1968 PLP 135 (PTD)

Income‑tax Act (XI of 1922), Ss. 10 & 41‑Receiver appointed by Court in partnership suit‑Receiver assessed under S. 41 in respect of income from business‑Extent of liability of receiver‑Contention by Department that receiver should be assessed under S. 10‑Maintainability. The liability of the receiver under section 41 of the Indian Income‑tax Act is a vicarious liability and it is co‑extensive with the liability of the person of whose property he is the receiver. If the case falls under the first proviso to the section, in other words, if the income, profits or gains received by the receiver are not specifically receivable on behalf of any one person, or where the individual shares of the persons, on whose behalf they are receivable, are indeterminate or unknown, then the proviso lays down that the tax shall be levied and recoverable at the maximum rate. If the case does not fall under the proviso, then the receiver is liable to pay tax in respect of the share which comes to him on behalf of the various persons of whose property he is the receiver. Where a receiver appointed under a consent decree in a part nership suit has been assessed to income‑tax by the Income‑tax authorities under section 41 of the Income‑tax Act in respect of the income of the partnership, it is not open to the Department itself to contend in a reference that the receiver should have been assessed under section 10 in respect of the business income and under section 9 in respect of property. Saifuddin Alimohamed v. Commissioner of Income‑tax (1953) 25 I. T. R. 237 ref. By these four applications, which are consolidated for the sake of convenience, the Commissioner of Income‑tax, Bombay City II, Bombay, requires the Appellate Tribunal to refer to the High Court two questions of law which are said to arise out of the Tribunal's orders in I.T.As. Nos. 4324, 4325, 4326 and 4327 of 1955‑

56. Inasmuch as, in our opinion, questions of law do arise out of the aforesaid orders, we hereby draw up a state ment of the case and refer it to the High Court of Judicature at Bombay under section 66 (1) of the Indian Income‑tax Act.

2. There was a firm consisting of 6 partners, 5 of them having a share of 18 cents each and the remaining partner having 10 cents. The first partnership deed was executed on 26th February, 1924. It was modified in 1907. A fresh partnership deed was executed on 26th September 1929. A copy of the part nership deed dated 26th September, 1929, is Annexure `A' and forms part of the case. This partnership deed provided, inter alia, that if a partner died during the continuance of the period of the partnership, the heirs of the deceased partner would con tinue to be the shares of profits and loss till the end of the period 3 and the partnership would not be deemed to hive been dissolved. It was also provided that the heirs of the deceased partner might appoint some one from themselves as their representative and such person would be treated as a partner of the firm, if he was approved of by the other partners of the firm.

3. The firm was carrying on business in the name of M. M. Buxabahi & Co., in India, in the name of G. M. Mahomedally & Co. at Aden and in the name of A. M. Mahomedally & Co. at Abyssinia, Djibouti and Barbeira.

4. A suit was filed on 28th March, 1947, for the dissolution of the firm. A consent decree was passed on 24th September, 1947. A copy of the consent decree is Annexure `B' and forms part of the case. At' the time when the suit was filed, 5 partners out of the original 6 had died and their 6 representatives were taken as partners. Thus, at the time the suit was filed, there were 7 partners, although the number of shares of profits was much greater. The heirs of the deceased partners have been brought on the record of the High Court. Four joint receivers were appointed by the High Court. The joint receivers were directed to wind up the affairs of the firm. The Court receiver was appointed receiver on 11th August, 1950. The assessment for the year 1949‑50 was made by the Income‑tax Officer on 28th May, 1953. The assessments for the years 1950‑51, 1951‑52 and 1952‑53 were also made on the same day. These assessments were made on the Court receiver.

