1964 PLP 749 (PTD)

Transfer of assets‑--Minor admitted to benefits of partnership Father not a partner‑Income of son whether can be included in father's total income‑Scope of Ss. 16 (3) & 16 (3) (a) (iv)‑Indian Income‑tax‑Act, 1922, Ss. 16 (3) & 16 (3) (a) (iv). Section 16 (3) deals with notional or artificial income. It makes an assessee pay tax on income which is not his own in fact but which is notionally his income. Therefore, section 16 (3) must be very strictly construed. It is only if a particular income comes within the strict ambit of section 16 (3) that the assessee can be made liable to pay tax on that income. The income of a partner cannot be taxed twice, once as forming part of the total income of the firm and then as his individual income. If the father is a partner in a firm and the minor's share is regarded as his income under section 16 (3) (a) (ii) he can avoid double payment of taxation if the firm has been taxed. But if the father is not a partner and the minor's share of profits is regarded as the father's income the father will have to pay tax on that income. There being no provision for excluding that sum from the total income of the firm, the firm would also be made to pay tax on the same amount and there would be double taxation. It is, therefore, clear that the minor's share of profits can be regarded as the income of the father only if section 16 (3) (a) (ii) is attracted. In cases where the father is not a partner in the firm, the share of the minor in the partner ship cannot be regarded as the income of the father. The assessee, J, divided his capital account in a firm and gifted them to his sons. His minor son, P, thereby received a sum of Rs. 74,

721. P was admitted to the benefits of partnership in three firms in one of which J was a partner. One of the firms was at Dhubri, the other, Galla Department, at Dhubri and the third at Calcutta. The amount which P had received as gift had been invested in the Dhubri firm and a sum of Rs. 11,000 out of the credit appearing in the personal account of P in Dhubri was transferred to the firm at Calcutta. The share of profits which the minor derived from the three firms teas included in the income of J under section 16 (3) (a) (iv). The Tribunal held that the minor had been admitted as a partner in the firm at Dhubri only because of the introduction of the initial capital of Rs. 74,721 and as it was apparent that the other two firms were also allied concerns and there must be intimate financial connection between them, the share income which the minor had been deriving from each of the three firms was directly attributable to the amount gifted by J and, as such, the provisions of section 16 (3) (a) (iv) applied. On a reference: Held, that there was no evidence on record to justify the finding that the minor had been admitted to the benefits of the partnership at the Dhubri firm only because he had undertaken to deposit the sum of Rs. 74,721 given to him by his father. There was no finding and no material to justify the finding that the sum of Rs. 11,000 was the minor's contribution to the Calcutta firm or that it formed part of the original capital transferred by J to his son. The extent of the financial connection between the firms could not be determined by the material on record. Hence it could not be said that the minor's share of profits in the firms was a benefit arising directly or indirectly from assets transferred by the assessee to him and sec tion 16 (3) (a) (iv) was not applicable. Held also, that the failure of the assessee to raise the objection in earlier proceedings and his claim for earned income allowance in respect of the income did not debar him from raising the objection. Bhogilal Laherchand v. Commissioner of Income‑tax (1954) 25 I T R 523 applied. S. M. Lahiri and N. M. Lahiri for the Assessee. P. Choudhuri for the Commissioner. JUDGMENT MEHROTRA, C. J.‑The following questions of law have been referred to this Court for opinion under section 66 (2) of the Indian Income‑tax Act, 1922, by the Income‑tax Appellate Tribunal, Calcutta Bench "A" : "(i) Whether, under the facts and circumstances of the case, the share income of the minor son from the three firms is liable to be included in the assessment of the father under section 16 (3) (a) (iv)? (ii) Whether, in view of the fact that there was no contribu tion of any sum in the Galla and Calcutta firms by the minor son out of the gift money from the father, the share income from these two firms was liable to be included in the assessment of the father under section 16 (3) (a) (iv)?" The assessment year is 1959‑60, the corresponding previous years being 2014‑15 R. J. Year, 2014‑15 Dewali year and 2015 Ram Navami. The assessee, Jwala Prasad Agarwala was a partner in Messrs Onkarmal Jwalaprasad. As disclosed in the books of account he divided the balance of his capital account in four equal parts and made a gift of a sum of Rs. 74,721 to each of his four minor sons in July 1953. Three of his sons have attained majority but the fourth son, Parmeshwar Agarwala, was a minor during the relevant accounting year. He was admitted to the benefits of the partnership in three firms known as (1) Jwalaprasad Mulchand, Dhubri (Assam), (2) Jwalaprasad Mulchand (Galla department), Dhubri (Assam) and (3) Jwalaprasad Mulchand, Calcutta. The amount which is gifted by the father to the minor, Parmeshwar Agarwala, is found to have been invested in the firm of Jwalaprasad Mulchand, Dhubri. The other fact referred to in the. statement of the case is that a sum of Rs. 11,000 out of the credit appearing in the personal account of Parmeshwar Agarwala in the account books of Jwalaprasad Mulchand, Dhubri, is transferred to the firm of Javalaprasad Mulchand, Calcutta, during the previous year for the 1957‑58 assessment year. In the firm of Jwalaprasad Mulchand (Galla department), Dhubri, no money of the minor has been invested. The shares of profit which the minor derived from the above three firms were included in the income of the father, Jwalaprasad Agarwala, under section 16 (3) (a) (iv) of the Indian Income‑tax Act, 1922. The contention raised by the assessee before the Tribunal was that the shares of profits which the minor derived from the three firms were not liable to be included in the income of the assessee. Section 16 (3) (a) of the Income‑tax Act reads as follows : "16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included‑ (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly‑ (i) from the membership of the wife in a firm of which her husband is a partner; (ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner; (iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart; or (iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration." Admittedly, the assessee father is not a partner in any of these firms and thus section 16 (3) (a) (ii) will not apply. The department claimed that under section 16 (3) (a) (iv) the share of the profit of the minor in the three firms is liable to be included in the income of the father. The share of the profit of the minor in these three firms is the income which is derived from the assets transferred to the minor, Parmeshwar Agarwala, without any consideration. The Tribunal has found that the minor had been admitted as a partner in Jwalaprasad Mulchand, Dhubri, only because of the introduction of the initial capital of Rs. 74,721 in his name by his father. So far as the other two firms are concerned, the finding is that it is apparent that these are allied concerns and there must be intimate financial connection subsisting between them and Messrs Jwalaprasad Mulchand, Dhubri, and the Calcutta firm. Thus, in spite of the fact that each of these irons is paying interest to the minor, the Tribunal held that the share incomes which the minor had been deriving from each of these firms is directly attributable to the introduction of the original capital of Rs. 74,721 which the assessee had given to his minor son and thus in the opinion of the Tribunal the provisions of section 16 (3) (a) (iv) were applicable both in respect of the interest on the original capital sum of Rs. 74,721 and the share incomes of the minor as derived from the above mentioned three firms. So far as the two firms, namely, Jwalaprasad Mulchand (Galla department, Dhubri) and Jwalaprasad Mulchand, Calcutta, are concerned, there is neither any finding by the Tribunal that the minor contributed any money towards the capital of these firms out of the sum of Rs. 74,721, the amount of money trans ferred to the minor by his father, the assessee, nor is there any material for coming to such a finding. The Tribunal has held that the minor's share of profits in these two firms will be included in the income of the father, only on the ground that the three firms are allied firms and there must be an intimate financial connection subsisting between these firms and Messrs Jwalaprasad Mulchand, Dhubri. What would be the extent of the financial connection between the two and whether any money out of the sum of Rs. 74,721 transferred to the minor was contributed by the minor towards the capital of the Calcutta and Galla firms cannot be determined by the material on the record. Thus, merely because the minor was admitted to the benefits of these two firms and as there must be some sort of financial connection between the three firms, it cannot be said that the minor's share of profit in these two firms is the benefit directly arising or indirectly arising to the minor from the assets transferred by the assessee to him. Section 16 (3) (a) (iv) will thus not to be attracted in this case. The next question which arises for consideration is how far the share of the minor in the partnership business of Jwalaprasad Mulchand, Dhubri, to the benefits of which he was admitted, will be included in the income of the father, the assessee. The Tribunal has relied upon two circumstances in support of its finding that the share of the minor in the firm of Jwalaprasad Mulchand, Dhubri, was his income arising out of the transfer of the assets of the father, the assessee. The first circumstance is that the past record of the assessse shows that this objection was never raised before. On the other hand, in connection with the assessment for 1953‑54, the assessee had claimed before the Tribunal that earned income allowance be granted by the Department in respect of the share incomes of the minor which had been assessed in the hands