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Prahladrai Agarwala Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 202 of 1969
Judge
Reported in[1973]92ITR130(Cal)
ActsIncome Tax Act, 1961 - Section 64; ;Income Tax Act, 1922 - Section 16(3)
AppellantPrahladrai Agarwala
RespondentCommissioner of Income-tax
Appellant AdvocateP.K. Pal and ;Sanjoy Bhattacharjee, Advs.
Respondent AdvocateA.K. Bose and ;A.K. Sen Gupta, Advs.
Cases ReferredCol. H.H. Sir Harinder Singh v. Commissioner of Income
Excerpt:
- .....had been and at the material time also was a partner in a firm called m/s. ramesh & co. in this firm the assessee had 8 annas share and the balance was shared by three other partners, kunjilal, assessee's father, hariram, assessee's brother, and one jagdish prosad, a stranger. from his account with the said firm the assessee made two gifts to his wife, kaushalya debi, rs. 21,000 on 10th november, 1960, and rs. 30,000 on the 28th november, 1960. the assessee also made a gift of rs. 11,000 to his mother, smt. chilli bai, on 28th november, 1960, by similarly drawing from his account with the firm.3. smt. chilli bai also received another gift of rs. 20,000 from her husband, the said kunjilal, which was also made by him similarly drawing from his account with the firm. the assessee's wife,.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question has been referred to this court:

'Whether, on the facts and in the circumstances of the case, the share of the profit of assessee's wife was includible in the total income of the assessee under Section 64(iii) of the Income-tax Act, 1961 ?'

2. The assessee is an individual. The reference arises in respect of the assessment year 1962-63 for which the accounting year is 2018 R.N. corresponding to the period 26th March, 1961, to 13th April, 1962. The assessee had been and at the material time also was a partner in a firm called M/s. Ramesh & Co. In this firm the assessee had 8 annas share and the balance was shared by three other partners, Kunjilal, assessee's father, Hariram, assessee's brother, and one Jagdish Prosad, a stranger. From his account with the said firm the assessee made two gifts to his wife, Kaushalya Debi, Rs. 21,000 on 10th November, 1960, and Rs. 30,000 on the 28th November, 1960. The assessee also made a gift of Rs. 11,000 to his mother, Smt. Chilli Bai, on 28th November, 1960, by similarly drawing from his account with the firm.

3. Smt. Chilli Bai also received another gift of Rs. 20,000 from her husband, the said Kunjilal, which was also made by him similarly drawing from his account with the firm. The assessee's wife, Smt. Kaushalya Debi, as well as Smt. Chilli Bai, assessee's mother, became partners with three others in the newly constituted firm of M/s. Kunjilal Hariram & Co. The five partners of the firm were: Moharilal Agarwala, assessee's father, Hariram Agarwala, assessee's brother, who was also a partner with the assessee in the firm of M/s. Ramesh & Co., Chilli Bai, assessee's mother, Smt. Kaushalya Debi, assessee's wife, and Jagdish Prosad Gupta, a stranger. The partnership deed provided that the business was to commence from 12th November, 1960, and the said deed was drawn up on 10th November, 1960. The preamble to the deed stated as follows:

'Whereas the partner of the first part (Jagdish Prosad Gupta) who has extensive and outstanding talent of organisation in jagree and grains trade but little finance requested the partners of the first four parts to enter into co-partnership with him on contributing the necessary finance to carry on business in jagree and grains and also act as commission agents in jagree, grains and allied commodities to which request they acceded.'

4. Clause 4 of the partnership deed provided as follows :

'That the partners of the first four parts shall initially contribute Rs. 25,000 each to be put in within 6 months from the commencement of the partnership. The said contribution augmented by further deposits and profits or depleted by withdrawals and losses shall carry interest at the rate of 6% per annum. The amount, if any, standing to the credit of the partner of the fifth part shall carry interest at the same rate.'

5. It appears that the assessee's wife, Kaushalya Debi, contributed as capital on the 12th November, 1960, Rs. 21,000, which came out of the gift of the assessee on 10th November, 1960, and 28th November, 1960. The assessee's wife also contributed Rs. 30,000 as capital which also came out of the same gift made on 10th November, 1960.

6. The Income-tax Officer making the assessment for the assessment year 1962-63 included the profits of the wife from the firm under Section 64(iii) of the Income-tax Act, 1961. The assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. The assessee, thereafter, preferred an appeal before the Income-tax Appellate Tribunal. The assessee conceded before the Tribunal that the interest received by the assessee's wife in respect of the capital contribution to the firm of M/s. Kunjilal Hariram & Co. was to be included in the total income of the assessee as it had been earlier conceded before the Appellate Assistant Commissioner, It was, however, contended before the Tribunal that the balance of the share of the profit of the assessee's wife was not to be included on the ground that the assessee's wife had become the partner of the firm in her own right and the fact that the capital with which she became the partner had been provided as a gift by the assessee did not matter. The Tribunal came to the conclusion that the share of the profit was to be included under Section 64. The Tribunal came to a finding that, in the instant case, the assessee's wife was admitted to the partnership because of contributing capital to the firm as a pre-condition to the admission. In those circumstances the Tribunal was of the opinion that the profit arising to the wife from the said partnership should be included in the assessee's income under Section 64(iii) of the Income-tax Act, 1961. The Tribunal further accepted the argument made on behalf of the revenue that there could not be any distinction between the interest earned and the share of profit in the partnership firm. The Tribunal pointed out that in so far as the interest was concerned, inasmuch as it had been conceded that the interest was to be included, there was no reason why the share of profit should also not be included. Upon these considerations, the Tribunal confirmed the order of the Appellate Assistant Commissioner and dismissed the appeal. Thereupon, an application having been made the aforesaid question of law has been referred to this court.

7. We are not concerned in this case with the question whether interest arising from the investment made in the firm by the assessee's wife out of the gift made by the assessee should be included in the assessee's hands. We are concerned with the point whether the share of profit earned by the assessee's wife in the new firm, referred to hereinbefore, should be included in the assessee's income under Section 64(iii) of the Income-tax Act, 1961. It will, therefore, be necessary to set out the relevant provisions of Section 64 of the Act.

'64. Income of individual to include income of spouse, minor child, etc.--In computing the total income of any individual there shall be included all such income as arises directly or indirectly--......

(iii) subject to the provisions of Clause (i) of Section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.'

8. The aforesaid section is in Pari materia with the provisions of Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922. It is not disputed, in the instant case, that the assets were transferred directly to the spouse by the assessee. The only question with which we are concerned in this reference is whether the share of profit earned by the wife from the new firm as a partner can be said to be income arising either directly or indirectly from the assets transferred by the assessee. As mentioned hereinbefore, the assessee became the partner for the purpose of contributing the capital and the profit was earned out of the profits made by the firm on the capital contributed by the assessee. In those circumstances, it might be contended that the profits arose indirectly from the assets. The expression 'profit arising indirectly from the assets transferred' came up for consideration before the Supreme Court in the case of Commissioner of Income-tax v. Prem Bhai Parekh, : [1970]77ITR27(SC) . There the assessee who was a partner in a firm having 7 annas share therein retired from the firm on 1st July, 1954. Thereafter, he gifted Rs. 75,000 to each of his four sons, three of whom were minors. There was a reconstitution of the firm with effect from 2nd July, 1954, whereby the major son became a partner and the minor sons were admitted to the benefit of partnership in the firm. The question that came up for consideration before the Supreme Court was whether the income arising to the minors by virtue of their admission to the benefits of 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. The Supreme Court found that the connection between the gifts made by the assessee and the income of the minors from the firm was a remote one and it could not be said that the income arose directly or indirectly from the transfer of the assets. The income arising to the three minor sons of the assessee by virtue of their admission to the benefits of the partnership in the firm, it was held, could not be included in the total income of the assessee. The Supreme Court observed at page 30 of the report as follows :

'Before any income of a minor child can be brought within the scope of Section 16(3)(a)(iv), it must be established that the said income arose directly or indirectly from assets transferred directly or indirectly by his father. There is no dispute that the assessee had transferred to each of his minor sons a sum of Rs. 75,000. It may also be that the amount contributed by those minors as their share in the firm came from those amounts. But, the question still remains whether it can be said that the income with which we are concerned in this case arises directly or indirectly from the assets transferred by the assessee to those minors. The connection between the gifts mentioned earlier and the income in question is a remote one. The income of the minors arose as a result of their admission to the benefits of the partnership. It is true that they were admitted to the benefits of the partnership because of the contribution made by them. But there is no nexus between the transfer of the assets and the income in question. In cannot be said that that income arose directly or indirectly from the transfer of the assets referred to earlier. Section 16(3) of the Act created an artificial income. That section must receive strict construction as observed by this court in Commissioner of Income-tax v. Keshaval Lallubhai Patel, : [1965]55ITR637(SC) . In our judgment before an income can be held to come within the ambit of Section 16(3), it must be proved to have arisen--directly or indirectly--from a transfer of assets made by the assessee in favour of his wife or minor children. The connection between the transfer of assets and the income must be proximate. The income in question must arise as a result of the transfer and not in some manner connected with it.'

9. It is clear that the Supreme Court emphasised that the income arose primarily because of the participation as a partner by the minor sons in the reconstituted firm and that participation of the minor sons in the reconstituted firm depended upon not any action on the part of the asses-see in connection with the gift or transfer, but on the agreement between the partners of the reconstituted firm. The Supreme Court also noted that the minors were admitted to the benefits of the firm because they had agreed to contribute to the capital, but even then the Supreme Court was of the opinion that the profits arose riot because of the gifts, but because of their participation and admission to the firm which was dependent upon the agreement of the other parties. The aforesaid decision of the Supreme Court was distinguished by the Andhra Pradesh High Court in the case of Potti Veerayya Sresty v. Commissioner of Income-tax, : [1972]85ITR194(AP) . There, the Andhra Pradesh High Court observed that the Supreme Court in the aforesaid case of Commissioner of Income-tax v. Prem Bhai Parekh, : [1970]77ITR27(SC) came to the conclusion that the profits that the minor had derived from the partnership firm for his share was not in consequence of his investing the assets transferred to him by his father, but on account of the fact that the other partners had agreed to admit him to the benefits of a partnership. It was observed by the Andhra Pradesh High Court that, on those facts, the Supreme Court had held that there was no nexus between income earned and the asset transferred. In the case before the Andhra Pradesh High Court the wife had invested assets in a business of her own and earned an income. In the instant case also if we separate the question of interest from the share of profits then the profits earned by a partner cannot be said to be the result of the assessee's making the gift, but it was because of the assessee's wife's participation in the partnership which was because of the agreement with the other partners. The profits did not arise as a consequence of investing the gifts made, but on account of the participation in the partnership firm in agreement with other partners. In the case of Smt. Mohini Thapar v. Commissioner of Income-tax, : [1972]83ITR208(SC) the assessee made certain cash gifts to his wife. From out of these cash gifts, she purchased certain shares and invested the balance in deposit. The question was whether the income derived by the assessee's wife from the deposits and shares had to be assessed in the hands of the assessee under Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922.

10. It was held by the Supreme Court that the transfer in question was direct transfer and the income realised by the wife was indirectly received in respect, of the transfer of the cash made by the assessee. There was a proximate connection between the income and the transfer of the assets made by the assessee. Therefore, the Supreme Court in those circumstances held that the income derived by the assessee's wife was to be included in the total income of the assessee under Section 16(3)(a)(iii) of the Act of 1922. Reliance was placed before the Supreme Court on the decision of Commissioner of Income-tax v. Prem Bhai Parekh, : [1970]77ITR27(SC) and the Supreme Court observed that the aforesaid decision was inapplicable to the facts of the case before the Supreme Court, that is to say, in the case of Smt. Mohini Thapar. v. Commissioner of Income-tax, : [1972]83ITR208(SC) . In the instant case, before us also, it is not a question of investment but a case of earning profit by a partner in a firm but in respect of which the partner had contributed the capital derived as a gift from the assessee. Counsel for the revenue drew our attention to certain observations of the Supreme Court in the case of Col. H.H. Sir Harinder Singh v. Commissioner of Income-tax, : [1972]83ITR416(SC) . There the Supreme Court, referring to the decision of Commissioner of Income-tax v. Prem Bhai Parekh observed that the court could not ignore the clear and unambiguous expression contained in Section 16(3) of the Act and the expression should receive a proper interpretation. Counsel for the revenue sought support from the aforesaid observation for contending that the Supreme Court had doubted the observations in the case of Commissioner of Income-tax v. Prem Bhai Parekh and invited us to construe the expression 'indirectly' to include the share of profits earned by the assessee's wife from the partnership firm as coming within the mischief of the provisions of the section. It is true that the section speaks of income arising both directly or indirectly. Therefore, the expression 'indirectly' must receive proper construction and should be given meaning. But the expression 'indirectly' should not be construed to include consequences or income which have too remote a connection with the assets transferred. In the instant case, as in the case of Commissioner of Income-tax v. Prem Bhai Parekh, the share of profits arose primarily because the partnership made a profit and though that had connection with the gift it did not arise as a result of the gift; secondly, the income arose from the share of profits only because other partners had agreed to take the assessee's wife as a partner and had allowed her to contribute to the partnership firm. This was also not as a result of the gift. In those circumstances, it appears to us that the connection between the income of the share of profits and the gifts made by the assessee to his wife was tooremote to be included in the total income under the provisions of Section 64(iii) of the Income-tax Act, 1961.

11. The Tribunal was unable to accept the distinction between the interest earned by an investment made by the assessee's wife and the share of profit earned by the assessee's wife in the partnership firm. It is true that both these had connection with the gifts made. But in the case of interest there is no question of the participation in the business of the firm in agreement with Other partners. Interest earned by an investment in a partnership firm is just like interest earned from a bank or other places of deposit of money. Such interest earned can be included under Section 64(iii) of the Act.

12. In the aforesaid view of the matter, we, therefore, answer the question referred to us in the negative and in favour of the assessee.

13. Each party will pay and bear its own costs.

Hazra, J.

14. I agree.


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