Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the allocation of the profits to the minors is valid and the allocation has been done in accordance with s. 67(2) ?

Sections 67(2), 247

Asst. Year 1966-67

Counsel Appeared

K. Mani, for the Assessee : J. Jayaraman & Mrs. Nalini Chidambaram, for the Revenue

BALASUBRAHMANYAN, J.:

The reference raises a rare question as to the allocation of the components of the total income of a registered firm as between the partners, on the one hand, and the minors admitted to the benefits of the partnership, on the other. The allocation, as made by the ITO, was for the asst. yr. 1966-67. The allocation was a follows :

From the table given above, it will be seen that Krishnagopal Jhaver, Srigopal Jhaver and Harigopal Jhaver, all of whom are minors, have between them shares in the partnership to the extent of Re. 0-4-6. The firm was in receipt of income under the head “other sources” and also “interest income” during the accounting year. The firm, however, sustained a loss in business and also incurred speculation loss. Under the terms of the partnership, the minors were only admitted to the benefits of the partnership which means and implies that they are not to be mulcted with any share in the losses incurred by the firm. It was pursuant to his provision in the partnership that allocation has been made by the ITO of the total income as between the several shares. The officer did not make any allocation of business loss or the speculation loss to the shares of the minors admitted to the benefits of the partnership, but the entire share of loss from these sources, he allocated as between the two major partners, Jhaver and Daga, alone. As for the allocation of interest, it would appear that interest was paid to the minors as well as one of the partners, but disallowed and added to the income of the firm. The only major positive income of the firm which had been allocated as between the partners as well as the minors admitted to the benefits of the partnership is the income from “other sources” amounting to Rs. 6,96,683.

2. The claim of the assessee-firm was that the allocation in the agreed ratio of Re. 0-7-0 to Jhaver, Re. 0-4-6 to Daga and Rs. 0-4-6 to the three minors must be done only after first setting off the business loss and the speculation loss in the sums of Rs. 16,34,707 and Rs. 14,97,112, respectively, as against the income under other sources amounting to Rs. 6,96,683. The ITO rejected this scheme of allocation propounded by the assessee and adopted the one set out in the table given above. On appeal, the Tribunal confirmed the decision of the ITO. The Tribunal referred to s. 67(2) of the IT Act, 1961, and held that the section forbids any allocation as between the partners otherwise than strictly in accordance with the components of the total income of the firm. Against the Tribunal’s decision aforesaid, the assessee has obtained a reference on the following question :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the allocation of the profits to the minors is valid and the allocation has been done in accordance with s. 67(2) ?”

3. The answer to this question is fairly clear from the terms of the assessee-firm’s partnership deed and the governing provisions of the statute. Sec. 67 of the IT Act, 1961, lays down the method of computing a partner’s share in income of the firm. Sub-s. (2) of this section lays down a mandatory principle in the allocation of shares of partners in the total income as assessed in the hands of the firm. The provision reads as follows : “The share of a partner in the income or loss of the firm as computed under sub-s. (1) shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income.”

4. This provision insists that the share income of a partner to be dealt with as part of his individual assessment, is not a head of income in itself, but is really a share of the components of the total income of the firm in which the partner has a share. If, for instance, the firm has income under several heads such as, business, property income, securities and other sources, then the aliquot share of each partner in the firm’s income will have to be reckoned in accordance with the share of that partner under the partnership instrument in each and every one of the heads of income. This would be true in cases where all the partners are adult partners. The same rule applies to the allocation of loss computed in the hands of the firm. The share of loss of each partner under each head must be separately allocated to each partner

5. In the present case, it is common ground that the minors, Krishnagopal Jhaver, Srigopal Jhaver and Harigopal Jhaver, who between themselves held a Re. 0-4-6 share in the partnership, were only admitted to the benefits of the partnership and under the terms of the partnership deed, they were not liable for any part of the losses of the firm. In the assessment of the firm, the ITO had arrived at a figure of loss under the head “Business” and under the head “Speculative transactions”. Applying the law relating to the admission of minors to the partnership, the losses incurred by the firm under business and speculative transactions can by no means be allocated as and towards the share of the minors. The apportionment made by the ITO in his order of assessment, which we have earlier set out in the form of a table, is, therefore, quite in accordance with the terms of the partnership as well as with the mandatory provisions of s. 67(2) of the IT Act, 1961. The assessee cannot put forward a claim that for the purpose of apportionment as between the partners and the minors admitted to the benefits of the partnership, the results of the year’s trading for the firm must be regarded in a global fashion, setting off the business loss and the speculation loss as against the income from other sources and the net income should be apportioned as between the partners and minors admitted to the benefits of the partnership. This system of apportionment is not only against the teeth of s. 67(2) of the IT Act, 1961, but would also go counter to the fundamental basis of the admission of the minors to the partnership. Taking the figures of loss in this very case, the business loss and the speculation loss together amount to Rs. 24,33,325 and this aggregate loss for the year more than absorbed the profit of the firm under other sources, viz., Rs. 6,96,683, with the result that the net trading position of the firm would only be of minus quantity. It is this minus quantity which learned counsel requires to be apportioned and allocated, not only as between the two adult partners, but also as between the minors admitted to the benefits of the partnership. Virtually, therefore, an apportionment of this kind, as urged by the assessee-firm, would involve a minor being burdened with losses up to the extent of Re. 0-4-6 in every rupee. Such a result cannot be countenanced even on any principle or provision of partnership law, quite apart from the special provisions of s.

