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Commissioner of Income-tax, Gujarat Vs. Nandiniben Narottamdas - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome tax Referance No. 26 of 1976
Judge
Reported in(1982)26CTR(Guj)200; [1983]140ITR16(Guj)
ActsIncome Tax Act, 1961 - Sections 5, 60 and 63
AppellantCommissioner of Income-tax, Gujarat
RespondentNandiniben Narottamdas
Appellant Advocate B.R. Shah, Adv.
Respondent Advocate J.M. Thakore, Adv.
Excerpt:
direct taxation - share in profits - sections 5, 60 and 63 of income tax act, 1961 - share in profits of assessee in firms of which he was partner was deleted by tribunal from total income of assessee - same challenged by authorities - circumstances shows that there was diversion of said income at source within the meaning of section 60 by creation of overriding title in favour of beneficiaries named in trust - valid and effective gift made in favour of beneficiaries - held, income from share in profits cannot be included in total income of assessee. - - act, 1961 (hereinafter referee to as 'the act'), were clearly attracted and the amounts received by the assessee in the respective assessment years were taxable as income in her hands. the obligation of the latter kind in usually.....p.d. desai, j.1. the income-tax appellate tribunal has referred the follows in three questions of law of the opinion of this court: for the assessment year 1967-68 '(1) whether, on the facts and in the circumstances of the case, the tribunal was right in deleting the shares of profits in the firm of m/s. amrit chemicals added by the income-tax officer for the assessment year in question ?' 2. for assessment years 1968-69 & 1969-70 '(1) whether, on the facts and in the circumstances of the case, the tribunal was right in deleting the share of profits in the firms of m/s. amrit chemicals added by the income-tax officer for the assessment years 1968-69 and 1969-70 (2) whether, on the facts and in the circumstances of the case, the tribunal was right in deleting the share of profits in the.....
Judgment:

P.D. Desai, J.

1. The Income-tax Appellate Tribunal has referred the follows in three questions of law of the opinion of this court:

For the assessment year 1967-68

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the shares of profits in the firm of M/s. Amrit Chemicals added by the Income-tax Officer for the assessment year in question ?'

2. For assessment years 1968-69 & 1969-70

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the share of profits in the firms of M/s. Amrit Chemicals added by the Income-tax officer for the assessment years 1968-69 and 1969-70

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the share of profits in the firm of M/s. Star Radio and Electric Co., added by the Income-tax Officer for the assessment year 1968-69 and 1969-70 ?'

3. Three assessment years are involved herein, as indicated by the question themselves. They are assessment years 1967-68, 1968-69 and 1969-70. The corresponding previous years are Samvat Years 2022, 2023 and 2024, respectively.

4. The assessee was a partner in two partnership firms, namely, Amrit Chemicals and Star Radio and Electric Co. In the first partnership firm, the assessee's share was one anna in a rupee; whereas in the second partnership-firm, the share was 8%. By a declaration made on December 7, 1966 (the date, December 16, 1964, has been erroneously mentioned in the statement of case, of case, according to the parties), the assessee declared:

'I being desirous of assigning the benefits 0-1-0 shares in the said firm of M/s Amrit Chemicals, Ahmedabad, donated the same for the benefit of the beneficiaries valued in the trust of Panna, Pratiksha and Mamta Trust.... and the trustees of the said trust have accepted the said donation.....'

5. The declaration went on to state further that the assessee held 0-1-0 share in the said firm in the capacity of trustee of the said trust and not in the capacity of the owner of the same. By another declaration made on May 4, 1967, more or less in similar terms, the assessee made a similar donation of her 8 paise share in the firm of Star Radio and Electric Co. for the benefit of the beneficiaries named in the same trust. The said declaration also went on to state that the assays held her share in the said partnership firm in the capacity of trustee of said trust and not in the capacity of the partner of the same.

