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Commissioner of Income-tax Vs. S. Chandappa Iyer (Died) and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 278 of 1970 (Reference No. 66 of 1970)
Judge
Reported in[1976]103ITR810(Mad)
ActsIncome Tax Act, 1961 - Sections 64
AppellantCommissioner of Income-tax
RespondentS. Chandappa Iyer (Died) and ors.
Appellant AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Respondent AdvocateS.V. Subramaniam, Adv. for ;Subbaraya Iyer, Padmanabhan and Ramamani for assessee Nos. 2 to 4
Cases ReferredPrahladrai Agarwala v. Commissioner of Income
Excerpt:
- .....the interest on the sum contributed by her as capital cannot be included in the assessment of the assessment year 1962-63 '2. the assessee transferred a sum of rs. 60,000 to his wife by name tulasi ammal on 7th january, 1958. she entered into a partnership with her son, hunumantha rao, under a deed dated 6th july, 1958. the firm was known as indian sandal oil industries. this firm was granted registration under the income-tax act. we are concerned in the present reference with the assessment year 1962-63. for the earlier year, namely, 1961-62, she had earned a sum of rs. 2,385 as her share of profits and this sum was sought to be included in the assessment of the assessee. the assessment so made was disputed in appeal. for the assessment year 1962-63, she earned a sum of rs. 4,189 as.....
Judgment:

Sethuraman, J.

1. The Appellate Tribunal has referred the following question for decision :

' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the share of the assessee's wife in the firm, M/s. Indian Sandal Oil Industries, other than the interest on the sum contributed by her as capital cannot be included in the assessment of the assessment year 1962-63 '

2. The assessee transferred a sum of Rs. 60,000 to his wife by name Tulasi Ammal on 7th January, 1958. She entered into a partnership with her son, Hunumantha Rao, under a deed dated 6th July, 1958. The firm was known as Indian Sandal Oil Industries. This firm was granted registration under the Income-tax Act. We are concerned in the present reference with the assessment year 1962-63. For the earlier year, namely, 1961-62, she had earned a sum of Rs. 2,385 as her share of profits and this sum was sought to be included in the assessment of the assessee. The assessment so made was disputed in appeal. For the assessment year 1962-63, she earned a sum of Rs. 4,189 as interest on the said sum of Rs. 60,000 transferred by her husband. The share of profit exclusive of the said interest allocated to her came to Rs. 49,122. These two amounts totalling to Rs. 53,311 came to be included in the assessee's hands under the provisions of Section 64(iii) of the Income-tax Act, 1961.

3. The assessee appealed to the Appellate Assistant Commissioner. This appeal came to be heard along with the appeal for 1961-62 and also for the assessment year 1963-64. The Appellate Assistant Commissioner found that Tulasi Ammal had not been admitted as a partner in the firm because of her contribution of Rs. 60,000 and that she was an active partner taking part in the conduct of the business of the firm. He, therefore, accepted the contention of the assessee that to the extent of Rs. 49,122 as far as this year is concerned, the sum was not liable to be assessed in his hands. Interest of Rs. 4,189 earned in this year by her on the capital was considered to be assessable in the hands of the assessee.

4. The department appealed against the decision of the Appellate Assistant Commissioner to the Tribunal. The Tribunal took the view that Tulasi Ammal could not be considered as having been admitted as a partner in the firm by virtue of her contribution of capital of the sum of Rs. 60,000 and that her share in the profit other than the interest on this sum could not be included in the assessment of the assessee. At the instance of the department the question as extracted already has been referred to this court.

5. This question has to be considered in the light of the decision of the Supreme Court rendered under Section 16(3) of the Indian Income-tax Act, 1922, in Commissioner of Income-tax v. Prem Bhai Parekh, : [1970]77ITR27(SC) . In that case the assessee was a partner in a firm having 7. annas share therein. He retired from the firm on the 1st of July, 1954. He gifted Rs. 75,000 to each of his four sons, three of whom were minors. There was a reconstitu-tion of the firm with effect from 2nd July, 1954, whereby the major son became a partner and the minor sons were admitted to the benefits of the partnership. The question was whether the income arising to the minors by virtue of their admission to the benefits of the partnership in the firm could be included in the total income of the assessee under Section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, which corresponds to Section 64 of the present Act. The Tribunal found that the capital invested by the minors in the firm had its source in the gift made in their favour by their father. The Supreme Court held that the connection between the gift made by the assessee and the income of the minors from the firm was a remote one and that it could not be said that the income arose directly or indirectly from the transfer of the assets and that the income arising to the three minor sons of the assessee by virtue of their admission to the benefits of partnership in the firm could hot be included in the total income of the assessee. In the light of this decision, we have to see whether Tulasi Ammal became a partner by virtue of her contribution of capital or independently of it. In the present case she did not become a partner by virtue of her contribution of capital. As already noticed, it has been found by the Appellate Assistant Commissioner, and concurred in by the Tribunal, that she had not been admitted as a partner to the firm because of her contribution of capital and that she was an active partner taking part in the conduct of the firm. In view of this finding it follows that the income earned by her is referable to her being admitted as a partner in the firm by virtue of her own right.

6. This question has directly come up for decision by the Calcutta High Court in Prahladrai Agarwala v. Commissioner of Income-tax, : [1973]92ITR130(Cal) . In that case an individual made gifts to his wife and the wife invested the sum in a firm and became a partner. She received a share of profits of the firm. The question was whether the share of profit was liable to be assessed in the hands of the husband. It was held that as the profit arose primarily because the partnership made a profit, though that has a connection with the gift, it did not arise as a result of the gift and that the income arose only because the other partners had agreed to take her as a partner. As taking her as a partner was not as a result of the gift, it was held that the income of the share of profits in the firm could not be included in the total income of the husband under the provisions of Section 64(iii). We are of the same view. It follows that the question referred to us has to be and is accordingly answered in the affirmative and in favour of the assessee. The assessee will have his costs. Counsel's fee Rs. 250.


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