement between the assessee, his wife and his minor son for shares, but the assessee, as guardian of the minor son, could continue as a partner in the main firm not only on behalf of himself but also on behalf of his wife and minor son and that they would share the profits equally earned by the assessee from the main firm. The learned advocate, appearing on behalf of the assessee, made a strenuous attempt to persuade us that this is virtually an arrangement for the use of the capital of Devendra Kaur and Shailendrasingh by the assessee Mahendrasingh and that in consideration of the permission to use the capital, they were to be given equal shares in the profits subject to a minimum of Rs. 1,000 per annum to each. It was emphasised on behalf of the assessee that the elements of an agreement to carry on business as well by mutual agency are absent in the present arrangement. We are afraid, we cannot agree with the submission made by the learned advocate. As stated by S. T. Desai J. in N. R. Wadia & Co.'s case : [1960]39ITR754(Bom) , the true test for determining whether a person, deriving income from the business in the form of profits, is or is not a partner is to examine whether the business was carried on by others acting for him, and whether the relationship of principal and agent subsisted between them. In other words, whether one was authorised to work on behalf of another and not merely whether there was an arrangement for sharing profits. Having regard to the last portion of clause (i) to the effect that the assessee would become on and from November 3, 1967, and continue as a partner in the main firm for himself and as a representative of his wife and minor son is sufficient authority for the assessee to carry on business which he had hitherto carried on as a partner of the main firm in his representative capacity as karta of the HUF. It is no doubt true that in clause (3) of the agreement it has been said that the assessee is merely granted a licence to use the amounts belonging to his wife and minor son and lying to the credit of their accounts in the books of the main firm, but the form of the document cannot conclude the matter. In N. R. Wadia & Co.'s case : [1960]39ITR754(Bom) , it is stated that the question, whether there is a partnership or not is not merely a question of opinion but is a question of substance. Even if we consider from the angle of the format of the arrangement. We do not feel any hesitation in saying that in view of the clear provision made in the agreement and the corresponding provision in the new partnership deed all the three elements which go to constitute a partnership firm are in existence and there is no escape from the conclusion that a sub-partnership between the assessee, his wife and his son had come into existence. In that state of circumstances, we are of the opinion that the learned Government Pleader was right so far as this second contention is concerned.

21. The Tribunal, in our opinion, has not dealt with this question at all and brushed aside the contention in a cryptic manner without considering the different aspects of the question, which have a bearing on the contention urged. The Tribunal, in our opinion, therefore, has committed an error of law in rejecting the contention of the revenue that a sub-partnership had come into existence between the assessee, his wife and his son.

22. The learned advocate for the assessee has invited our attention to the earlier decision of this court in Addl. CIT v. Chandulal C. Shah : [1977]107ITR91(Guj) , where a Division Bench of this court, speaking through T. U. Mehta J., found itself unable to spell out the existence of a partnership firm since the stipulation in the deed of partition before it did not contain anything which could be suggestive of the relationship of partnership between the members of the family, and more particularly because the contention of the revenue that a sub-partnership came into existence would result in minors becoming liable for the losses of that sub-partnership, a situation which was patently illegal, because no minor can legally enter into a partnership agreement. We do not think that this decision can be of any assistance to the cause of the assessee, because in the present case before us, the agreement in question was merely for sharing the profits coming to the assessee from the main and, therefore, the minor son of the assessee could never be held liable for the losses of that sub-partnership, if at all losses arise in the business of the sub-partnership.

23. The result, therefore, is that these reference should be accepted and we answer the former part of question No. 1 in each reference in the affirmative, that is, in favour of the assessee and against the revenue, and we answer the latter part of question No. 1 in each reference in the negative, that is, in favour of the revenue and against the assessee by holding that a sub-partnership consisting of the assessee, his wife and son had come into existence on partial partition by virtue of the agreement of December 7, 1967. The second question, in each reference, is also answered in the negative, that is, in favour of the revenue and against the assessee. The assessee shall pay the costs of Income-tax Reference No. 18 of 1975 to the Commissioner of Income-tax.

24. Mr. Shah, learned advocate for the assessee, orally applies for leave to appeal to the Supreme Court as substantial question of law arises in these reference. We agree that since an important and substantial question of law arises in these references, leave as prayed for should be granted to the assessee for appeal to the Supreme Court. There would be no order as to costs so far as this application is concerned.

25. These three references are disposed of accordingly. However, there would be no order as to costs in Income-tax Reference Nos. 141/1976 and 146/1976.


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