# FATEHCHAND MURLIDHAR AND ANH • v. COMMISSIONEH OF INCOME-TAX, CALCUTTA

- **Citation:** [1966] Supp. 1 S.C.R. 453
- **Court:** Supreme Court of India
- **Decided:** 1966-07-19
- **Bench:** K. N. Wanchoo Ands. M. S!Kri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/fatehchand-murlidhar-and-anh-v-commissioneh-of-income-tax-calcutta-3874
- **Pages:** 11

## Headnote

Income-tax Act (11 of 1932), s. 23(5)(a:-Scope of-PartnershipSub-partnership between a pa.rtner and strangers-Agreement-to
share profits and loss~s of partner in the Partnershqr--Income from
the Partnership-Whether belongs to partner or sub-partnership.
The assessee was a partner in a registered firm. In 1949, he
entered into a partnership with persons v.rho \vere strangers to the
registered firm and a deed of partnership was executed between them.
It recited that the profits and losses for the share of the asscssce in
the registered firm should belong to the new firm and be divided and
borne by the partners of the new firm in accordance with the shares
specified in the deed.
On the question whether the income of the assessee from the
registered firm for the years 1952-53, 1953-54 and 1955-56, should be
jncluded in his individual assessment,
HELD: The income should be included in the assessment of the
new firm and not in the personal assessment of the assessee.
(i) The new partnership constituted a sub-partnership in respect
of the assessee's share in the registered firm. Tn the case of a subpartnership, it creates a superior title and d1verts the lncome before
it becomes the inoome of the partner, that is, the partner in the main
firm receives the income not only on his o\vn behalf but on behalf
of the partners in the sub-partnership. The fact that a sub-partner
can have no direct claim to the profits vis-a·vis the other partners
of the main firm and that it is the partner alone who is entitled to
the profits vis-a-vis the other partners in the main firn1,
does not
show that the changed character of the partner should not be taken
into consideration for income-tax purposes. r461E-F; 462Cl
Iii) The object of s. 23(5)(a) is not to assess the firm itself but to
apportion the income among the various partners. After the income
has been apportioned, the Income-tax Officer has to find whether it
is the partner who is assessable or whether the income should be
taken to be the real income of some other person. If it is the real
income of another firm, it is that firm which is liable to be assessed
under the section. There is nothing in the section that prevents the
income of the assessee from the registered firm being treated as the
income of the sub-partnership and the section being applied again.
G
r463C, Fl
Charandas Haridas v. Commissioner of Income Taa:,
S.C.R. 296, and Commissioner of Income Tax,
Bombay v.
Tirathdas [19611 3 S.C.R. 634, followed.
[1960] 3
Sitaldas
Commissioner of Income Ta~-:c, Punjab v. Laxmi Trading Co. 24
I.T.R. 173 and R.rititat 13. Daftari v. Commissioner of Income Ta.x,
H
Bombay, 36 I.T.R. 18, referred to.
Mahaliram Santhatia v. Commissioner of Income Tax 33 I.T.R.
261, overruled.
SUPllElfE COURT REPORTS
tJ 966) ~Ul'P. S.tJ,11,
CIVIL APPELLATE JuRJsDICTION: Civil Appeal Nos. 1108 to A
1110 of 1964.
Appeals by special lea.ve from the judgment and order dated
August I, 1962 of the Calcutta High Court in Income-tax Reference Nos. 20 and 21 of 1959.
A. K. Sen, S. C. Mazumdar and J. Dalla Gupta. for the
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appellants.
;
R. M. /lazarnavis, R. Ganapathy Iyer and R. N. Sac!tthey,
fo! the respondent.

## Text

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FATEHCHAND MURLIDHAR AND ANH •
v.
COMMISSIONEH OF INCOME-TAX, CALCUTTA
July 19, 1966
[K. N. WANCHOO ANDS. M. S!KRI, JJ.]
Income-tax Act (11 of 1932), s. 23(5)(a:-Scope of-PartnershipSub-partnership between a pa.rtner and strangers-Agreement-to
share profits and loss~s of partner in the Partnershqr--Income from
the Partnership-Whether belongs to partner or sub-partnership.
The assessee was a partner in a registered firm. In 1949, he
entered into a partnership with persons v.rho \vere strangers to the
registered firm and a deed of partnership was executed between them.