5. For the assessment year 1949‑50, the Income‑tax Officer computed the total income at Rs. 3,30,496 made up as follows: Property income Rs. 2,06,694 Business income at Aden Rs. 1,05,434 Less statutory rebate Rs. 4,500 Rs. 1,00,934 Other sources: Commission Rs. 3,442 Interest Rs. 19,426 Rs.22,868 The Income‑tax Officer, as we have stated, assessed the Court receiver and applied the maximum rate under the second proviso to section 41 (1) of the Indian Income‑tax Act. In making the assessment at the maximum rate the Income‑tax Officer, inter alia, stated as follows: "Thus the circumstances of the case prevailing in the relevant previous year to the above assessment are that the entire net assets of the firm of Messrs M. M. Buxabhoy & Co., now dissolved by the consent decree passed by the High Court, vest with the Court receiver appointed in this case and those assets would con tinue to vest with him till such time the receivers collect all assets, sell movable and immovable properties and out of the realisa tion discharge the liabilities, pay the debts and finally determine the quantum of net assets, or in other words the residuary estate of the defunct firm of Messrs M. M. Buxabhoy & Co., upon which the beneficiaries had been conferred any interest by the consent decree. Only the net assets are divisible among the beneficiaries in Suit No. 750 of 1947. Here too the receivers have first to meet the cost, charges and expenses of the receivers and cost of the parties. The exact quantum of the share of the beneficiaries is not determinable till such time the net assets or the residuary estate of the dissolved firm of Messrs M. M. Buxabhoy & Co. is determined. It cannot thus be held precisely whether in the relevant previous years any of the beneficiaries had any precise interest in the receipt or accrual of income or in the general fund or income received or accrued in the previous year and also the extent of the share in such income. Their shares in net assets would arise only when the total assets of the firm of Messrs M. M. Buxabhoy & Co. are determined

In these circumstances, it cannot be held that the income, profits and gains chargeable under the Act, which the Court receiver is entitled to receive are received on behalf of the beneficiaries. On the contrary, the receiver is entitled to receive income, profits and gains accruing and arising during the relevant accounting year on his own behalf and in his own capacity, as Court receiver managing the assets and business of Messrs M. M. Buxabhoy & Co.".

6. The Court receiver then appealed to the Appellate Assis tant Commissioner who gave some relief. It is not necessary to say at present what relief was granted by the Appellate Assistant Commissioner in so far as the quantum of assessment is con cerned. He was, however, of opinion that the appropriate rate should be applied to the income to be computed in accordance with his order.' A copy of his order is Annexure `C' and forms part of the case.

7. The Court receiver then appealed to the Appellate Tribunal. Since the decision of the Bombay High Court in the case of Saiffuddin ((1953) 25 I T R 237), the Department has been trying to assess the trustees even though the income which they are entitled to receive on behalf of the beneficiaries is receivable on behalf of persons whose shares are determinate. Not only this is being done in respect of income from business, but it is also done in respect of income from property assessable under section 9 of the Act. The Tribunal was of opinion that if the receiver was to be assessed at all, he has to be assessed under section 41 (1) of the Act. It was further of opinion that the income was receivable by the joint receivers and later on by the Court receiver on behalf of known persons whose shares were determinate. It, therefore, held that the first proviso to section 41 (1) did not apply. In the alter native, it was argued on behalf of the Court receiver that, at any rate, the property income should have been apportioned. No decision was given on this argument, inasmuch as the Tribunal was of opinion that section 41 (1) applied and the first proviso to section 41 (1) did not apply.

8. For the assessment year 1950‑51, income from property was determined at Rs. 2,00,880, income from business was estimated at Rs. 1,01,000 and income from other sources at Rs. 1,

077. Thus, the total income assessed by the Income‑tax Officer amounted to Rs. 3,02,957.

9. For the assessment year 1951‑52, the property income was computed at Rs. 1,82,958, business income at. Aden at Rs. 1,01,000 and income from other sources at Rs. 4,

478. Thus the total income computed for the assessment year 1951‑52 was Rs. 2,88,436.

10. For the assessment year 1952‑53, the property income was computed at Rs. 1,60,816, the income from business at Aden at Rs. 1,01,000 and income from other sources at Rs. 11,

196. Thus, the total income computed for the assessment year 1952‑53 was Rs. 2,73,012.

11. We might add that for the assessment year 1950‑51 the Aden income of Rs. 1,01,000 computed by the Income‑tax Officer was directed to be deleted by the Appellate Assistant Commissioner. The Appellate Assistant. Commissioner determined a loss of Rs. 11,927 from business at Aden for the assessment year 1950‑51.

12. For the assessment year 1951‑52, the Aden income of Rs. 1,01,000 estimated by the Income‑tax officer was directed to be deleted by the Appellate Assistant Commissioner and so also for the assessment year 1952‑53.

13. There was no dispute as to the quantum of ‑income before the Appellate Tribunal. A copy of the Tribunal's order in I.T.A. No. 4324 of 1955‑56 is Annexure `D' and forms part of the case.