6. In the course of proceedings for the assessee's assessment or income-tax of the assessment year 1967-68, the assessee contended that the amount received as and by way of share in the profits of Amrit Chemical was not liable to be included i her total income as the income was diverted at source in favour of the beneficiaries named in the Panna, Pratiksha and Mamta Trust. A similar contention was advanced in the proceedings for the assessee's assessment to income-tax for the assessment year 1968-69 and 1969-70 in regard to the amounts received as and by way of share in the profits of Amrit Chemicals and Star Radios and Electric Co. The ITO rejected the contention on the ground that the transaction evidence by the declarations amounted only to the gift of the share in the profits of the two partnership firms and that the asset, namely, the assessee's interest as a partner in each of the two firms, continued to remain the property of the assessee. According to the ITO, under such circumstances, the provision of s. 60 of the I.T. Act, 1961 (hereinafter referee to as 'the Act'), were clearly attracted and the amounts received by the assessee in the respective assessment years were taxable as income in her hands. On further appeal, the Income-tax Appellate Tribunal reversed the decision of the department authorities, holding that there was diversion of the income at source by creation of an overriding title in favour ofthebeneficiaries of the Panna, Pratiksha and Mamta Trust and that as such the said instances of the Revenue, however, the Tribunal has stated a case in respect of the questions set out at the commencement of the judgment.

7. The following submission were urged at the hearing of the reference on behalf of the Revenue:

(i) On a proper construction of the declarations made by the assessee and taking into account the surrounding circumstances, the transaction have not resulted in the creation of an overriding title over the income received by way of share of profits in the partnership firms. What has been done amounts only to the application of the income after its accrual.

(2)(a) Assuming that the assessee has divested herself of the income at source, since the entire income-producing asset, namely, the share in the partnership firms comprising of all the concomitant rights, is not transferred, the income is still assessable in her hands by virtue of the provision contained in s. 60 of the Act.

(b) The share in a partnership confers not only the right to claim the defined proportion of the divisible income but also the right ultimately to re-claim the capital contributed and the share sin the surplus assets of the firm at the proper time. The said right having not been transferred along with the right to received income, even if there is a partial transfer of the asset, the income is still assessable in the hands of the assessee, by virtue of the provision contained in s. 60 of the Act, as there is no transfer of the whole of the asset from which the income arises.

8. Now, the question as to whether the income was diverted at source of the creation of an overriding title or whether it was applied in a particulars manner after its accrual or receipts to meet an obligation has raised its head in several cases. In CIT v. Ramanlal Chimanlal, Income-tax Reference No. 46 of 1970, decided on August 19, 1972, a Division Bench of this court, consisting of Bhagwati C.J. (As he then was) and myself, was called upon to consider the question whether a portion of the remuneration payable to the assessee in that case as managing director which, by an agreement entered into between his and another person, was earmarked for payment to such other person after meeting with all the expanse required to be incurred in the discharged of the duties, obligations and responsibilities of the post of managing director, was taxable in the hands of the assessee. Speaking for the Division Bench, I had observed in that case as follows:

'Income-tax is a levy on income but every sum of money which appears to have been earned by a taxpayer is not necessarily income chargeable to tax. When the charging section of the Income-tax act Subject to charge the total income of the taxpayer, it is what reached him as income which it is intended to charge. In other words, income in respect of which liability to tax is attracted must be real income of the taxpayer and not his artificial or notional income. In a case where the income of a taxpayer is required to be diverted even before it reaches him as a result of an overriding obligation, there would be neither accrual nor receipt of income which can be brought to tax in his hands. The income, in such a case, is taken away from him even before its accrual since it is already allocated for a particular purpose prior to its receipts, in his hands. The taxpayer, even if he collects it, does so, not as a part of his income, but for an don behalf of the persons to whom it is payable and such income is not subject to tax in his hands. A case falling in this classes must, however, be distinguished from a case falling in another distinct class, though both cases might sometimes appear deceivably similar, namely, where a portion of the taxpayer's income is applied after its accrual or receipts in a particulars manner to meet an obligation. The payment in the later case, which is really made out of the taxpayer's income pursuant to an obligation undertaken or incurred by him, would be chargeable to tax because a subsequent applications of the income is of no concern to the revenue. These two classes of cases, which are distinct and separate, sometimes appears to bear a class resemblance at firms sight because in both case there is a common factors, namely, existing obligation to make a payment. The dissimilarity arises, however, because of the nature of the obligation which is really and materially different in each of them. The obligation as a result of which income is diverted at source is substantially different from the obligation in consequence of which income is applied after its accrual or receipt. The obligation of the former kind ordinarily arises out of an overriding charge existing either upon the assert or its income or is traceable to an assignment or creation of a superior title over it ore superior from a division of the asserts between joint owner or co-owners and required that the income which accrues or is received from such asset should be applied to discharge the said obligation. The obligation of the latter kind in usually undertaken or incurred by the taxpayer, be it by virtue of a decree, settlement, agreement, testamentary direction or the like and required that a portion of one's own income after its accrual or receipts should be paid to another to get relieve of the said obligation. In the former case, there would be diversion of income in such a way that it never became the income of the taxpayer and such artificial or notional income would not be subject to tax in his hands. The latter case would be one of application of income in a particulars manner after its accrual or receipts and the portions of income so applied would be chargeable to tax i the taxpayer's hands. It would thus appear that the decisive factors which distinguishes one class of cases from the other is the nature of the obligation in discharge of which the income is diverted or applied, as the case may be. The test thus laid down is clear, though we may say that like some other tests it may not be easy of application in all cases.'

