High Court Of Gauhati
Radha Krishna Jalan vs. CIT
Section 10(2A)
Asst. Year 1996-97, 1997-98
D. Biswas & Smt. A. Hazarika, JJ.
IT Appeal Nos. 52 & 53 of 2004
29th August, 2007
Counsel Appeared
P. Agarwalla with U. K. Barthakur, for the Appellant : U. Bhuyan, B. K. Das, B. Chakravorty & A. Hazarika, for the Respondent
JUDGMENT
D. Biswas, J. :
These appeals under s. 260A of the IT Act, 1961, are directed against the order dt. 17th Sept., 2003, passed by the Tribunal, Gauhati Bench, Gauhati in ITA Nos. 49/Gau/2001 and 33/Gau/2001 relevant to the asst. yrs. 1996-97 and 1997-98. The appeals were admitted by this Court by the order dt. 10th Sept., 2004, for hearing on the following questions of law : In IT Appeal No. 52 of 2004 :
“(a) Whether, on the facts and in the circumstances of the case and on interpretation of the provisions of sub-s. (2A) of s. 10 of the Act, the Tribunal was justified in holding that the income received by the assessee is not exempt under s. 10(2A) of the Act ?
(b) Whether, on the facts and in the circumstances of the case, can it be said that the income received from the parent firm by the appellant sub-partnership does not possess the same character of share of income and, therefore, is not entitled to the exemption ?
(c) Whether, on the facts and in the circumstances of the case and when the assessed total income of the parent firm is Rs. 39,426 only, can there be an assessed income of Rs. 1,83,13,990 in the hands of the appellant sub-partnership when its sole source of profit/loss is 45 per cent in the said parent firm ?
(d) Whether, on the facts and in the circumstances of the case, the sub-partnership constituted as M/s Radha Krishna Jalan is liable to levy of tax ?
(e) Whether, on the facts and in the circumstances of the case, the conclusion of the Tribunal that the income of the appellant is not exempt from the levy of tax, does not lead to double taxation of the same income ?”
In IT Appeal No. 53 of 2004 : “(a) Whether, on the facts and in the circumstances of the case and on interpretation of the provisions of sub-s. (2A) of s. 10 of the Act, the Tribunal was justified in holding that the income received by the assessee is not exempt under s. 10(2A) of the Act ? (b) Whether, on the facts and in the circumstances of the case, can it be said that the income received from the parent firm by the appellant sub-partnership does not possess the same character of share of income and, therefore, is not entitled to the exemption ? (c) Whether, on the facts and in the circumstances of the case and when the assessed total income of the parent firm is Rs. 42,750 only, can there be an assessed income of Rs. 2,89,09,160 in the hands of the appellant sub-partnership when its sole source of profit/loss is 45 per cent in the said parent firm ? (d) Whether, on the facts and in the circumstances of the case, the sub-partnership constituted as M/s Radha Krishna Jalan is liable to levy of tax ? (e) Whether, on the facts and in the circumstances of the case, the conclusion of the Tribunal that the income of the appellant is not exempt from the levy of tax, does not lead to double taxation of the same income ?”
2. We have heard Mr. R.P. Agarwalla, learned senior counsel, assisted by Mr. U.K. Barthakur, learned counsel for the appellant, and also Mr. U. Bhuyan, learned standing counsel for the Revenue.