67(2) of the IT Act, 1961.

6. Learned counsel for the assessee was not in a position to cite any authority for the system of allocation which the assessee- firm had advanced before the IT authorities and the Tribunal. He frankly conceded that a situation of this kind had not arisen before Courts nor was there any decision on this point rendered by any Court and reported so far. Having regard to the considerations aforesaid, we are satisfied that our answer to the question must be in the affirmative and against the assessee.

7. The reference to the Tribunal also contains a second question for our opinion. It relates to a technicality of income-tax practice or procedure. The question is as follows :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the appeal was filed by the firm against its assessment and the correctness of allocation of share income cannot be questioned in such an appeal ?”

8. Before the Tribunal, objection was taken by the IT Department to the effect that in an appeal against its own assessment, an assessee-firm cannot canvass the correctness of the ITO’s apportionment of the components of the firm’s income as between the partners and/or minors admitted to the benefits of the partnership. It was urged that the order of allocation, even though made by the officer dealing with the firm’s assessment, was a matter concerning the individual partners, and they alone had locus standi to appeal, objecting to the officer’s allocation. This contention was upheld by the Tribunal by reference to s. 247 of the Act. The section, when analysed, is in two parts. In the first part, it lays down what are the matters which can be agitated in an appeal against an order passed against a firm both as respects its income and as respects the allocation or apportionment of the income between the several partners. With reference to these two matters, the section lays down that any partner of the firm may file an appeal against the assessment of the firm objecting to the total amount of income assessed in the hands of the firm and also objecting to the apportionment thereof between the several partners. The second part of s. 247 of the Act lays down a bar or prohibition. It prohibits any partner, who is appealing against his own assessment of total income, from agitating the two matters which are properly contestable in an appeal against the assessment of the firm, namely, the computation of the firm’s total income, and the apportionment of the income of the firm as between the partners.

9. The Tribunal would appear to have mixed up the purport of the two distinct parts of s. 247 of the IT Act, 1961. It wrongly held that the correctness of the apportionment of the firm’s income among the partners cannot be agitated in an appeal filed by a firm. This view is based on a misunderstanding of the provisions of s. 247 of the Act. The Tribunal overlooked the first part of s. 247, which, inter alia, specifically lays down that the apportionment of the firm’s income as between the partners is a fit subject of appeal by the firm itself.

10. It is argued by learned counsel for the Department that the question of apportionment of the total income of the firm as between the partners, although it is usually made as an appendix to an assessment of the firm, is in point of subject-matter, eminently appealable only by an individual partner, if he were minded to question the allocation in so far as his share is concerned. According to learned counsel, it is difficult to conceive that there can be a comprehensive or general objection to the scheme of the allocation made by the ITO even in cases where the order of allocation hits one or some of the partners alone and cannot be made common cause of by the others. We do not accept this contention as well-founded. If what the Departmental counsel says is a correct understanding of s. 247 of the Act, then, the question of allocation or apportionment of the total income as between the partners will have to fall between two stools, as it were. For, where the allocation is questioned, it cannot be agitated in an appeal against the firm’s assessment, nor can it be agitated in an appeal filed by any partner in his own personal assessment, if it appertains to a group of partners, but not all. We do not accept the thesis that each individual partner separately and distributively can only agitate an appeal in so far as the allocation is objectionable in his own personal assessment. There may be cases where as between the partners, inter se, an allocation made by the ITO may not be correct or may not follow faithfully the terms of the partnership deed, and in that sense, may be subject to a general criticism. But even an objection raised by an individual partner alone as to the correctness of the apportionment of his own share and nobody else’s may have repercussions on other partners and affect pro tanto the interests of the other partners as well. Either way, therefore, the appropriate appeal in which an allocation can be properly agitated in a comprehensive manner either as respects one partner, or as respects some partners, or as respects all partners, is in an appeal against the firm’s assessment. In any case, this is what the first part of s. 247 of the Act says when it provides that in any case where a firm is assessed and the partners of that firm are themselves separately and individually assessable on their respective shares in the firm, each and every one of the partners is entitled to carry an appeal as against the firm’s assessment as well as the manner of allocation of the shares of profit as between different partners. An appeal is a creature of statute and has to be interpreted on the language of the provision, without imposing ideas of our own. Regarded either as a clarificatory provision or as an enabling provision, s. 247 confers on a partner of a firm the right or privilege to file an appeal questioning the assessment on the firm as well as the allocation of the share of income as between the different partners. It is not for a Court of construction to overlook this provision merely for the reason that under a rational system of appeal, it would be more sensible to leave the subject of allocation of the firm’s income as between the partners as a fit subject of appeal in the hands of each partner concerned, rather than treat it as a matter of general importance to the partnership as a whole. For the reasons stated above, we do not agree with the view expressed by the Tribunal that the firm was not competent to question the allocation of share income as between the partners in an appeal against the firm’s assessment. The second question of law is, therefore, answered in the negative and against the Department. In the circumstances of the case, there will be order as to costs.

[Citation : 170 ITR 368]