JAGADISAN J. - This is a reference under section 66 of the Indian Income-tax Act and the question that has been referred to us is as follows :
'Whether the assessment of the aforesaid sum of Rs. 15,232 is legal ?'
The assessee, a private limited company, advanced a loan of Rs. 5 lakhs in 1954 to one Ramaswami Naidu. It is alleged that this amount was lent to Ramaswami Naidu with a view to enable him to acquire 4,000 shares of the face value of Rs. 100 each in Kadiri Mills Ltd., and to enable him to obtain a 6 annas share in the firm of Messrs. Krishna & Co., who are the managing agents of the mills. It is now common ground that this loan was repaid by Ramaswami Naidu to the assessee partly in cash and partly by transfer of 2,000 shares of the Kadiri Mills Ltd. valued at Rs. 3 lakhs.
The assessee and Ramaswami Naidu entered into an agreement, the terms whereof were reduced to writing and embodied in an instrument dated October 30, 1956. We shall refer to the terms of the agreement in detail later. The substance of the agreement is that the assessee should get 3 annas share from Ramaswami Naidu out of his 14 annas share in the managing agency remuneration earned by Krishna & Co. of which he was a partner. In pursuance of this agreement, the assessee received from Ramaswami Naidu a sum of Rs. 15,232 in January 1957. This amount was computed as follows :
'Assessees share of commission out of the net managing agency commission : Rs. 27,639; deduct income-tax and super-tax thereon : Rs. 12,407; balance Rs. 15,232.'
In respect of the calendar year 1956, the previous year for the assessment year 1957-58, Krishna & Co. was assessed as an unregistered firm, but treated as a registered firm under section 23(5) (a), and Ramaswami Naidu was assessed on his share income of the firm. The sum of Rs. 12,407 is perhaps included in the amount paid by Ramaswami Naidu by way of income-tax and super-tax in respect of his share income of the firm of Krishna & Co. There are no materials to show that Ramaswami Naidu deducted Rs. 12,407 as tax on Rs. 27,639 deductible at source and paid that tax to the department. In the agreed statement of facts, the Tribunal observes : 'Besides this, there was no other payment of tax by Ramaswami Naidu referable to Rs. 12,407'.
For the year ended April 12,1957, the relevant previous year for the assessment year 1957-58, the assessee returned a gross income of Rs. 27,639. The assessee contended before the Income-tax Officer that the net amount of Rs. 15,232 received from Ramaswami Naidu was not taxable as income as the said amount had already suffered tax in the hands of Ramaswami Naidu. The officer rejected this contention and the assessee went up on appeal to the Appellate Assistant Commissioner. Before the appellate authority the assessee urged that the assessment to tax of this sum of Rs. 15,232 would amount to double taxation, that the relationship between the assessee and Ramaswami Naidu was that of partners, and that therefore section 14(2) (a) of the Act would come into operation, that even if their relationship was not that of partners they must be treated as an association of individuals, and that the provisions of section 14(2) (b) of the Act would apply. The contentions were, however, rejected by the appellate authority. There was further appeal to the Tribunal by the assessee, reiterating the said contentions but that was also unsuccessful. Thereafter the question set out above has been referred to us under section 66(1) of the Act by the Tribunal.
Mr. Swaminathan, learned counsel for the assessee, urged the following contentions before us. 1. The assessment of the amount in question of Rs. 15,232 is illegal and improper as such an assessment would amount to a double taxation of income which is not permissible. 2. The assessee and Ramaswami Naidu are members of an unregistered firm, and the sum of Rs. 15,232 received by the assessee is exempt from taxation under section 14(2) (a) of the Act. 3. In the alternative if the plea of partnership covered by ground No. 2 fails, the relationship of the assessee and Ramaswami Naidu must be regarded as an 'association of individuals' and that the amount would not be taxable by reason of the exemption contained in section 14(2) (b) of the Act.