3. M/s Rock International is a partnership firm constituted by a partnership deed executed on 14th Feb.,1995, by Shri Radha Krishna Jalan and two others. The firm is engaged in the business of supply and export of rock, stone boulders and other goods including the business of import and export of different commodities. Shri Jalan as per terms of the partnership had a share of 45 per cent in the profit and loss of M/s Rock International. The said Shri Jalan also entered into an agreement with four others on 1st April, 1995, to constitute a sub-partnership firm, namely, M/s Radha Krishna Jalan. The agreement provided that the partners would supplement the funds required to be invested by Shri Jalan in the partnership business of M/s Rock International. The holding of Shri Jalan is at 60 per cent while the remaining four is at 10 per cent each. The appellant filed its return of income for the asst. yr. 1996-97 on 16th July, 1999, in response to a notice under s. 148 of the IT Act, 1961, showing the assessable income as nil. The assessee claimed exemption under s. 10(2A) of the Act. The assessment was completed on 9th June, 2000, under s. 143(3)/147 of the Act. The income was assessed at Rs. 1,83,13,990. The exemption and deduction claimed under ss. 10(2A) and 80HHC have been rejected by the AO. The appellant firm preferred an appeal before the CIT(A), Guwahati. The CIT(A) allowed the appeal permitting the claim of exemption and deduction under ss. 10(2A) and 80HHC of the Act. The Revenue being aggrieved, preferred an appeal before the Tribunal at Guwahati. The appeal was numbered as ITA No. 49/Gau/2001. The learned Tribunal allowed the appeal by the consolidated order passed on 17th Sept., 2003, reversing the order passed by the CIT(A) and restoring that of the AO. On this background, the appellant firm is on appeal before this Court.
4. It is considered worth to place on record that the income of the parent firm, namely M/s Rock International is mainly from export business which is exempt under s. 80HHC of the Act. The gross income of the parent firm for the assessment year was Rs. 4,07,07,008 and after exemption under s. 80HHC, the balance income of Rs. 19,583 which arose out of domestic sale was assessed to tax. The AO determined the income at Rs. 39,426 after rejection of the claim of deduction of Rs. 19,846 on account of donation. There was no appeal by the Revenue against this assessment order. According to the appellant, as the income of the parent firm is from export business and has been finally assessed in the hands of the parent firm, the said amount is also exempt under s. 80HHC, when it reaches the hands of the sub-partnership. According to the appellant, the total income of the parent firm was determined at Rs. 39,426 and, therefore, there cannot be taxable income in the hands of sub-partnership (appellant) amounting to Rs. 1,83,13,990 as assessed by the AO. It may be mentioned here that the appellant firm voluntarily submitted its return for the asst. yr. 1997-98 on 10th March, 1999, disclosing its total income as nil in view of the claim of exemption in respect of 45 per cent of the share of income of the parent partnership as exempt under s. 10(2A) of the IT Act, 1961. The AO denied the claim of exemption and assessed the income of the appellant at Rs. 2,89,09,160. The appellant firm preferred an appeal against the said order to the CIT(A). The CIT(A) allowed the appeal permitting exemption under s. 10(2A).
The Revenue preferred an appeal before the Tribunal. Both the appeals numbered as 33 and 49 of 2001 for the asst. yrs. 1996-97 and 1997-98 were disposed of by the Tribunal rejecting the claim of the appellant on the ground that the appellant firm was not and could not be a partner in the parent partnership and, therefore, income received by the superior title is not exempt under s. 10(2A) of the Act. The Tribunal further held that the appellant firm’s income is not eligible for deduction under s. 80HHC as it is not engaged in sale of goods or merchandise directly outside India or to any export house or trading house. Mr. R.P. Agarwalla, learned senior counsel for the appellant, relying upon various decisions of the apex Court, particularly in Murlidhar Himatsingka vs. CIT (1966) 62 ITR 323 (SC) and CIT vs. Sunil J. Kinariwala (2003) 179 CTR (SC) 15 : (2003) 259 ITR 10 (SC), argued at length to justify the contention that the income is from export business and therefore, it is eligible for deduction under s. 80HHC even when it reaches the hands of the sub-partnership, i.e., the appellant. Mr. Agarwalla further argued that the issues to be answered in this appeal require interpretation of the principles