14. The questions of, law that, therefore, arise are: "(1) Whether in the circumstances of the case section 41(1) of the Indian Income-tax Act applied ? (2) If so, whether in the circumstances of the case, there was material for the Tribunal's holding that the shares of the beneficiaries in the income are known and determinate."

15. Parties accept the statement of the case. No suggestions are offered. The order in this appeal will also govern the disposal of I. T. As. Nos. 4325, 4326 and 4327 of 1955‑56.

2. There was a firm consisting of 6 partners, 5 of them having a share of 18 cents each and the remaining 10 cents. The partnership deed was executed on 26th February, 1904. A fresh partnership deed was executed on 26th September, 1929. The partnership deed dated 26th September, 1929, provided inter alia, that if a partner died during the continuance of the period of the partnership the heirs of the deceased partner would continue to be the sharers of profit and loss till the end of the period and the partnership deed would not be deemed to have dissolved. It was also provided that the heirs of the deceased partner might appoint someone from amongst themselves as their representative and such person would be treated as a partner of the firm if he was approved of by the other partners of the firm. A suit was filed on 28th March, 1947, for the dissolution of the partnership. A consent decree was passed on 24th September, 1947. When the suit was filed, 5 partners out of the original 6 had died and their representatives six in all were taken as partners. Thus at the time the suit was filed there were 7 partners, although the number of sharers of profits was much more : vide the statement filed by the court receiver. The heirs of the deceased partners have been brought on the record of the High Court. Four joint receivers were appointed by the High Court. The partnership was dissolved with effect from the date of the consent decree. The joint receivers were directed to wind up the affairs of the firm. The firm was carrying on business in India as well as at Aden and Djibouti. The court receiver was appointed receiver on 11th August, 1950.

3. The Income‑tax Officer made the assessments under appeal on the court receiver and applied the maximum rate under the first proviso to section 41(1) of the Indian Income‑tax Act. The Appellate Assistant Commissioner gave some relief, in so far as the quantum is concerned. He was, however, of opinion that the maximum rate should not have been applied and that the rate to be applied was the appropriate rate to the income determined by him.

4. There is no dispute in so far as the income determined by the Appellate Assistant Commissioner .is concerned. The firm had income from property. The firm had business income for the assessment year 1949‑

50. For the assessment year 1950‑51 there was a loss in business. There was no income from business for the assessment years 1951‑52 and 1952‑53.

5. The only question that arises for determination in these appeals is whether section 41(1) applied to the facts of the case or whether the receiver was to be assessed as if the income accrued to him and the tax determined at the rate applicable to his income.

6. Both the assessee and the Department relied on Saifuddin's case. It appears to us that the observations made in that case have to be read in the context of the facts of that case. That case does not, in our opinion, lay down any new proposition of law. That case does not, for instance, by implica tion or otherwise overrule the Privy Council case of Raja Bejoy Singh Dudhuria ((1933) 1 I T R 135). In fact, in Saifuddin's case there is no reference whatsoever to the Privy Council case. It was not even referred to at the hearing of the reference by the High Court. The Appellate Assistant Commissioner stated as follows: "As already stated above, the property of the dissolved firm vests in the court receiver and he, having been enjoined to carry out certain instructions by the High Court as per the consent decree and after carrying them out is to determine the net divisible 'residue and distribute it between the existing parties ; the income which the court receiver receives during the process of the administration till the net divisible residue is determinable could be said to be the income of the court receiver in his capacity as such, and it cannot be the income received by him on behalf of the persons on whose behalf he is appointed the receiver. This income only forms part of the assets in his hands. The so‑called beneficiaries have no vested or beneficial right in such income. In this case the alleged beneficiaries' right to income would arise only when the net residue has been determined." It appears to us that the Appellate Assistant Commissioner is in error. The joint receivers were appointed under Order XL, rule 1 (d), Code of Civil Procedure. Order XL, rule 1 (d), is in the following terms: "Where it appears to the Court to be just and convenient, the Court may by order confer upon the receiver all such powers, as to bringing and defending suits and for the realization, management, protection, preservation and improvement of the property, the collection of the rents and profits thereof, the application and disposal of such rents and profits, and the execution of documents as the owner himself has, or such of those powers as the Court thinks fit." The consent decree, inter alia, provided as follows: "And this Court by and with such consent doth further order that the conveyances and other necessary documents in respect of the sale of the movable and immovable properties of the partnership be executed by the said joint receivers on behalf of the partnership and all the parties hereto and for that purpose the said properties do hereby vest in the joint receivers." The properties of the firm vested in the joint receivers and thereafter in the court receiver only for the purpose of executing documents and not for any other purpose. The receiver as such receives no income which is liable to tax in view of the Privy Council's decision in Dudhuria's case. Certain persons have an over‑riding title. We, therefore, think that the receiver, if at all he has to be assessed, has to be assessed under section 41 (1) of the Indian Income‑tax Act.