It recited that the profits and losses for the share of the asscssce in
the registered firm should belong to the new firm and be divided and
borne by the partners of the new firm in accordance with the shares
specified in the deed.
On the question whether the income of the assessee from the
registered firm for the years 1952-53, 1953-54 and 1955-56, should be
jncluded in his individual assessment,
HELD: The income should be included in the assessment of the
new firm and not in the personal assessment of the assessee.
(i) The new partnership constituted a sub-partnership in respect
of the assessee's share in the registered firm. Tn the case of a subpartnership, it creates a superior title and d1verts the lncome before
it becomes the inoome of the partner, that is, the partner in the main
firm receives the income not only on his o\vn behalf but on behalf
of the partners in the sub-partnership. The fact that a sub-partner
can have no direct claim to the profits vis-a·vis the other partners
of the main firm and that it is the partner alone who is entitled to
the profits vis-a-vis the other partners in the main firn1,
does not
show that the changed character of the partner should not be taken
into consideration for income-tax purposes. r461E-F; 462Cl
Iii) The object of s. 23(5)(a) is not to assess the firm itself but to
apportion the income among the various partners. After the income
has been apportioned, the Income-tax Officer has to find whether it
is the partner who is assessable or whether the income should be
taken to be the real income of some other person. If it is the real
income of another firm, it is that firm which is liable to be assessed
under the section. There is nothing in the section that prevents the
income of the assessee from the registered firm being treated as the
income of the sub-partnership and the section being applied again.
G
r463C, Fl
Charandas Haridas v. Commissioner of Income Taa:,
S.C.R. 296, and Commissioner of Income Tax,
Bombay v.
Tirathdas [19611 3 S.C.R. 634, followed.
[1960] 3
Sitaldas
Commissioner of Income Ta~-:c, Punjab v. Laxmi Trading Co. 24
I.T.R. 173 and R.rititat 13. Daftari v. Commissioner of Income Ta.x,
H
Bombay, 36 I.T.R. 18, referred to.
Mahaliram Santhatia v. Commissioner of Income Tax 33 I.T.R.
261, overruled.
SUPllElfE COURT REPORTS
tJ 966) ~Ul'P. S.tJ,11,
CIVIL APPELLATE JuRJsDICTION: Civil Appeal Nos. 1108 to A
1110 of 1964.
Appeals by special lea.ve from the judgment and order dated
August I, 1962 of the Calcutta High Court in Income-tax Reference Nos. 20 and 21 of 1959.
A. K. Sen, S. C. Mazumdar and J. Dalla Gupta. for the
B
•
•
appellants.
;
R. M. /lazarnavis, R. Ganapathy Iyer and R. N. Sac!tthey,
fo! the respondent.
The Judgment of the Court was delivered by
Sikri, J. These appeals by special leave are directed against
the judgment of the High Court of Calcutta in two cases referred
to it by the Income Tax Appellate Tribunal, Calcutta Bench,
under s. 66(1) of the Indian Income-tax Act !XI of 1922) hereinafter called the AcO. One of the references (income Tax Reference
No. 20 of 1959) was made at the instance of Mis Fatehchand
Murlidhar, and the other (income Tax Reference No. 21 of 1959)
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was made at the instance of Shri Murlidhar Himatsingka. ·In the
former reference the question referred was "whether on the facts
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and in the circumstances of the case, the income of Murlidhar
Himatsingka for his share in the firm of Messrs. Basantlal Ghan-
;hyamdas for the assessment years 1952-53
and
1953-54
was
rightly excluded from the income of the applicant firm". In the
latter reference the question referred was "whether on the facts
and circumstances of the case the income of Murlidhar Himatsingka for his share in the firm of Messrs. Basantlal GhanshyamE
das for the assessment year 1955-56 was rightly included in his
personal assessment for that year".
The tacts and circumstances out of which these references
were made arc common because the real question raised by these
references is whether the income of Murlidhar Himatsingka, from
the firm of M / s Basantlal Ghanshyamdas, in which he was a partI'
ner, should be included in his personal assessment <'r in the assessment of the firm of Fatehchand Murlidhar, to which
Murlidhar
Himatsingka had purported to assign the profits and losses from
M / s Dasantlal Ghanshyamdas. It is sufficient to take the facts
from the statement of the case in Income Tax Reference No. 21
of 1959. made at the instance of Murlidhar Himatsingka. Murlidhar Himatsingka was carrying on business
in
shellac,
jute,
G
hessian etc. under the name and style of "Fatehchand Murlidhar"
at 14/1, Clive Row and 71, Durlolla Street, Calcutta. He was also
a partner in the registered firm, Messrs Basantlal Ghanshyamdas
having -i2/8 share. On December 21, 1949, a deed of partnership
was executed by the said Murlidhar
Himatsingka
and his two
sons, Madanlal Himatsingka and Radhaballav Himatsingka and
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a grandson named Mahabir Prasad Himatsingka. The deed recited that Murlidlrnr llimatsingka had bec<'>me too old and infirm
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MURLIDHAR V. C. I. T. (Sikri, J.)