of diversion of income at source by superior or overriding title from the hands of the representative partner to the sub-partnership. According to Mr. U. Bhuyan, learned counsel for the Revenue, the pre- requisite for the income of a person to come within the ambit of s. 10(2A) is that the person concerned must be a partner of the firm which is separately assessed to tax. According to Mr. Bhuyan, the parent firm (M/s Rock International) is a firm which is separately assessed to tax and the appellant firm (M/s Radha Krishna Jalan) is not a partner of the parent firm. Therefore, according to Mr. Bhuyan, the appellant assessee not being a partner of M/s Rock International is not entitled to the benefit of exemption as provided under s. 10(2A). According to Mr. Bhuyan, the provision of s. 10(2A) is required to be interpreted in its literal sense since the taxing statute is to be construed having regard to the letter of law. Mr. Bhuyan contended that the words employed in a taxing statute have to be read as they are according to grammatical meaning. Departure from this rule of construction is permissible only when such literal interpretation leads to absurdity. According to Mr. Bhuyan, the appellant-firm would also not be entitled to the said benefit because the appellant firm is not engaged in the business of export out of India. Mr. Bhuyan relied upon a number of decisions of the apex Court in A.V. Fernandez vs. State of Kerala AIR 1957 SC 657; J.K. Steel Ltd. vs. Union of India AIR 1970 SC 1173; Member Secretary, Andhra Pradesh State Board for Prevention and Control of Water Pollution vs. Andhra Pradesh Rayons Ltd. AIR 1989 SC 611, Aphali Pharmaceuticals Ltd. vs. State of Maharashtra AIR 1989 SC 2227; Sutlej Cotton Mills Ltd. vs. CIT (1990) 90 CTR (SC) 130 : AIR 1991 SC 218 and Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99 : (2003) 262 ITR 278 (SC) which crystallize the law relating to the interpretation of the taxing statute. Sec. 10(2A), so far it relates to the case at hand, provides that the income of a person being a partner of a firm which is separately assessed as such shall not be included while computing the total income of such person. The provision of s. 10(2A) in its literal sense means that the income of a partner of a firm which is separately assessed to tax shall not be reassessed in his hand. It further appears from the said section that the prerequisite for income of a person to be exempt under the provisions of s. 10(2A) is that he must be a partner of a firm which is separately assessed.
If we go by the law as recapitulated above, the appellant firm not being a partner of M/s Rock International appears to be ineligible for deduction under s. 10(2A) of the Act. The firm is also not entitled to deduction under s. 80HHC since it is not engaged in the business of export out of India. Mr. Agarwalla, learned senior counsel, submitted that the decisions relied upon by the Revenue for a literal or strict interpretation of the provisions of s. 10(2A) were not rendered in the context of interpretation of the provisions relating to exemption/deduction. According to Mr. Agarwalla, the above decisions cited on behalf of the Revenue are distinguishable in the facts and circumstances. Mr. Agarwalla submitted that the questions involved in this case were not under consideration of the apex Court in the judgments relied upon by the Revenue and, therefore, the issues raised in this appeal will have to be answered in the facts and circumstances peculiar to the case at hand. The decision in CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC) has been cited in support of this contention. We have considered the decision in Sun Engineering Works (P) Ltd. (supra). The Supreme Court provided that it is neither desirable nor permissible to pick out a word or a sentence from the judgment, divorced from the context of the issues under consideration and treat it to be the complete law declared by the Supreme Court. The Hon’ble Supreme Court held that while applying the decision of the Court to a later case, the Courts must carefully try to ascertain the true principle enunciated to support their reasoning. It is in this context, we would now like to examine the propositions canvassed by Shri Agarwalla which are summarised below : (i) Whether for the limited purpose of assessment by IT authorities in the case of income diverted by overriding title to the sub-partnership of a person, such person is to be deemed to be a partner in the main partnership or not ? (ii) Whether for the purpose of the IT Act, 1961, the income diverted by overriding title ceased to be the income of, the partner as intended under s. 10(2A) ?