9. The question posed for our opinion are required to be answered in the light of the above legal position.

10. The assessee has rested her case with regard to the diversion of the income in question at source primarily on the two declarations referred to earlier. Beside, the assessee has relied upon the following circumstances:

(1) The transaction with regard to the gift of the shares in both the firms was assessed to gift-tax;

(2) the respective share income for the relevant assessment years was returned by the assessed to income-tax in the hands of the trust not an a protective or precautionary measure but as and by way of final and substantive assessments; and

(3) The share of loss in the business carried on by Star Radio and Electric Co. (erroneously mentioned as the share of loss in the business carried on by Amrit Chemicals in the statement of case) was debited in the assessee's books in the account of Panna, Pratiksha and Mamta Trust and a corresponding credit entry was given in the books of the trust in the account maintained in the name of the assessee in S.Y. 2025.

11. The Revenue, on the other hand, rested its case with regard to the income-producing asset still continuing to remain with the assessee on the following fact and circumstances:

(1) The recitals in the declarations recorded merely the assignment of 'the benefits' of the share.

(2) The undisputed fact that the amounts standing in the capital account of the two firms in the name of the assessee were not transferred in favour of the beneficiaries of the Panna, Pratiksha and Mamta Trust.

(3) Wealth-tax was continued to be paid by the assessee on the amounts standing to here credit in the said capital account. And

(4) Interest earned by the assessee on the amounts standing in the said capital account was returned and assessed in e individual assessment of assessee even after the transaction in question.

12. We must first turn our attention to the two declarations. Be it noted at this stage that it is an undisputed fact that declarations themselves do not purport to make a gift of the share in the two firms. They are merely a record of the past transaction. The first declaration in point of time relates to the assessee's share in Amrit Chemicals and the material part thereof reads as under:

'That I being desirous of assigning the benefits of 0-1-0 share in the said firm of M/s. Amrit Chemicals, Ahmedabad, donated the same for the benefits of the beneficiaries valued in the trust of 'Panna, Pratiksha and Mamta Trust' executed on October 29, 1966, and the trustees of said trust have accepted the said donation in view of the power vested in them by virtue of clause 17 of the said trust.

I further declare that I hold 0-1-0 share in the said firm of M/s. Amrit Chemicals, Ahmedabad, in the capacity of trustees of the said trust and not in the capacity of the owner of the same.'

13. The second declaration in point of time relates to the assessee's share in Star Radio and Electric Co. The material portion thereof reads as under:

'That I being desirous of assigning the benefits of share of 0.68 paise in the said firm of M/s. State Radio and Electric Co. Ahmedabad, donated the same for the benefit of the beneficiaries names on the trust of 'Panna, Pratiksha and Mamta Trust' executed on October 29, 1966, and the trustees of the said trust have accepted the said donation in view of the power vested in them by virtue of clause 17 of the said trust.

I further declare that I hold 0.68 paise share in the said firm of M/s Star Radio and Electric Co., Ahmedabad, in the capacity of trustee of the said trust and not in the capacity of the partner of the same.'

14. It was strenuously contended on behalf of the Revenue that on a true construction of both the declaration, it is apparent that the gift was only in respect of 'the benefits of.... share' in each firm and that it was that gift which was accepted by the trustees of the Panna, Pratiksha and Mamta Trust. Therefore, the gift was confined only to the right to share in the profit of the firms and not losses. Under such circumstances, who there is merely an assignment of profits, there was truly no diversion at the source. According to the Revenue, the statement contained in the second paragraph of each declaration to the effect that after the gifts the assessee held that share in each firm inthecapacity of the trustees of the Panna, Pratiksha and Mamta Trust and not in the capacity of the owner or partner did not advance the case of the assessee further because the statement was misconceived and went beyond the true scope and effect of the disputed transaction.

15. We are unable to uphold the contention. In the first place, true it is that the declarations refer in the first paragraph to the donation of 'the benefits of share' and that it is 'the said donation' which it stated to have been accepted by the trustees of the said trust. However, we are not prepared to read those words as conveying that the gift was merely of profits without the liability to contributed in case o losses. A mere look at the documents is sufficient to convince that they are not the handiwork of an expert either in language or in law and that the expressions there in are not so precisely used, as in a formal conveyance, that each word signifies a technical or legal meaning. There is no warrant, therefore, to read the words, 'benefits of share' s equivalent to the expression 'benefits of partnership' in s. 30 of the Partnership Act, 1932, and construe then accordingly. Even the collection is different and so is the context. In the next place, in the second paragraph of the declaration pertaining to the share in Amrit Chemicals, the assessee declared that she held the said 'share.... in the capacity of the trustees of the said trust and not in the capacity of the owner of the same' and in the declaration relating to the share in Star Radio and Electric Co. she declared that she held the said 'share.... in the capacity of the trustee of the said trust and not in the capacity of the partner of the same'. The words 'partner' in the latter part of the declaration relating to the assessee's share in Star Radio and Electric Co. is apparently used to convey the meaning 'partners in individual capacity' of it is read in the context. It will be noticed that the word used in the latter parts of the declaration is 'share' and not 'the benefits of share'. The words 'share' is there not qualified or restrict by the use of any adjectival expression and, save and except what was admittedly excepted from the gift of share, it must be taken to comprehend all that is ordinarily comprised therein. The declaration must, therefore, be read as stating in unequivocal terms in the letter part that the assessee had divested herself of the right to share in the profits and also of the liability to contribute to the losses of firms in here individual capacity. In the last place each declaration will have go be resolved upon a harmonious reading of both the parts and by letting one part expound the other. The latter part, in the instant case, is clear and specific. It is not possible to ignore or whittle down the true effect of the word 'share' which is there used in its ordinary sense. It contains an unambiguous declaration of the nature and character of the interest which the assessee held in the share in each of the two firms. It is also not possible to read to the later part as merely setting our the assessees erroneous understanding of the true effect of the transaction as contended by the Revenue. It is a statement of fact and not an inference from a fact. The only manner in which the conflict, if any, in the former and latter parts of the declarations can be resolved, therefore, is to read the words 'the benefits of share' in the former part in the light of the unequivocal declaration in the later part and to interpret them as meaning that the gift was of the right to share in the profits coupled with the liability to contributed to the losses, if any, for two firms. The restriction or qualification, if any, intended to be conveyed by the expression was confirmed to exclusion of: (1) any lien or claim upon the amounts standing to the credit of the assessee in the capital account, and (ii) any rights to reclaim the capital contributed and toe claim the surplus assets, if any as and where the occasion arose. In our opinion, thereof, on a fair, comprehensive and integral of the declarations in all their material parts, it is not passable to uphold the continuation urged on behalf of the REvenue that what the declarations evidence is a transactions where under only the share of profits in each of the firms was gifted to Panna,Pratiksha and Mamta Trust.

16. Fortunately, for the assessee, the declaration are not the only evidence of the disputed transaction and there are other circumstances which lend support to the view which we are inclined to take on a proper reading of those declarations. The most important circumstances which furnishes a true guide to the intention of the parties is an action which was taken shortly after the declaration in relation to the gift of the assessees share on Start Radio and Electric Co. It appears that the said firm had sufferred a loss in the year 1968 and that the loss was apportioned amongst the partners. Since the assessee continued to be a partner of the firm, not withstanding the transaction in question, in vies of the provision of the Partnership Act, here share of the loss was apportioned to her. In her own books of account, the loss was debited in the account maintained in the name of the trust and in the books of the trust, a corresponding credit was given in the account maintained in the name of the assessee. The transactions evidenced by those cross-entries, which are not so far removed from the date of the declaration as to become irrelevant, clearly show that the gift was not merely in respect of the sharing or profits. If profits alone were gifted, there was no question of debiting the loss to the trust. In our opinion, even if there was a room for doubt with regard to the true meaning of the declarations, the same must stand finally resolved by the above mentioned transaction regarding the debit of loss in respect of Star Radio and Electric Co.

17. From the foregoing discussion, it would appear that the assessee has made a gift of here respective share in the two firms in question in favour of the beneficiaries of the Panna, Pratiksha and Mamta Trust and by share we mean the share in profits and losses of the firms. Since that is the true nature of the transactions, there is no manner of doubt that the assessee has divested herself of the income-producing apparatus or asset and that by the overriding title created in favour of the beneficiaries of the Panna, Pratiksha and Mamta Trust, the share income of the assessee standing diverted even before it reaches her. She undoubtedly continues to collect it but she does so not as a part of her own income, but for and on behalf of the beneficiaries of the said trust. Such income could not, therefore, have been taxed in her hands.

18. The decision of the Supreme Court in Murlidhar Himatsingka v. CIT : [1966]62ITR323(SC) , completely supports the view taken by us. The assessee, in that case, was a partner in a registered firm. He entered into as sub partnership with his two sons and a grandson. The deed of sub-partnership provided that the profits and losses of the assessee in the register firm shall belong to the sub-partnership and that they shall be borne and dividend in according with the shares specified therein, but the capital with its assets and liability would belong to the assessee exclusively. The sub-partnership was also registered. In the course of the assessee's assessment to income-tax for three subsequent assessment years, the income falling to the shares of the assessee of the assessee in the main partnership firm was sought to be included in the assessee's individual assessment. The Supreme Court held that since the assessee's share in the losses in the main partnership firm was also to be shared, the right to receive profits and pay losses became an asset of the sub-partnership firm, that there was an overriding obligation and the income of the assessee from the main partnership firm did not remain his income and that, therefore, his shares of income from the main partnership firm had to be included in the assessment of the sub-partnership firm and not in his personal assessment. In reaching the conclusion that the sub-partnership had succeeded in diversion the income of the assessee before it reached him, the Supreme Court attached importance to the circumstances that losses were also to be share by the partner sin the sub-partnership. What became the asset of the sub-partnership firm was the right to receive profits and pay losses. The facts in the case before the Supreme Court and those in the case before us bear a close resemblances. In the present case, as in case before the Supreme Court, what has been diverted by the assessee is his right to receive profits and pay losses in both the firms. The further common factor in both the case is that the amounts standing in the capital account of the firms continued to belong to the assessee and that the sub-partners in the case before the Supreme Court and the beneficiaries of the Panna, Pratiksha and Mamta Trust in the present case had no lien or claim upon the said share capital. It would thus appear that both the cases bear a close resemblance and that the conclusion which we have reached is fortified by the view taken by the Supreme Court in Murlidhar's case : [1966]62ITR323(SC) .

19. It was strenuously contended on behalf of the Revenue, however, that even assuming that what was gifted by the assessee in favour of the beneficiaries of the Panna, Pratiksha and Mamta Trust was the right to receive profits coupled with the liability to contribute to the losses, if any, incurred by both the firms, there was still no diversion of the asset which produced the income with the meaning of s. 60, inasmuch as the share of the assessee in the said two firms consisted not only of the right to receive profits and to contribute to the losses but also to receive back the capital contributed by her as well as the shares in the assets of the firm upon her ceasing to be a partners or upon the firm being dissolved and that since that part of the shares was not transferred by gift, the asset from which the income arose is not transferred. Considerable reliance was placed in support of this submission on the fact that the amounts standing in the name of the assessee in the capital account of the firm still continued to belong to here and that it was not even the assessee's case that anything more than the right to receive profits and contribute to the losses was transferred to the beneficiaries of the Panna, Pratiksha and Mamta Trust.

20. Section 60, which finds placed in the fasciculus of sections grouped under the heading 'Income of other persons, include in assessee's total income', in Chap. V of the Act, reads as under:

'60 Transfer of income where there is no transfer of assets-All income arising to any persons by virtue of a transfer whether revocable to not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income.'

21. Section 63, which, inter alia, defines the word 'transfer' occurring in s. 60 provided that 'transfer' includes any settlement, trust, covenant, agreement or arrangement. The object of this section if to overtake or circumvent the tendency on the part of the tax payers to avoid or reduced tax a liability by a device which consists of the disposal by the taxpayer of a part of his property in such a way that the income would no longer be received by him, while at the same time he retains certain powers over, or interest in, the property. The section, therefore, provides that in all cases where by virtue of a 'transfer' (including any settlement, trust, covenant, agreement or arrangement) income arises to any persons and there is no transfer of the assets from which the income arises, the income may be regarded as the income of the transferor and it should be assessed as such. The fiction operates in cases where the asset which produced the income still remains the property of the transfer but the income lawfully belongs to the transferee. Furthermore, it operates, irrespective of whether such transfer is revocable or not and whether it is effected before or after the commencement of the Act. Be it noted, however, that the section is attracted only when there is a valid and effective transfer in favour of a third party as a result of which the income ceases to belong to the transferor. If there is no valid, effective and complete transfer of the right to receive income, the income would continue to accrue to the transferor under the general law and would be taxable in his hands, even apart from s. 60. In such a case, there is no need to resort to the fiction to tax the income as the income of the transferor. The corresponding provision in the Indian I.T. Act, 1922, was s. 16(1)(c) read with its second proviso. The relevant part of the said provision was toe the effect that in computing the total income of an assessee, all income arising to any person, by virtue of a settlement or disposition, whether revocable or not, and whether effected before or after the commencement of the Indian I.T. (Amendment) Act, 1939, from assets remaining the property of the settler or disponer, shall be deemed to be the income of the settler or disponer. The second provision enacted that the expression 'settlement or disposition' shall for the purpose of s. 16(1)(c) include any disposition, trues, convenient, agreement or arrangement, and the expression 'settler or disponer' in relation to a settlement or disposition shall include any person by whom the settlement or disposition was made.

22. Against the background of the aforesaid statutory provisions, the question which arises for consideration is whether, when a person holding a shares in partnership firm transfers to another only the right to receive share oftheprofits coupled with the liability to contribute to the losses of the firm (without transferring his right, title or interest in the capital contributed to the firm and the further right to re-claim the capital and to share in the assets of The firm if and when the occasion arises), the transaction has resulted in the transfer of the asset from which the income by way of the share in the profits arises to the transferee. The contention of the REvenue is that the share in the firm consists of the entire bundle of rights of a partners and not merely a portion thereof and that unless the entire bundle of such right is transferred, there is no transfer of asset within the meaning of s. 60. The contention on behalf of the assessee, on the other hand, is that since the I.T. authorities are concerned merely with the taxation of income, what has to be seen is whether or not apparatus or asset which has a direct and immediate nexus with the production of income has been transfers and that once it is established that the right to receive profits coupled with the liability to contribute to the losses has been transferred, there is a transfer of asset within the meaning of s. 60. The question is as to which, out of the two contentions, must prevail.