It will now be convenient to refer to the terms of the agreement dated October 30, 1956, between the assessee and Ramaswami Naidu. Ramaswami Naidu is referred to therein as the first party and the assessee as the second party. The document recites that the first party was in need of financial assistance and that the second party advanced a sum of Rs. 5 lakhs in 1954, and that the first party utilised that amount and acquired 4,000 shares of the Kadiri Mills (Coimbatore) Ltd. and 6 annas share in the partnership and goodwill of G. Krishna & Co., the managing agents of the said mills. The document further recites that this loan of Rs. 5 lakhs had been repaid by the first party by transferring 2,000 shares of the Kadiri Mills of the total agreed value of Rs. 3 lakhs, and by paying in cash another Rs. 2 lakhs. In consideration of this financial assistance rendered by the second party to the first party, the first party agreed to pay to the second party a three annas share out of his 14 annas share of managing agency remuneration earned by Krishna & Co. as the managing agents of Kadiri Mills. The following clauses are relevant and may therefore be extracted : 1. The first party shall pay to the second party 3/14ths of the net managing agency remuneration earned by the first party as and for his fourteen annas share of the managing agency remuneration earned by Messrs. G. Krishna & Co. as the managing agents of Kadiri Mills (Coimbatore) Ltd., Oddarpalayam. 2. For the purpose of determining the amount payable to the second party under clause 1 above, the net managing agency remuneration earned by the first party shall be computed in the manner following namely :- Deduct the following sums from the managing agency remuneration..... : (i) A sum of Rs. 9,000..... on account of allowance in respect of the salary of the managing partner, irrespective of the actual salary paid to the managing partner under the deed of partnership of G. Krishna & Co. (ii) All amounts paid on account of income-tax, super-tax, surcharge, business profits tax, if any, and all other taxes, whatsoever, payable to the Central Government, the State Government and/or any other local body.
An amount equal to 14/16 of the net amount after the above deductions shall be deemed to be the net managing agency remuneration earned by the first party as and for his 14 annas share of the managing agency remuneration earned by G. Krishna & Co. 3. The amount payable to the second party, as aforesaid, shall be paid in respect of the managing agency remuneration earned by G. Krishna & Co. for the calendar year 1952 and for every succeeding year and shall continue to be paid as long as all the following conditions co-exist : (i) That the first party or his son and/or his or their descendants in the male line, have at least a three annas share in the managing agency of the Kadiri Mills (Coimbatore) Ltd., Oddarpalayam, whether such managing agents be Messrs. G. Krishna & Co. or any other individual, firm or body corporate. (ii) That the second party and/or its nominees now holding 2,000 shares in the capital of the Kadiri Mills (Coimbatore) Ltd. continue to hold the same, unless the whole or any part thereof has been dealt with in accordance with clause 6 below..... 5. The first party shall not, during the time this agreement is in force, voluntarily part with or transfer any more than a eleven annas share out of the fourteen annas share he now owns in the partnership of G. Krishna & Co. except with the consent in writing of the second party.'
The terms of the above document are fairly clear and do not admit of any doubt or ambiguity. Ramaswami Naidu was entitled to a fourteen annas share of the managing agency remuneration earned by G. Krishna & Co. of which he was a partner. Out of this fourteen annas share he carved out a three annas share and agreed to hand it over to the assessee each year within thirty days after the managing agents became entitled to receive the remuneration from the Kadiri Mills. The agreement of Ramaswami Naidu to pay the three annas share to the assessee amounts to a disposal of a portion of the income earned by him as a partner of Krishna & Co. It has to be noted that the assessee became entitled only to a three annas share of the net managing agency remuneration and that net amount was to be arrived at by deduction a sum of Rs. 9,000 said to be the salary of the managing partner, irrespective of the actual salary paid to him, and deducting all taxes and public charges levied by the Central Government or the State Government or any other local body. What is transparently clear is that the assessee is not entitled to participate directly or indirectly in the whole or part of the managing agency remuneration earned by Krishna & Co. Indeed the obligation undertaken by Ramaswami Naidu under this document is an absolute obligation, which is quite independent of the factual continuance of Krishna & Co. as managing agents. In effect Ramaswami Naidu has agreed that the assessee would be entitled to the three annas share whoever be the managing agents, whether it be Krishna & Co. or any other firm of partnership or any body corporate. Except for the fact that the amount which Ramaswami Naidu has agreed to pay to the assessee was described in terms of a share of the managing agency remuneration, there is absolutely nothing in the document to indicate that the assessee became clothed with any right to the managing agency remuneration as such obtained through the medium of Ramaswami Naidu, the partner of Krishna & Co.
We shall now examine the contention whether the assessee can legitimately avoid paying tax on this sum of Rs. 15,232 admittedly received by it in the year of account, on the ground that the assessment of the amount to income-tax in its hands would amount to double taxation by the department. The contention urged is that the total managing agency remuneration earned by Krishna & Co. had suffered tax in the hands of that firm, and that the amount received by the assessee being only a part of that amount should not again be subjected to tax. The principle that the same income cannot be taxed twice over in the hands of the same person is now well settled. In fact the revenue has never claimed such a right. The Income-tax Act does not contain any express prohibition against repeated taxation of the same income in the hands of the same assessee, first as income from one source, and next as income from another source. But it is implicit in the stature that income is chargeable only once. Income-tax is one tax and it would be manifestly unjust to hold that income assessed under one head or source should again be taxed under a different category. To quote the observation of Lord Sumner in Bradbury v. English Sewing Cotton Co. Ltd. :
'Though the Acts nowhere say so, this principle has long been assumed. Whether the contention may ever be raised that the Crown is not bound by mere conventions of fair-play current from time to time, hitherto, at any rate, the binding force of this principle has not been questioned.'