To appreciate the above contention, we may refer to the scheme of the Indian IT Act, 1922, prior to its amendment by the Finance Act, 1956. The scheme recognizes two kinds of firms unregistered and registered firms. In the case of an unregistered firm, the tax payable by the firm was assessed as in the case of any other distinct entity and tax was levied on the firm and the partners were not required to pay tax again on their share of income out of the profit of the partnership business. In the case of registered firm, the firm was not required to pay tax and the income of the firm was not assessed to tax. The share of profits of each partner in the income of the firm was added to his other incomes. The levy was on the partners severally and not on the firm. The total income of the partner comprises of his other income and his share of income from the firm. It is, therefore, clear that under the provisions of the 1922 Act, neither the unregistered firm nor the registered firm was subjected to double taxation. After the amendment in 1956, till 31st March, 1993, the unregistered firm continued to be assessed to tax as distinct entity as before and tax was levied on it. The partner though not liable to pay tax to his income had to include his income from the partnership in computing his total income for the purpose of determining the rate of tax to be applied in determining his tax liability on his other income. In the case of income of registered firm, there was double taxation. Firstly, tax on a nominal rate had to be paid by the registered firm and the partners thereof were also taxed in their individual assessments as before in respect of their share of income from the firm. This position continued till 31st March, 1993. The Finance Act, 1992, introduced wide changes in respect of assessment of income of the firms w.e.f. 1st April, 1993. The changed position applicable to the asst. yrs. 1996-97 and 1997-98 recognizes two kinds of firms, i.e., firm assessed as firm under s. 184 and firm assessed as AOP under s. 185. In the instant case, the admitted position is that M/s Rock International and M/s Radha Krishna Jalan are firms assessed as firms under s. 184. It may be mentioned here that in the case of firms which are assessed as firms, payment of interest, salary, bonus, commission or remuneration paid to the partners has been allowed to be deducted in the hands of the firm requiring the firm to pay tax on its total income as a distinct entity as provided in s. 167A. The share of income of an individual partner is not to be included in computing his total income, but the interest, salary, bonus, commission or remuneration received by a partner from the firm is assessable in his hands as income from business or profession. It is, therefore, clear that w.e.f. 1st April, 1993, there is no scope for double taxation in the case of a firm assessed as firm under s. 184. On the other hand, as provided in s. 185, in force w.e.f. 1st April, 1993, to 31st March, 2004, a firm is required to be assessed as an AOP and the provisions of ss. 67A, 167B and 86 are applicable to such firm. That a share of income of an individual partner is not required to be included in his total income is further crystallized in the provisions of sub-s. (2A) of s. 10.
14. From above discussion, it would appear that there is no scope for double taxation of an income by a partner of a firm which is separately assessed to tax. Keeping this in mind, we are called upon to interpret the provisions of the Act relating to exemption or deduction or benefit to be given to certain kinds of income. In this connection, we may refer to the observation of the apex Court in CIT vs. Canara Workshops (P) Ltd. (1986) 58 CTR (SC) 108 : (1986) 161 ITR 320 (SC). It was held : “It seems to us that the object in enacting s. 80E is properly served only by confining the application of the provisions of that section to the profits and gains of a single industry. The deduction of 8 per cent is intended to be an index of recognition, that a priority industry has been set up and is functioning efficiently. It was never intended that the merit earned by such industry should be lost or diminished because of a loss suffered by some other industry. It makes no difference that the other industry is also a priority industry. The co-existence of two industries in common ownership was not intended by Parliament to result in the misfortune of one being visited on the other. The legislative intention was to give to the meritorious its full reward.”
15. Again in Bajaj Tempo Ltd. vs. CIT (1992) 104 CTR (SC) 116 : (1992) 196 ITR 188 (SC), the Supreme Court held as follows : “A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. In Broach District Co-operative Cotton Sales, Ginning and Pressing Society Ltd. vs. CIT (1989) 77 CTR (SC) 70 : (1989) 177 ITR 418 (SC), the assessee, a co-operative society, claimed that the receipts from ginning and pressing activities was exempt under s. 81 of the IT Act. The question for interpretation was whether the co-operative society which carried on the business of ginning and pressing was a society engaged in ‘marketing’ of the agricultural produce of its members. The Court held that the object of s. 81(1) was to encourage and promote growth of co-operative societies and consequently, a liberal construction must be given to the operation of that provision. And since ginning and pressing was incidental and ancillary to the activities mentioned in s. 81(1), the assessee was entitled to exemption and the proviso did not stand in his way. In CIT vs. Strawboard Manufacturing Co. Ltd. (1989) 77 CTR (SC) 75 : (1989) 177 ITR 431 (SC), it was held that the law providing for concession for tax purposes to encourage industrial activity should be liberally construed. The question before the Court was whether strawboard could be said to fall within the expression ‘paper and pulp’ mentioned in the Schedule relevant to the respective assessment years. The Court held that since the words ‘paper and pulp’ were mentioned in the Schedule, the intention was to refer to the paper and pulp industry and since the strawboard industry could be described as forming part of the paper and pulp industry, it was entitled to the benefit.”