455
to look after the various businesses and that Madanlal and Radha
Ballav were already practically managing the business and that
they had signified their intention to become the partners of the
said firm "Fatehchand Murlidhar" and had agreed to contribute
capital, Rupees ten thousand, Rupees five thousand and Rupees
five thousand respectively. The parties further agreed to become
and be partners in the business mentioned in the deed. Clause S
of this deed is important for our purpose and reads as follows: -
"The profits and losses for the share of the said Murlidhar Himatsingka as partner in the said partnership firm
of Basantlal Ghanshyamdas shall belong to the present
partnership and shall be divided and borne by the parties
hereto in accordance with the shares as specified hereafter, but the capital with its assets and liabilities will
belong exclusively to Murlidhar Himatsingka the party
hereto of the First Part and the Parties hereto of the
Second, Third and Fourth parts shall have no lien or
claim upon the said share capital or assets of the party
hereto of the first part in the business of the said Messrs
Basantlal Ghanshyamdas".
Clause IO provides:
"The Profits and losses (if any) of the partnership
including the shares of the profits and losses of the said
partnership firm of Basantlal Ghanshyamdas aforesaid
shall be divided and borne by and between the parties
in the following manner: -
Party hereto of the First Part-Six annas
(Murlidhar Himatsingka).
Party hereto of the Second Part-Four annas
(Madanlal Himatsingka).
Party hereto of the Third Part-Three annas
(Radhaballav Himatsingka).
Party hereto of the Fourth Part-Three annas
(Mahabirprasad Himatsingka).
Clause 11 provides that "all partnership moneys and securities
for money shall as and when received be paid into and deposited
to the credit of the partnership account". In clause 13 it is provided that "the party hereto of the First Part shall have the sole
control and direction of the partnership business and his opinion
shall prevail if there be any dispute between the parties hereto".
Clause 16 provides that "the net profits of the partnership after
payment of all outgoings interest on capital or loans and subject
to the creation and maintenance of any reserve or other fund
shall belong to the parties and the losses, if any, shall also be
borne and paid by the parties in proportion to their shares as
stated in Clause IO hereof''.
For the assessment year 1955-56 the Income Tax Officer
included the income from the share in the registered firm of
L/S5SCI-31
SUPR'f'.JU: COURT REPORTS
(1966)
SUI"l'.
8.C.R.
Basantlal Ghanshyamdas in the individual assessment of Murli·
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dhar Himatsingka, Murlidhar Himatsingka appealed to the Appel·
late Assistant Commissioner. Referring to s. 23(5)(a) of the Act,
he held that as Murlidhar Himatsingka was a partner in the
registered firm of Hasantlal Ghanshyamdas, his share had to be
assessed in his hands. He further held that the agreement was
merely an arrangement which came into force after the profits
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were earned and not before they were earned. He held that this
agreement being a subsequent disposition of profits, after they
had been earned, had to be disregarded.
Murlidhar Himatsingka appea'ed to the Income Tax Appel·
late Tribunal. The Appellate Tribunal heard this appeal together
with the two appeals filed by Mis Fatehchand Murlidhar. The
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Appellate Tribunal, agreeing with the views of the
Appellate
Assistant Commissioner, dismissed the appeal.
The High Court held that it was a case of diversion of in·
come by Murlidhar Hirnatsingka after it had accrued to him and
it was not a diversion at the source by any overriding interest.
In the result, the High Court answered the questions in the affir·
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mative in both the references. Murlidhar Hirnatsingka and Mis
Fatehchand Murlidhar having obtained special leave, the appeals
are now before us.