23. Now, we must, at the outset, point out that the problem was not posed before the Tribunals inthemanner in which it is presented to us. The question as to what is the asset from which the income arises in a given case and whether such asset is transferee or not is not pure question of law. Unless the Tribunal is invited to find the essential facts bearing on the question, it would not be possible to answer the question by applying any legal formula. In the context of a transaction involving the gifts of the right to receive profits coupled with liability to contribute to the losses, the question may arises in diverse situations, depending upon factors such s the terms ofthepartnership agreement, the absence or presence of capital contribution, etc. For example, if reliance it so be placed upon the fact that the capital contributed to the firm is to continue to belong exclusively to the transferor even after the gift of the right to share in profits and to contribute to the losses, in order to determined whether the income-producing asset can be said to have been transferred, the Tribunal must be invited to find as a matter of fact that there was an intrinsic or inseparable inter-connection between the contribution of capital and the right to receive profits in the defined proportion. Unless such foundation is laid, it would not be possible to answers the question at the stage of reference, even if the partnership agreement its on record. The partnership agreement would itself be a mere piece of evidence and it may not constitute the whole of the evidence. Under s. 11 of the Indian Partnership Act, 1932, a contract between the partners can be varied by consent of all the partners and such consent may be express or may be impaled by a course of dealing. Therefore, unless precise evidence is led and the finding is invalid as to the immediate and direct nexus between the contribution of the capital and the right to revive profits in the defined proportion, a theoretical question cannot be raised and answered in the reference. In the present case, no such foundation has been laid. In our opinion, therefore, it is not possible to examine on facts the Revenues contention in the form it is raised before us.

24. Even assuming, however, that it is possible to examine this contention in the light of the circumstances relied upon by the Revenue, the short answer to the contention is that the issue is concluded by the decision in Murlidhar's case : [1966]62ITR323(SC) . As earlier pointed out, there's a close resemblance between the two cases. In both the cases, only the right to receive profits coupled with the liability to contribute to the losses (and no more) has been transferred. In both the cases, the amount standing to the credit oftheassessee inthecapital account has contributed to belong to the assessee. If, against the aforesaid factual background, it is found in Murlidhar's case : [1966]62ITR323(SC) , that an overriding obligation was created in favour of the sub-partnership and that the income earned by Murlidhar as and by way of his share in the main partnership firm did not belong to hims it is difficult to understanding how a different conclusion can be arrived at in the present case. It was sought to be faintly urged that the decision in Murlidhar's case : [1966]62ITR323(SC) , did not notice the provision of s. 16(1)(c) of the Indian I.T. Act, 1922, and that when we are called upon the examine the contention in the present case in the light of the analogous provisions of s. 60, different consideration must weigh. It is difficult to appreciate, must less to accept the submission. The law declared by the Supreme Court in such clear terms in analogous fact-situation governed by similar provisions of law is binding on this court. The Supreme Court is presumed to have applied its mind to the relevant provisions of law then existing, even though those provision, in terms, might not have been referred to in the judgment. In other words, it would be legitimate to presume, any, we are duty bound to presume, that the decision in Murlidhar's case was rendered after considering implicitly, if not expressly, the parallel provision of s. 16(1)(c). Under such circumstance, in our opinion, its not open to the Revenue to urge that we should take a different view of the matter.

25. As a result of the foregoing discussion, we come to the conclusion that in the instance case, there was not only a valid and effective gift of the income in favour of the beneficiaries of the Panna, Pratiksha and Mamta Trust but also that the asset giving rise to the income was transferred to those beneficiaries within the meaning of s. 60. The right to receive profits and to contributed to losses of the two firms in question constituted the income-producing apparatus or assert and once that stood transfer by way of gift to the beneficiaries, s. 60 cannot be invoked.

26. It might be mentioned that reliance was placed on behalf of the Revenue on the decision in K. A. Ramachar v. CIT : [1961]42ITR25(SC) and upon certain passages in Lindley on Partnership, 14th Edn., pp. 442 and 462. The decision in Ramachar's case is clearly distinguishable because it was a pure case of assignment of profits (and not losses) by the partner during the period of eight years. Such is not be fact-situation in the instant case. The passage from Lindley on Partnership had no bearing, having regard to the fact that the question has to be examined from the limited view-point of taxation of income and the income-producing apparatus or asset within the meaning of the income-tax law and the meaning which must be taken to have been assigned to the word 'asset' by the binding decision in Murlidhar's case [1966] 62 ITR 322 .

27. In the result, the question referred to us are answered as follows:

28. For the assessment year 1967-68

29. The question is answered in the affirmative, i.e., in favor of the assessee and against the Revenue.

30. For the assessment years 1968-69 and 1969-70

Question No. 1

Answer: In the affirmative, i.e., in favour of the assessment and against the Revenue.

Question No. 2

Answer: In the affirmative, i.e., in favour of the assessee and against the Revenue.

The Commissioner shall pay the costs of the reference to the assessee.


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