16. In CIT vs. Podar Cement (P) Ltd. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC), the Hon’ble Supreme Court held as follows : “We are conscious of the settled position that under the common law, ‘owner’ means a person who has got valid title legally conveyed to him after complying with the requirement of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of s. 22 of the IT Act, having regard to the ground realities and further having regard to the object of the IT Act, namely, ‘to tax the income’, we are of the view, ‘owner’ is a person who is entitled to receive income from the property in his own right.” The above decisions support the view that the legislative intent cannot be frustrated by attributing literal interpretation of the provisions of the statute. An income which is already taxed in the hands of the firm is obviously not exigible to tax in the hands of the partner. This provision available in s. 10(2A) is obviously incorporated to obviate double taxation. On this background, we may now proceed to discuss the principles of diversion of share of a partner by superior or overriding title to a sub-partnership comprising the partner and strangers to the main partnership. Subpartnerships have been recognized in India and registration accorded under the Indian IT Act, 1922, though subpartnership has not been defined either in the Indian Partnership Act, 1932 or in the IT Act, 1961. In support of this proposition, we may refer to the decision of the apex Court in various cases. In Murlidhar Himatsingka vs. CIT (supra), the Supreme Court held as follows :
“A sub-partnership is, as it were, a partnership within a partnership; it pre-supposes 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 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……………. Since the decision of the House of Lords in Cox vs. Hickman (1860) 8 HL 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.”
19. The above judgment of the apex Court lends support to the contention of Shri R.P. Agarwalla that sub- partnership has been recognized in India and registration has been accorded to them under the Indian IT Act, 1922. It has also been held that sub-partnership creates a superior title and diverts the income before it becomes the income of the partner. The partner in the main firm receives the income not only on his behalf but on behalf of the partners in the sub-partnership. This view is crystallised in the judgment of the Hon’ble Supreme Court in Murlidhar Himatsingka (supra), the apex Court held that 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 partners. This otherwise means that the partner in the main firm receives the income not only in his behalf but on behalf of the partners in the sub- partnership. In CIT vs. Sunil J. Kinariwala (supra), the Supreme Court held that when a third person becomes entitled to receive the amount under obligation of an assessee even before he could lay a claim to receive the income, there would be a diversion of income by overriding title. Referring to the decision of P.C. Mullick vs. CIT (1938) 6 ITR 206 (PC), the, Supreme Court had observed in CIT vs. Sunil J. Kinarizvala (supra), as follows : “In Murlidhar Himatsingka vs. CIT (1966) 62 ITR 323 (SC), it was held there was overriding obligation which converted the income of the partner in the main firm into the income of the sub-partnership and, therefore, the income attributable to the share of the partner had to be included in the assessment of the sub-partnership. That was on the principle that a partner in the sub-partnership had a definite enforceable right to claim a share in the profits accrued to or received by the other partner in the main partnership, as on entering into a sub-partnership, such a partner changes his character vis-a-vis the sub-partners and the IT authorities. Further, a sub partnership creates a superior title and results in diversion of the income from the main firm to the sub-partnership before the same becomes the income of the concerned partner. In such a case, even if the partner receives the income from the main partnership, he does so not on his behalf but on behalf of the sub-partnership……..
It is apt to notice that there is a clear distinction between a case where a partner of a firm assigns his share in favour of a third person and a case where a partner constitutes a sub-partnership with his share in the main partnership. Whereas in the former case in view of s. 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership, except, of course, to receive that part the profits of the firm referable to the assignment and to the assets in the event of dissolution of the firm in the latter case, the sub-partnership acquires a special interest in the main partnership. The case on hand cannot be treated as one of a sub-partnership, though in view of s. 29(1) of the Indian Partnership Act, the trust as an assignee, becomes entitled to receive the assigned share in the profits from the firm not as a sub-partner because no sub-partnership came into existence but as an assignee of the share of income of the assignor-partner.”
20. From the decisions referred to above, we may cull out the following principles relating to diversion of share of income of a partner at source by overriding title : (1) A sub-partnership is a partnership within a partnership in respect of the share of a partner in the main partnership. Formation of a sub-partnership does not affect the position of the partner in the main partnership though its character changes vis-a-vis the sub-partnership and the IT authorities. (2) The superior title of the sub-partnership diverts at source the share income of the concerned partner in the main partnership before it becomes the income of the partners. (3) Assessment of a share of income of a partnership in the hands of a partner has to be apportioned as per the provisions of the IT Act and, thereafter, the IT authorities are required to determine whether it would be assessed in the hands of that partner or in the hands of the sub-partnership. (4) The diversion of the income of a partner in the main partnership at source to the sub-partnership by overriding obligation created by the sub-partnership converts the income of a partner into the income of the sub-partnership, thus, vesting an enforceable right upon the sub-partnership to claim a share in the profits accrued to or received by the partner. (5) The right to receive profits and pay losses becomes the asset of the sub-partnership.
It would appear from the above principles that diversion of income by overriding title to sub-partnership confers upon it the attributes of a partner insofar as it relates to such income for the purpose of the IT Act, 1961, irrespective of the provisions of the Indian Partnership Act, 1932. As stated hereinbefore, a sub-partnership has been recognized in India and registered as a partnership firm under the IT Act though the term has not been defined in the Indian Partnership Act, 1932. A partnership firm cannot become a partner in another partnership firm for the purpose of the Indian Partnership Act, 1932 since a firm is not a person under this Act and is, therefore, not eligible to enter into an agreement. But the position is otherwise insofar the IT Act, 1961, is concerned. In the IT Act, 1961, a “person” has been defined in sub-s. (31) of s. 2 which, amongst, others includes a firm also. In the instant case, there is no dispute that the share of income receivable by Shri Radha Krishna Jalan from M/s Rock International stood diverted by a superior title to the sub-partnership of M/s Radha Krishna Jalan, the appellant, before the partner in Shri Radha Krishna Jalan could lay hand on it. The Tribunal relying upon a decision in Dulichand Laxminarayan vs. CIT (1956) 29 ITR 535 (SC) has taken the view that the provision of s. 10(2A) is not applicable in the case of income diverted to the appellant firm. The Tribunal was of the view that s. 10(2A) is applicable only in case of a partner of the firm and the appellant firm not being a partner of M/s Rock International cannot get the exemption under s. 10(2A). But the Tribunal failed to notice that the judgment in Dulichand Laxminarayan (supra) was rendered in the context of r. 2 of the Indian IT Rules, 1922, which required that all the partners of a firm must sign the application for registration. Since a firm is not a partner under the Indian Partnership Act, 1932, the Tribunal held that going by the definition of “partnership” in the Partnership Act, the sub-partnership in the instant case could not enter into any partnership for the reason that one partner of such firm signing on behalf of the firm would not meet the requirement short of compliance with r. 2. The following situations better clarify the position : (1) An HUF cannot be partner per se in a firm under the Partnership Act, though a “Karta” representing it can be a partner therein. For the purpose of the Partnership Act, his position in the firm is that of a partner and his share is not assessed in his hands but in the hands of the HUF. (2) A trust cannot be a partner in a firm whereas a trustee may be. The share of income pertaining to such trustee is assessed in the hands of the trust.