The learned counsel for the appellants, Mr. A. K. Sen, con·
tends that a partner"s share is property capable of being assigned,
mortgaged, charged and dealt with as any other property, and
where a partner sells his share to a stranger, though that stranger
does not become a partner yet the vendor partner holds the property as trustee for the purchaser and consequently the income
received by the partner is not his income but the income of the
purchaser. He says that similarly if a partner assigns part of his
share the same result fol'ows. He further contends that in this
case, by the agreement dated December 21,
1949, Murlidhar
Hirnatsingka had entered into a sub-partnership with his two sons
and a grandson in respect of his share in the firm Basantlal Ghan·
shyamdas, and it is the sub-partnership that is entitled to the
income from the firm Basantlal Ghanshyamdas and not Murli·
dhar Himatsingka who must be taken to be acting on behalf of
the firni Fatehchand Murlidhar. Mr. Sen further urges that the
lndian Income Tax Act taxes real income and not notional in·
come and the real income in this case belonged not to Murlidhar
but to Mis Fatehchand Murlidhar.
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Mr. Hazarnavis, on the other hand, contends that this agreement is a mere device for dividing income which had accrued to
Murlidhar Himatsingka among his sons and grandson.
In
the
alternative he contends that the Indian Income Tax Act does not
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contemplate the application of s. 23<5)(a) twice. He says that the
firm of Basantlal Ghanshyamdas was a registered firm and the
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MURLIDBAR V. C. I. T. (Sikri, J.J
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Income Tax Officer was bound, under s. 23(5)(a), to assess Murlidhar in respect of the income received from this firm; he could
not carry this income to the assessment of another registered firm,
namely, Fatehchand Murlidhar, and then apply s. 23(5)(a).
The first point that arises is whether the agreement dated
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December 21, 1949, has succeeded in diverting the income from
Murlidhar's share in Mis Basantlal Ghanshyamdas to Mis Fatehchand Murlidhar before it reached Murlidhar. What is the effect
of the agreement? In our opinion the agreement dated December 21,
1949, constituted a sub-partnership in respect of Murlidhar's share
in MI s Basantlal Ghanshyamdas. The High Court in this conc
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nection observed : -
"At best it could be called a sub-partnership entered into by Murlidhar with strangers in respect of his
share of the partnership".
In arriving at this conclusion we attach importance to the fact
that losse~ were also to be shared and the right to receive profits
and pay losses became an asset of the firm, Fatehchand Murlidhar.
In Commissioner of Income-tax, Bombay v. Sitaldas Tirathdas,(') Hidayatullah, J., speaking for the Court, laid down the
following test for determining questions like the one posed above.
After reviewing a number of authorities, he observed: -
"In our opinion, the true test is whether the amount
sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in
every case, but it is the nature of the obligation which
is the decisive fact.
There is a difference between an
amount which a person is obliged to apply out of his
income and an amount which by the nature of the obligation cannot be said to be a part of the income of the
assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where
the income is required to be applied to discharge an
obligation after such income reaches the assessee, the
same consequence, in law, does not follow. It is the first
kind of payment which can truly be excused and not the
second. The second payment is merely an obligation to
pay another a portion of one's own income, which has
been received and is since applied. The first is a case in
which the income never reaches the assessee, who even
if he were to collect it, does so, not as part of his income
but for and on behalf of the person to whom it is payable".
(') [1961] 3 S.C.R. 634, 642.
St:PRKJ,n; COt:RT REPORTS
[ 1966) Sl'PP, S.C. R.
This test c~early shows that it is not every obligation to apply
. income in a particular way that results in the diversion of income
before it reaches the asse5fce. In its judgment in the above case
(Sitaldas Tirathdas v. Commissioner of Income-tax.
Bombay(')
the High Court of Bombay had observed: -
"It is not essential that there should be a charge, it
is quite sufficient if there is a legally enforceable claim".
These
observations
must be treated as unsound. The test laid
down by this Court is quite clear, though like some other tests
it is not easy of application in all cases.
The other cases cited before us, namely, K. A. Ramachar v.
Commissioner of lncf'me-tax, Madra,(') and Provat Kumar Mitter
v. Commissioner of Income-tax, West Bengal(') do not assist us
in disposing of this case because the facts are not similar. Only
two cases, one of the Bombay High Court and the other of the
Calcutta High Court, have close resemblance to the facts of this
case and we may now consider them. In Rati/al B. Daftri v. Commissioner of Income-tax. Bombay(') the assessee who was one of the
sixteen partners in a
registered
partnership
had
contributed
Rs. 25,000/- out of the capital of the partnership, Rs. 3,45,000/-.