Now the precise scope of this principle is not that income which has borne tax in the hands of a particular individual becomes wholly immune from taxation in all its subsequent stages of devolution or passage. To understand the rule against 'double taxation', as it is called, in this fashion would be to misconceive and misinterpret the provisions of the taxing Act. An assessee is no doubt saved from the harassment and inconvenience of two income-taxes on the same income in his hands. But it would be a misnomer to call the amount in his hands that remains after payment of tax as an 'income-tax free' fund which can never be subjected to taxation whatever destination it reaches and whichever way it may pass through. We cannot do better than quote the observations of Rowlatt J. in Commissioners of Inland Revenue v. Sanderson as the learned judge combined vast experience in tax law with happy felicity of expression. At page 44 the learned judge observed :
'It is often said, but not always understood, that in income-tax the same income is not taxed twice. That means that you cannot tax it more than once on one passage of the money in the form of one sort of income. If a man earns Pounds 100 by his profession and gives it to his son to clothe himself, or his daughter, for the year, the son or the daughter does not pay income tax; there is only one passage of the money in the form of that income. If a man earns Pounds 100 and pays it to somebody else for services rendered in a trade or profession by that other person, the sum of Pounds 100 enters upon another passage, in another form of income, and therefore attracts income tax again.'
Adopting this test, which has been accepted as sound in several decisions of the English courts, what we have now to find out is whether the receipt of Rs. 15,232 by the assessee is in the 'same passage' as the passage through which the money paid by the Kadiri Mills Ltd. passed into the hands of G. Krishna & Co. In other words did the assessee receive the amount as part of the managing agency remuneration payable by the mills to the managing agents. We have no doubt that the answer to this question should be clearly in the negative. The character in which the assessee received the money from Ramaswami was not in the character of managing agents. The assessee had nothing to do with the managing agency contract between Krishna & Co. and Kadiri Mills. The assessee received the amount only in pursuance of the terms of the contract by which Ramaswami Naidu undertook to pay a three annas share of what he would get as the partner of Krishna & Co. which in turn were the managing agents of the mills. In the hands of the assessee the amount did not represent the managing agency remuneration. It was a mere receipt of income by the assessee under a valid contract entered into by it with Ramaswami Naidu. The first contention of the learned counsel for the assessee, therefore, fails.
The second contention that was urged was on the footing of an alleged partnership between the assessee and Ramaswami Naidu. The question whether there is a partnership as alleged depends almost entirely on the terms of the agreement set out above. Did the parties thereto agree to engage in a business with a view to profit The answer to this question must be derived from the construction of the document. If on its true construction the relationship of co-partners between the parties can properly the inferred, the failure of the parties to describe themselves as partners may not avail to defeat its legal effect.
'If they have in fact stipulated for all the rights of partners an agreement that they shall not be partners is an useless protest against the consequences of the real agreement.' Lindley on Partnership, page 50).
We have, therefore, to ascertain the true import of the document, whether it contains all the elements necessary to constitute a partnership as the term is defined in the partnership Act.
Section 4 of the Partnership Act is in these terms :
'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.
Persons who have entered into partnership with one another are called individually partner and collectively a firm and the name under which their business is carried on is called the firm name.'
In order to attract the above definition the following ingredients must be conjointly present : (1) An agreement between two or more competent persons; (2) This agreement must be to share the profits of a business; (3) the business must be carried on by all or any of the contracting parties acting for all. 'Business' is no doubt a word of large amplitude and comprehends any trade, occupation or profession. A notable feature of the document in question is that it does not contain an agreement to share the profits of a business. On the terms of the document, it is almost impossible to hold that the assessee and Ramaswami Naidu combined themselves to be engaged in the business of the managing agency of the Kadiri Mills. The agreement to pay 3 annas share undertaken by Ramaswami Naidu cannot certainly be construed as sharing of the profits of the business of managing agency in the ratio of three annas and eleven annas between the parties. Even assuming that there was an agreement to share the profits of a business, namely, the business of the managing agency, it cannot be pretended that Ramaswami Naidu, one of the alleged partners, carried on that business for and on behalf of the assessee. That the business must be carried on by all or any of the contracting parties acting for all is an essential requisite for a valid partnership in law. Clause 1 of the document quite expressly states that 14 annas share earned by Ramaswami Naidu as partner of Krishna & Co. is his income.