23. In support of the above proposition, we may refer to the decisions of the Hon’ble Supreme Court in CIT vs. Kalu Babu Lal Chand (1959) 37 ITR 123 (SC); Charandas Haridas vs. CIT (1960) 39 ITR 202 (SC) and CIT vs. A. Abdul Rahim & Co. (1965) 55 ITR 651 (SC). The decisions rendered therein are relevant for the purpose at hand are quoted below : Kalu Babu Lal Chand (supra) : “It is now well-settled that an HUF cannot as such enter into a contract of partnership with another person or persons. The Karta of the HUF, however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of a partner. So far as outsiders are concerned, it is the Karta who alone is, and is in law recognized as the partner. Whether in entering into a partnership with outsiders, the Karta acted in his individual capacity and for his own benefit or he did so as representing his joint family and for its benefit is a question of fact. If for the purpose of contribution of his share of the capital in the firm the Karta brought in monies out of the till of the HUF, then he must be regarded as having entered into the partnership for the benefit of the HUF and as between him and 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 assessable as income in the hands of the HUF.
What are the facts here ? Here was the HUF of which B.K. Rohatgi was the Karta; the finding in this case is that the promotion of the company and the taking over of the concern and the financing of it were all done with the help of the joint family funds and the said B.K. Rohatgi did not contribute anything out of his personal funds if any. In the circumstances, we are clearly of the opinion that the managing director’s remuneration received by B.K. Rohatgi was, as between him and the HUF, the income of the latter and should be assessed in its hands.” Charandas Haridas (supra) : “In our opinion, here there are three different branches of law to notice. There is the law of partnership, which takes no account of an HUF. There is also the Hindu law, which permits a partition of the family and also a partial partition binding upon the family. There is then the IT law, under which a particular income may be treated as the income of the HUF or as the income of the separated members enjoying separate shares by partition. The fact of a partition in the Hindu law may have no effect upon the position of the partner, insofar as the law of partnership is concerned, but it has full effect upon the family insofar as the Hindu law is concerned. Just as the fact of a Karta becoming a partner does not introduce the members of the undivided family into the partnership, the division of the family does not change the position of the partner vis-a-vis the other partner or partners. The IT law before the partition takes note, factually, of the position of the Karta, and assesses not him qua partner but as representing the HUF. In doing so, the IT law looks not to the provisions of the Partnership Act, but to the provisions of Hindu law. When once the family has disrupted, the position under the partnership continues as before, but the position under the Hindu law changes. There is then no HUF as a unit of assessment in point of fact, and the income which accrues cannot be said to be an HUF. There is nothing in the Indian IT law or the law of partnership which prevents the members of a Hindu joint family from dividing any asset. Such division must, of course, be effective so as to bind the members, but Hindu law does not further require that the property must in every case be partitioned by metes and bounds, if separate enjoyment can otherwise be secured according to the shares of the members. For an asset of this kind there was no other mode of partition open to the parties if they wished to retain the property and yet hold it not jointly but in severalty, and the law does not contemplate that a person should do the impossible. Indeed, the results would have been the same, even if the dividing members had said in so many words that they had partitioned the assets, because insofar as the firms were concerned, the step would have been wholly inconsequential.”
A. Abdul Rahim and Co. (supra) :
“If the partnership is genuine and legal, the share given to the Benamidar will be the correct specification of his individual share in the partnership. The beneficial interest in the income pertaining to the share of the said Benamidar may have relevance to the matter of assessment, but none in regard to the question of registration.” It would appear from the above judgments that the formation of sub-partnership creates a legal fiction whereby the income or loss of a partner becomes the income or loss of the sub-partnership. This situation creates a legal fiction. Mr. Agarwalla, learned senior counsel, submitted that such income or loss has to be assessed in the hands of sub-partnership by the IT authorities. The effect thereof, according to Shri Agarwalla, is that for the purpose of assessment, the sub-partnership has to be deemed to be a partner of the main partnership. It is because once the sub-partnership becomes the real owner of the income for the purpose of assessment despite the provisions of the Partnership Act, it would be imperative to assume all those facts on which alone the fiction operates. In CIT vs. S. Teja Singh (1959) 35 ITR 408 (SC) at p. 413, it is held : “It is a rule of interpretation well-settled that in construing the scope of legal fiction it would be proper and even necessary to assume all those facts on which alone the fiction can operate”. Similarly, in Assam Bengal Carriers Ltd. vs. CIT (2000) 162 CTR (Gau) 170 : (1999) 239 ITR 862, 886 (Gau) it is held : “When a legal fiction is created for an obvious purpose full effect of it is to be given—there is no half way house”.