In order to contribute this capital of Rs. 25,000/- he had entered
into an agreement with four others on the same date on which
the registered partnership deed was executed, which provided for
contribution of diverse sums by the four others and it was further
provided in this agreement that the five parties would share the
profits and losses in proportion to their individual contribution.
It was also mentioned that the terms and conditions mentioned
in the registered partnership were to be applicable and binding
on them. The Bombay High
Court held that the assessce was
liable to be assessed only in respect of his share o[ the profits of
the registered partnership. In coming to this conclusion, the High
Court relied on two other decisions of the same Court, namely,
Mori/a/ Manekchand v. Commissioner of Income-tar(') and Sitalda~ Tirathdas v. Commissioner of Income-tar(')
As pointed out
by the learned counsel for
the
respondent,
Mr.
Ha1.arnavis,
Sitaldas Tirathdas v. Commissioner of Income-tax(') was reversed by
this Court in Commissioner of Income-tax v. Sita/dal' Tirathdas(')
Hidayatullah, J .. at p. 374 of his judgment reversing the judgment of
the Bombay High Court. had also referred to Mori/al Manekchand
v. Commissioner of Income-tax(') but did not expressly dissent from
this case. In our opinion the case of Rati/al B. Daftari v. Commissioner of Income-tax, Bombay(') was rightly decided, although the
reasoning given by the learned Judges of the High Court has to some
extent not been accepted by Hidayatullah. J., in Commissioner
of Income-tax v. Sitaldas Tirathdas('). We say so far the follow-
('I 33 I.T.R. 39J,31}4.
I') 42 I.T.u. 26.
(') 41 l.T.n. (;~4,
(') 36 I.T.R. 18.
1'1 311.T.R. 73;,
<'J 41 l.T.I\. 36;, [1961] 3 8.C·R. 6~4.
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MURLIDHAR v. C, I. T. (8ikri, J.)
459
ing reasons. Lindley on Partnership, 12th Edition, page 99, deals
with sub-partnerships as follows: -
"A sub-partnership is, as it were, a partnership within
a partnership; it presupposes the existence of a partnership to which it is itself subordinate. An agreement to
share profits only constitutes a partnership between the
parties to the agreement. 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 cal'ed
a sub-partnership, that is to say, it makes the parties to
it partners inter !Ye; but it in no way affects the other
members of the principal firm".
He further states: -
"Since the decision of the House of Lords in Cox
· v. Hickman (1860) 8 H. L. Cas. 268, a sub-partner could
not before the Partnership Act, 1890, be held liable to
the creditors of the principal firm by reason only of his
participation in the profits thereof, and there is nothing
in that Act to alter the law in this respect".
Sub-partnerships have been recognised in India and registration
accorded to them under the Indian Income Tax Act. (See Commissioner of Income-tax, Punjab v. Laxmi Trading Company)(')
The question then arises is whether the interest of the subpartnership in the profits received from the main partnernship
is of such a nature as diverts the income from the original partner
to the sub-partnership. Suppose that A is carrying on a business
as a sole proprietor and he takes another person B as a partner.
There is no doubt that the income derived by A after the date
of the p~rtnership cannot be treated as his income; it must be
treated as the income of the partnership consisting of A and B.
What difference does it make in principle where A is not carrying on a business as a sole proprietor but as one of the partners
in a firm? There is no doubt that there is this difference that the
partners of the sub-partnership do not become partners of the
original partnership. This is because the Law of Partnership does
not permit a partner, unless there is an agreement to the contrary,
to bring strangers into the firm as partners. But as far as the partner himself is concerned, after the deed
of agreement of sub'
partnership, he cannot treat the income as his own. Prior to the
case of Cox v. Hickman('), sub-partners were even liable to the
creditors of the original partnership. Be that as it may, and whether he is treated as an assignee within s. 29 of the Indian Partnership Act, as some cases do, a sub-partner has definite enforceable rights to claim a share in the profits accrued to or received
by the partner.
('I 24 I.T,R. 173.
(') [1860] 8 H.L. Cas. 268.
SUPRBllB OOURT REPORTS
[1966] SUPP. 8.0.B,
The decision of this Court in Chararulas Haridas v. CommisA
sioner of Income-tax (') seems to support, at least by inference, this
conclusion. In that case the facts were as follows. Charandas Haridas was the karta of a Hindu undivided family consisting of his
wife, his three minor sons and himself. He was a partner in six
managing agency firms and the share of the managing agency
commission received by him as such partner was being assessed
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as the income of the family. By a memorandum executed by the
co-parceners of the family a partial portion of the income from
the managing agency was brought about.