7. The next question that arises is whether the first proviso to section 41 (1) of the Act applies to the facts of the present case. In order to determine that question, we have to find out whether the income received by the joint receivers and thereafter by the court receiver was receivable on behalf of certain known parties and whether their shares were determinate. It is only when the income is not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf it is receivable are indeterminate or unknown, the tax is to be levied and recovered at the maximum rate.

8. The Income‑tax Officer applied the maximum rate stating, inter alia, as follows: "Thus the circumstances of the case prevailing in the relevant previous year to the above assessment are that the entire net assets of the firm of Messrs M. M. Buxabhoy & Co., now dissolved by the consent decree passed by the High Court vest with the court receiver appointed in this case and those assets would continue to vest with him till such time the receivers collect all assets, sell all movable and immovable properties and out of the realisation discharge the liabilities, pay the debts and finally determine the quantum of net assets or in other words the residuary estate of the defunct firm of. Messrs M. M. Buxabhoy & Co., upon which the beneficiaries had been conferred any interest by the consent decree. Only the net assets are divisible among the beneficiaries in Suit No. 750 of 1947. Hereto the receivers have first to meet the cost, charges and expenses of the receivers and cost of the parties. The exact quantum of the share of the beneficiaries is not determine able till such time the net assets or the residuary estate of the dissolved firm of Messrs M. M. Buxabhoy & Co., is determined. It cannot thus be held precisely whether, in the relevant previous years, any of the beneficiaries had any precise interest in the receipt or accrual of income or in the general fund or income received or accrued in the previous year and also the extent of the share in such income. Their share in net assets would arise only when the total assets of the firm of Messrs M. M. Buxabhoy & Co. are determined . In these circumstances, it cannot be held that the income, profits and gains chargeable under the Act which the court receiver is entitled to receive are received on behalf of the beneficiaries. On the contrary, the receiver is entitled to receive income, profits and gains accruing and arising during the relevant accounting year on his own behalf and in his own capacity as court receiver managing the assets and business of Messrs M. M. Buxabhoy & Co." If this was the Income‑tax Officer's view, he should not have applied the maximum rate.

9. The consent decree, inter alia, provided as follows: "And this Court by and with such consent doth further order that the said receivers do wind up the said partnership business at Bombay and collect and realise the assets of the partnership and pay the debts thereof with liberty to them to continue it partially for the benefit of the business outside Indian Dominion and this Court by and with such consent doth further order that the said joint receivers do make up the accounts of the partner ship business at Bombay and outside Indian Dominion." Later on, the consent decree provided as follows: "And this Court by and with such consent doth further order that the said joint receivers after making up the accounts realisation of the assets and payments of the debts and liabilities of the said parties do apply the net realisation and the proceeds as follows ...." In other words, the joint receivers and thereafter the court receiver was authorised to realise the assets of the firm and pay the balance left with the joint receivers and thereafter the court receiver to the partners or their heirs in the proportion in which they held the shares in the partnership.

10. At the time when the partnership was dissolved, namely, 24th September, 1947, let us say that the net assets of the partnership were worth Rs. X. Let us say that the assets became worth Rs. Y when the affairs of the partnership were wound up. Rs. Y minus Rs. X is the income received by the joint receivers or the court receiver, as the case may be. The shares of the persons entitled to receive Rs. Y minus Rs. X are known and determinate. The parties, i.e., the partners of the firm, were Dawoodi Bohras and are governed by Shia Mahomedan law. If a partner died, under the Mahomedan law his share in the assets of the firm devolved on his heirs at the moment of his death and the heirs succeed to the estate as tenants in common in specific shares.

11. In the alternative, it was argued that, at any rate, the property income should have been apportioned. We do not think that it is necessary to consider this alternative argument as, in our opinion, section 41(1) applies and the first proviso to section 41(1) does not apply.

12. The result is that the appeal is allowed. G. N. Joshi, with, Advocate‑General, for the Commissioner. R. J. Kolah for the Assessee: