1. The following questions are involved in this reference under Section 66(1) of the Indian I.T. Act, 1922 :
'(1) Whether, on the facts and in the circumstances of the case, the assessee-family was precluded, by virtue of the second proviso to Section 30(1) of the Indian Income-tax Act, 1922, from objecting to the inclusion in its total income of the sum of Rs. 26,708 in the appeal filed by it against its own assessment made in the status of a Hindu undivided family ?
(2) In case the answer to the first question be in the negative, whether on the facts and in the circumstances of the case, the Tribunal was justified in excluding from the total income of the assessee-family the sum of Rs. 26,708 being half of the dividends deemed to have been distributed to the firm of M/s. Banshidhar Durgadutt by operation of Section 23A '
2. The assessee is an HUF. Its karta was one Durgadutt Bhagat. After his death the name of his widow, Sm. Siksha Devi Bhagat, was substituted as the appellant before the AAC. Durgadutt was a partner in the firm of M/s. Banshidhar Durgadutt having a half share tharein. The firm of Banshidhar Durgadutt held a number of shares in two companies, viz., M/s. Bhagat Land Development Co. and M/s. Dhanlakshmi Trading Corporation Ltd.
3. Acting under Section 23A of the Indian I.T. Act, 1922, the ITO made an order declaring that the undistributed profits of the aforesaid two companies should be deemed to have been distributed as dividends to its shareholders in view of the unamended provisions which were then in force. Thereafter, the ITO acting under Section 34(1)(b) taxed the assessee in respect of the half share of Durgadutt relating to the deemed dividend deemed to have been received by the said firm.
4. The assessee filed an appeal and contended before the AAC that the deemed dividends could not be included as income of the assessee. It was contended on behalf of the department that the assessee was precluded from raising the said plea inasmuch as the assessee was a partner of M/s. Banshidhar Durgadutt in view of the second proviso to Section 30(1) of the Indian I.T. Act, 1922. The AAC accepted the contention of the department and held that the appeal did not lie.
5. The assessee filed an appeal before the Tribunal. The Tribunal held that the assessee was not precluded from agitating the question of inclusion of the deemed dividend in its own assessment, inasmuch as the assessee was not a partner of M/s. Banshidhar Durgadutt.
6. With regard to the share of dividend deemed to have been distributed to the firm, M/s. Banshidhar Durgadutt, by virtue of its holdings in the two companies and the allocation of such dividend as between the partners of the firm, it was contended that the assessee was the beneficial owner of the half share of the firm's income inasmuch as Durgadutt was the karta of the family and, therefore, the said amounts should be included as the assessee's income. The Tribunal rejected that contention on the ground that the deemed income was of a notional character and could not be assessed in the hands of the beneficial partner like the assessee-family and allowed the appeal.
7. Thereafter, at the instance of the Commissioner, the Tribunal referred the aforesaid questions to this court. A Division Bench of this court heard the reference earlier and directed the Tribunal to submit a supplementary statement of the case which has been done under Section 66(4) of the Act.
8. Mr. Ajit Sengupta, learned counsel for the revenue, repeats before us the arguments made by the departmental representative before the Tribunal on the second proviso to Section 30(1) of the 1922 Act. He argues on question No. 2 that, though in the hands of the firm of Banshidhar Durgadutt the deemed dividend was a notional income, it ceased to be so in the hands of the partners or the beneficial partner of the firm.
9. Mr. R. Murarka, learned counsel for the assessee, however, contends that so far as question No. 1 is concerned it must be decided in favour of the assessee inasmuch as the assessee was not a partner of M/s. Banshidhar Durgadutt. As to question No. 2, he argues that the proceeding under Section 34(1)(b) was confined to the deemed dividend of another firm in which the assessee was a partner as appears from the assessment order for the year 1954-55. He also argues that Section 23(5)(a) applies only to a partner of a firm and has no application in the case of a beneficial partner of a firm and, therefore, the amount in question could not be included in the income of the assessee-family.
10. Now, it has been found by the Tribunal that it was not the assessee-family but Durgadutt who was a partner of the firm of Banshidhar Durgadutt. It has also been found by the Tribunal that the assessee-family was the beneficial owner of the half share of Durgadutt in that firm. Under the second proviso to Section 30(1) of the Act where the partners of a firm are individually assessable on their shares in the total income of the firm, any such partner may appeal to the AAC against any order of an ITO determining the amount of the total income or loss of the firm or an apportionment thereof between the several partners but in respect of matters which are determined by such order no appeal against the assessment of its own total income would lie.
11. In view of the aforesaid findings of the Tribunal, it must be held that the second proviso under Section 30(1) of the Act cannot apply to the assessee-family inasmuch as the assessee-family was not a partner of M/s. Banshidhar Durgadutt. Therefore, the contentions of Mr. Sengupta must fail and we answer question No. 1 in the negative and in favour of the assessee.
12. A partner is entitled to his share of profit of the partnership firm. If the partnership firm is a shareholder of a company and it receives or is deemed to have received any dividend, it is an income of the firm. So far as an individual partner is concerned he being only entitled to the profits in accordance with his share in the partnership, his share represents his income, profits or gains from business. Therefore, the dividend income or the deemed dividend income ceased to be a dividend income so far as he is concerned.
13. The assessee-family was the beneficial owner of the income, profits and gains which Durgadutt was entitled to from the firm of M/s. Banshidhar Durgadutt. Durgadutt had half share in that firm. Therefore, his half share in the firm's income is liable to be taxed in the hands of the assessee-family.
14. In this view of the matter, we are unable to accept the contention of Mr. Murarka that this amount is not assessable in the hands of the assessee-family although Section 23(5) may not apply as contended by him. We, accordingly, answer question No. 2 in the negative and in favour of the revenue.
15. In view of the divided success, we make no order as to costs.
C.K. Banerji, J.
16. I agree.