The memorandum stated: -
"We have decided that ........ .in respect of the commission which accrues from !st January, 1946 and received after that date each of us becomes absolute owner
of his one-fifth share and therefore from that date ......
these commissions cease to be the joint property of our
family".
This Court held that the document effectively divided the income
and the income could no longer be treated as that of the Hindu
undivided family. This case shows that although the karta continued to be a partner in the managing agency firm, yet the character in which he received the income vis-a-vis the Hindu undivided
family had changed and the Court gave effect to the change of
his position. Previously he was acting as a karta on behalf of the
Hindu undivided family in the managing agency firm; later he
became a partner on behalf of the members of the family.
It
seems to us that when a sub-partnership is entered into the partner changes his character vis-a-vis the sub-partners and the Income
Tax authorities, although other partners in the original partnership are not affected by the changes that may have taken place.
In our view the Calcutta High Court decision relied on by
the High Court and the learned counsel
for
the respondent
(Mahaliram Santha/ia v. Commissioner of Income-tax(')
was
wrongly decided. The facts in that case were these. Mahaliram
Santhalia was a partner in the firm MI s Benares Steel Rolling
Miils. He was also a partner in another firm named MI s Radhak:issen Santhalia. By agreement dated April 3, 1944, between the
partners of M / s Radhakissen Santhalia, it was provided that the
partnership income from MI s Benares Steel Rolling Mills would
belong not to Mahaliram Santhalia individually but to the firm
of M / s Radhakissen Santhalia. The High Court of Calcutta held
that the agreement amounted only to voluntary disposition by
Mahaliram Santhalia of his income and there was no diversion of
income to the firm MI s Radhakissen Santhalia before it became
(1) [1960) 3 S.C.R. 296.
(1) 88 I.T.R.1181.
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MURUDHAR V. c. i. T. (Sikri, J.;
461
Mahaliram Santhalia's income. The High Court observed at
p. 272:-
"lf, as Mr. Mitra conceded, Mahaliram was rightly
taken as a partner of the Benares Steel Rolling Mills in
personal capacity and if a one-fourth share of the income was rightly allocated to him, any agreement between him and his three partners of the firm of Radhakissen Santhalia, under which the income was to be
treated as the income of the whole firm, could only be
an agreement by which Mahaliram Sanihalia was allowing what was really his income to be treated as the income
of the firm or, in other words, as agreement by which he
was applying or distributing an income which he had
already himself earned and received. Such application
or distribution would be a voluntary act of Mahaliram
Santhalia in respect of a sum which it was conceded, had
rightly been included in his own total, income and, therefore was his own income. If the moment the share of
the income from the Benard; Steel Rolling Mills
was allocated to Mahaliram Santhalia, it became his income and liable to be inclut.'!..1 in his own total income for
the purpose of his personal asses~ment, an agreement by
him with other persons regarding the rights to that income
could only be a voluntary disposition of his income by
him. No question of a diversion by superior title could
possibly arise."
With· respect, we are unable to agree with most of this reasoning.
In our view, in the case of a sub-partnership the sub-partnership
creates a superior title and diverts the income before it becomes
the income of the partner. In other words, the partner in the main
firm receives the income not only on his behalf but on behalf
of the partners in the sub-partnership. The Calcutta High Court
also seems to be, in our opinion, erroneously impressed by the
argument that "It is impossible to see how, after a proportionate
share of the income had thus been included in the total income of
a partner for the purposes of his personal assessment, it could
then go anywhere else or could be further divided between such
partners and other parties." We will deal with this aspect while
dealing with the second point raised by the learned counsel for
the revenue.
Mr. Hazarnavis, in this connection, drew our attention to the
following passage in K. A. Ramachar v. Commissioner of lncometax. Madras('):-
"This, in our opinion. is neither in accordance
with the law of partnership nor with the facts as we have
found on the record. Under the law of partnership, it
is the partner and the partner alone who is entitled to
(') 42 I.T.R. 25, 29.
462
8t;PRBl!Jo~ COURT REPO&TS
[1966) HUPP. S.C.I<.
the profits. A stranger. even if he were an assignee, has
and can have no direct claim to the profits. By the deeds
in question, the assessee merely allowed a payment to
his wife and daughters to constitute a valid discharge in
favour of the firm; but what was paid was, in law, a portion of his profits. or, in other words, his income".