A case in point is the decision of the Bombay High Court in Hirabai v. Bhagirath & Co. In that case the plaintiff-company was appointed as the managing agents of certain mills called Bhagirath Spinning, Weaving and . The mills came under financial difficulties and a scheme for its reconstruction was submitted to and sanctioned by the High Court of Bombay. In accordance with that scheme, the plaintiff-company surrendered its managing agency to the defendant company for a period of 15 days on condition that it should be paid a quarter of the commission earned by the defendant-company from the managing agency. The mills went into liquidation and before that the defendant-company earned commission as managing agents of a sum of the Rs. 39,958-5-4. The plaintiff filed the suit to recover the sum of Rs. 11,584 due for a quarter share of the commission in terms of the scheme of reconstruction. Of the several defences raised to the action one was that the suit was not maintainable as there was a partnership between the plaintiff and the defendant and the partnership was not registered as required by section 69 of the Partnership Act. The question for consideration, therefore, was whether under the terms of the reconstruction by which the plaintiff-company became entitled to a quarter share of the managing agency remuneration, a partnership was validly constituted. It was held that on those facts a partnership could not be inferred. We must point out that in that case there was an express clause in these terms : 'It (the quarter share of the managing agency commission) is to be paid to the plaintiff-company in the capacity of a sleeping partner.' Even so the Bombay High Court held that a partnership was not constituted. At page 180, Lokur J. observed thus :
'Thus although the right to participate in the profits of a business is a strong test of a partnership, yet whether that relationship does or does not exist must depend on the real intention and contract of the parties. The true test is whether such a participation of profits constitutes the relationship of principal and agent between the person taking the profits and those actually carrying on the business. In the present case there is nothing in the agreement to suggest that the defendant-company was to carry on the business of the mills-company on behalf of itself and the plaintiff-company. The responsibility for the management of the business was completely taken over by the defendant-company..... The mere fact that in the agreement itself the plaintiff-company was described as a sleeping partner cannot alter the real nature of the transaction.'
The ratio of the Bombay decision, with which we respectfully agree, is that unless the relationship of principal and agent is also constituted and unless the partnership business is carried on by all the partners or by some on behalf of all, no valid partnership can be inferred in law. In our opinion in this case the terms of the agreement relied upon as the foundation of the jural relationship of a partnership do not lend themselves to the interpretation that the assessee constituted Ramaswami Naidu as its agent in the matter of carrying on the business of managing agency or earning the remuneration of such agency.
Mr. Swaminathan contended that the assessee was a sub-partner with Ramaswami Naidu in respect of the main partnership business of the managing agency of Krishna & Co. He relied upon the following passage in Lindleys book at page 69, to bring out the concept of a sub-partnership :
'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.'
A sub-partnership must, as the term itself connotes, be itself a partnership. If the relationship between the alleged sub-partners cannot be that of partners, there cannot be a sub-partnership merely because the subject-matter in respect of which the parties entered into an agreement relates to a partnership business. The passage from Lindley quoted above makes this much clear, namely, that if one of the partnership business enters into another partnership in respect of his share income, the latter partnership can be called a sub-partnership, which really means that there are two partnerships, a partnership within a partnership, the one main and the other subsidiary, the one primary and the other secondary. We do not understand the above passage as an enunciation of a legal principle that whenever a partner enters into an agreement regarding his share of the partnership income with another, irrespective of the terms and legal effect of such an agreement, a sub-partnership should be presumed. As stated already, it is inconceivable that there can be a sub-partnership without the requirements of law regarding the constitution of partnership being fully satisfied. A sub-partnership is as much a partnership as the main partnership and if it is impossible to infer the relationship of partners between the parties to the so called partnership, there cannot, of course, be a sub-partnership in law.