Let us consider the anomalous situation that would emerge in case a sub-partnership is not deemed to be a partner in respect of assessment of its income diverted from a partner in the main partnership by overriding title. With effect from 1st April, 1993, the income of a partnership is subject to tax in the hands of the firm. The share of an individual partner has been exempted under sub-s. (2A) of s. 10. If the benefit of s. 10(2A) is denied in case of diversion, it would completely nullify the basic scheme of the Act since the income of the partner once taxed in the hands of the partnership would be again exigible to tax in the hands of sub-partnership. This would be contrary to the legislative scheme in force w.e.f. 1st April, 1993, relating to assessment of partnership firm. The learned Tribunal negated the contention of the appellant firm relying upon a decision of the Rajasthan High Court in CIT vs. Alisher Contractors (1986) 53 CTR (Raj) 380 : (1986) 159 ITR 534 (Raj). But in that case, the assessment year in question was 1973-74, i.e., prior to 1st April, 1993, when the scheme of the Act was different and the burden of tax was on the partner and not the partnership firm. The provision for exemption under s. 10(2A) came into force w.e.f. 1st April,1993, and, therefore, the said decision could not be relied upon by the Tribunal in deciding the case at hand.
26. The IT Act provides for levy of tax on the total income of an assessee after computation of income from all sources, setting off the losses and deducting the allowable deduction. In the instant case, the total income of M/s Rock International has been computed at Rs. 39,426 for the asst. yr. 1996-97 and Rs. 42,750 for the asst. yr. 1997-98. Shri Radha Krishna Jalan was entitled to 45 per cent of the aforesaid income of the main partnership for the two assessment years. His personal income as partner of the main partnership would roughly be Rs. 17,742 and Rs. 19,234, respectively. The said amount stood diverted to the appellant firm, M/s Radha Krishna Jalan by overriding title. But the IT authorities assessed the total income of M/s Radha Krishna Jalan, the appellant firm, at Rs. 1,83,13,993 for the asst. yr. 1996-97 as against the total taxable income of Rs. 39,426 of M/s Rock International, though the share of income of Shri Radha Krishna Jalan diverted at source to the sub-partnership could not be more than Rs. 17,427. Similarly, for the asst. yr. 1997-98, the total income of the main firm was Rs. 42,750 and the share of Shri Radha Krishna Jalan was Rs. 19,327. This amount was diverted at source to the sub- partnership. But the total income of sub-partnership has been assessed at Rs. 2,89,09,158. This anomalous and illogical consequence has arisen because of refusal to consider M/s Radha Krishna Jalan, the appellant firm, as a partner of the main partnership firm M/s Rock International for the limited purpose of s. 10(2A) of the IT Act, 1961. This is evidently not only contrary to the facts available on record, but also to the scheme of the IT Act as well as the principles of diversion of income by overriding title. This refusal has ended in double taxation. The legal fiction created for non-application of the provisions of s. 10(2A) on the ground that the appellant firm is not a partner of the main partnership has ushered in an absurd situation contrary to the facts as well as the provisions of the Act. The note of discord has to be tuned with the legislative intent as reflected in the scheme of the Act. To obviate this absurdity, we hold that a sub-partnership which is in receipt of the share of profit of a partner in the main partnership, has to be deemed to be a partner in the main partnership for the limited purpose of s. 10(2A). Else, the absurdity will continue. The contention of the Revenue that the appellant firm not being a partner of the main partnership will not be entitled to the benefit of s. 10(2A) is not accepted for the reason that it is totally in disharmony with the scheme of the Act.
27. For the reasons above, we answer the questions formulated in both the appeals in favour of the assessee and against the Revenue. Consequently, we set aside the order dt. 17th Sept., 2003 passed by the Tribunal, Gauhati Bench, Guwahati, in ITA Nos. 49/Gau/2001 and 33/Gau/2001. No order as to costs.
[Citation : 294 ITR 28]