This passage was also relied on by the High Court. In our opinion,
these observations have to be read in the context of
the facts
found in that case. In that case it was neither urged nor found
that a sub-partnership came into existence between the assessee
who was a partner in a firm and his wife. married daughter and
minor daughter. It was a pure case of assignment of profits (and
A
B
not losses) by the partner during the period of eight years. FurC
!her the fact that a sub-partner can have no direct claim to the
profits vis-a-vis the other partners of the firm and that it is the
partner alone who is entitled to profits vis-a-vis the other partners
does not show that the changed character of the partner should
not be taken into consideration for income tax purposes.
This
Court held in Commissioner of Income-tax, Gujarat
v.
Abdul
Rahim(') that registration of the firm could not be refused on the D
ground that a partner was a binamidar and that a benamidar is
a mere trustee of the real owner and he has no beneficial interest
in the profits of the business of the real owner. Under the law of
pannership it is the benamidar who would be entitled to receive
the profits from the other partners but for income tax purposes
it does not mean that it is the benamidar who alone can be assessed in respect of the income received by him.
In conclusion we hold that the High Court was in error in
holding that there was no question of an overriding ogligation in
this case and that the income remained the income of Murlidhar
Himatsingka in spite of the sub-partnership created by him under
the agreement dated December 21, 1949.
•
The second contention raised by Mr.
Hazarnavis was not r·
debated in the High Court, but in our opinion, there is no substance in this contention. We have already mentioned that a benamidar can be a partner in a firm. Now if Mr. Hazarnavis's contention is right, under s. 25<5)(a) of the Act it is only he who
could be assessed, but there is no warrant for this proposition. In
Commissioner of Income-tax, West Bengal v.
Ka/u
Babu La/
Chand(') this Court mentioned with approval Kaniram llazarimul/ G
v. Commissioner of Income-tax(') where income from a partnership received by a ktJrta was held to be assessable in the hands of
Hindu Undivided famlly.
This Court observed at p. 12 as follows: -
"If for the purpose of contribution of his share of
H
the capital in the firm the karta brought in monies out
(')
5~ 1.1'.R Ml.
I') 37 I.T.R. 123.
('l. 27 l.T.R. 294.
•
)
..
•.
•
A
>
B
c
D
E
F
G
MUP..LIDHAR V. C. I. T. (8ikr/, J,)
of the till of the Hindu undivided family, then he must
be regarded as having entered into the partnernship for
the benefit of the Hindu undivided family and as between him and the other members of his family he would
be accountable for all profits received by him as his share
out of the partnership profits and such profits would be
assesseable as income in the hands of the Hindu undivided family. Reference may be made to the cases of
Kaniram Hazarimull v. Commissioner of Income-tax(')
and Dhanwatav v. Commissioner of
Income-tax(') in
support of this view".
463
The object of s. 23(5)(a) is not to assess the
firm itself but to
apportion the income among the various partners. After the income has been apportioned, the Income Tax Officer has to find
whether it is the partner who is assessable or whether the income
should be taken to be the real income of some other person. If
it is the real income of another firm, it is that firm which is liable
to be assessed under s. 23(5)(a) of the Act.
This view was taken by the Bombay High Court in Ratilal
B. Daftri v. Commissioner of Income-tax('). The Bombay High
Court observed at p. 24 as follows:-
"The principle asserted in that case is that even in
the
case
of a partner in
a
registered
firm,
when the question arises as to his individual assessment,
what is to be considered is not the income allocated to his
share by employing the machinery of section 23(5)(a),
but his real income, and that real income is what remains
after deducting the amounts which may be said to have
been diverted and never constituted his real income and
such amounts will have to be excluded before his real
income is reached".
In conclusion we hold that there is nothing in s. 23(5)(a) that
prevents the income from the firm Basantlal Ghanshyamdas being
treated as the income of MI s Fatehchand Murlidhar and s. 23(5)
·(a) being applied again.
In the result we accept the appeals, set aside the judgment of
the High Court and answer the questions in the negative. The
appellants will be entitled to costs here and in the High Court. One
hearing fee.
Appeals allowed.
(') 27 I.T.R. 294.
(') 32 I.T.R. 682.
(') 36 I.T.R. 18.