Mr. Swaminathan referred us to the decision of the Supreme Court in Steel Brothers & Co. Ltd. v. Commissioner of Income-tax. The question there was whether a document constituted a partnership between three companies, A, B and C, or whether it was a partnership only between A and B companies. A and B were two companies carrying on business in Burma rice. C was another such company. A held all the shares of the C company and was also its managing agent. An agreement was entered into between A, B and C for the amalgamated working of the Burma rice business of the three companies. Under the terms of the said agreement A company was to be in management of the whole business on behalf of B and C as well. At the end of each accounting year the profit or loss of this combination of A, B and C was distributed at various percentages, A and C being jointly allotted a percentage and B separately given its percentage. No separate share for A or C was mentioned. The combination made applications under section 26A of the Income-tax Act for registration of the partnership. This application was signed only by A and B on the footing that the agreement made only A and B partners. The contention of the applicant for the registeration was that C was not a partner. It was held on the facts that the relationship brought into existence by the agreement between the three companies, A, B and C, was a relationship of partners between all the three. At page 11, Bhagwati J., delivering the judgment of the court, observed as follows :
'a true construction of the agreement dated 29th November, 1928, we have, therefore, come to the conclusion that Burma was a partner along with Steels and Ellermans in the Combination and had a joint share with the Steels in the profit or loss of the Combination..... There was a sharing of the profit or loss of the business of the Combination and there was also an agency in so far as Steels were to manage and carry on the business on behalf of all the partners of the Combination. Thus all the ingredients of partnership were satisfied and it is futile to urge that the agreement was a hybrid document which was a tripartite agreement so far as the business of the Combination was concerned and was a partnership agreement only between two partners, viz., Steels and Ellermans.'
This decision turned on the terms of the document which came in for construction. We are unable to see how the decision can help the assessee in the present case to advance the contention that a partnership or a sub-partnership was constituted between Ramaswami and the assessee company. Incidentally, we may point out that the Supreme Court relied upon the subsistence of the agency of Steels to carrying on the combination business as one of the essential ingredients necessary to constitute a partnership in law. This was also the view of the Bombay High Court referred to above and with which we have already expressed out concurrence. In our opinion, the plea of the assessee that the document in question constituted a partnership between the assessee company and Ramaswami is not well founded.
What remains is the consideration of the question, whether the assessee and Ramaswami Naidu can be treated as an association of individuals within the meaning of the said expression under the Act. An association of persons is no doubt a unit of assessment under the Act. A combine for a joint venture or grouping for a common enterprise is a distinctive feature of 'an association of persons', which has been personified by the Act. It is the income earned as a result of the common endeavour that is chargeable to tax as the income of the associated personnel. A mere joint receipt is not sufficient to club the persons receiving it as such an association. Again we have to look into the document dated October 30, 1956, to find out whether the assessee and Ramaswami Naidu banded themselves together for the common endeavour of earning the managing agency remuneration payable by the mills. In our opinion, the terms of the document cannot and do not lead to such an inference. The agreement between Ramaswami and the assessee is quite a simple one and that is a contract between them by which Ramaswami Naidu agreed to pay a definite fraction of his managing agency income to the assessee. Mr. Swaminathan laid great emphasis on the that the agreement permitted Ramaswami Naidu to take Rs. 9,000 as salary and to have that amount deducted in ascertaining the net managing agency remuneration from and out of which the assessee was to be paid. He contended that this deduction of salary is a strong indication that there was a common endeavour by the contracting parties to earn the income. The learned counsel sought to make good this argument by relying upon the decision of this court in M. M. Ipoh v. Commissioner of Income-tax. It was held in that case that in order to be an assessable entity as an association of persons, the persons should have engaged themselves in a joint enterprise for the purpose of producing income, profits and gains. That case was concerned with a family consisting of a father and a minor son. The father exercised his right under the Hindu law to effect a division. Did the division automatically bring into existence an association of persons between the dividend members was one of the questions raised. It was held that it was impossible to hold that an association of persons was the result of the division, though such a view might be taken where the members of the family are all sui juris. The passage that was relied upon by Mr. Swaminathan is at page 305 :
'..... ten per cent. commission of the profits was being given to the M. S. M. M. firm in respect of its management of these properties. It seems to be fairly well established, therefore, that subsequent to this partition, the properties in question were managed by the M. S. M. M. firm, and that firm while taking to itself 10 per cent. of the profits as commission was crediting the balance in the M. M. Ipoh account to Meyyappa and his son, Chettiappa.'
In the case cited above, there was definite evidence of a joint enterprise by reason of a common management of the business. But such proof is lacking in the instant case. The allowance of Rs. 9,000 said to be salary in favour of Ramaswami Naidu cannot indicate or lead necessarily to the inference that Ramaswami was in management of the managing agency business on behalf of the assessee. Even as taxes and all public charges were allowed to be deducted an amount of Rs. 9,000 per year was also allowed to be reserved by Ramaswami Naidu in computing the net amount from and out of which the assessee was to be paid. In our opinion the right of Ramaswami Naidu to keep the amount of Rs. 9,000 every year alleged to be by way of salary is too thin a foundation to erect the structure of 'association of persons' between the contracting parties.
The Tribunal was right in holding that the terms of the document dated October 30, 1956, did not create either a partnership in law or an association of persons.
The reference is answered against the assessee, who will pay the costs of the department. Counsels fee Rs. 250.
Reference answered against the assessee.