of the father. The second circumstance is that the minor had been admitted as a partner in Jwalaprasad Mulchand, Dhubri, only because of the introduction of the initial capital of Rs. 74,721 in his name by his father. As regards the first circumstance pointed out by the Tribunal, the failure of the assessee to raise the said objection in the earlier proceedings does not debar him from raising the point that the minor's share of profits in the said firm cannot be regarded as the income of the assessee. This circumstance can also not be regarded as evidence of the fact that the minor's share of profit in the firm arose out of the assets transferred by the father. The claim of the assessee in the assessment year 1953‑54 that he should be granted earned income allowance in respect of the share incomes of the minor, does not also debar the assessee from contending that the share of the minor in the business cannot be regarded as his income under section 16 (3). The decision by the Income‑tax Tribunal does not constitute res judicata. Regarding the second circumstance relied upon by the Tribunal there is no evidence on the record to justify a finding that the minor had been admitted as a partner in Jwalaprasad Mulchand, Dhubri, only because of the introduction of the initial capital of Rs. 74,721 in his name by his father. From the account books it appears that Rs. 74,721 were taken as the minor's deposit in the account books and, further, that the minor was admitted to the benefits of the partnership. There is no evidence to show that he was admitted to the benefits of the partnership because he had undertaken to deposit the sum of Rs. 74,721 given to him by his father in the firm. In the absence of any such connection between the deposit and the admission of the minor to the benefits of the firm, it cannot be said that the minor's share of profit in the firm of Jwalaprasad Mulchand, Dhubri, arose out of the assets transferred to him by the assessee. As observed by Chagla, C. J. in the case of Bhogilal Laherchand v. Commissioner of Income‑tax ((1954) 25 I T R 523) section 16 (3) of the Income‑tax Act deals with notional or artificial income and it makes an assessee pay tax on income which in fact is not his own, but which is notionally made to be his income, and therefore section 16 (3) must be very strictly construed, and it is only if a particular income comes within the strict ambit of section 16 (3) that the assessee can be made liable to pay tax on that income. There is another aspect of the matter which may be examined Under section 2 (6‑B) of the Income‑tax Act, a "partner" has been defined as follows: "2. (6‑B) 'firm', `partner' and `partnership' have the same meanings respectively as in the Indian Partnership Act, 193" (IX of 1932): provided that the expression 'partner' includes any person who being a minor has been admitted to the benefits of partnership." Section 3 of the income‑tax Act says that where any Central Act enacts that income‑tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with and, subject to the provisions of. this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partner of the firm or the members of the association individually. Thus the firm has also been made liable to pay income‑tax under this section. For income‑tax purposes the firms may be classified into two categories : (1) those which are registered under section 26‑A, and (2) those which are not registered. Under section 23 the Income‑tax Officer has to determine both the tax payable by the firm as such and also the total income of each partner, that is, including his share of profits of the firm. The income, however, of the partner cannot be taxed twice over, once as forming part of the total income of the firm and then as his individual income. A minor, who has been admitted to the benefits of the partnership, is a partner for the purposes of the Income‑tax Act and thus his share of profit will be included in his separate income and the income of the firm will also include his share of profit. The Income‑tax Act has provided for the contingency to avoid double payment by the partner in the event of the firm paying tax on its total income. If the father is a partner in the firm and the minor's share is regarded as his income under section 16 (3) (a) (ii), he can avoid double payment of taxation if the firm has been taxed. But if the father is not a partner of the firm, in that event, if the minor's share of profit is regarded as the father's income, the father will have to pay tax on that income, and there being no provision for excluding that amount from the total income of the firm, the firm may also be made to pay income‑tax on the said amount and in that event the share of the minor's profit will be liable to double taxation. It is, therefore, clear that the minor's share of profit can be regarded as the income of the father only if section 16 (3) (a) (ii) is attracted. In cases where the father is not a partner in the firm, the share of the minor in another partnership cannot be regarded as the income of the father. The share which the minor gets in the partnership business is on account of the fact that he has been admitted to the benefits of the partnership and not as the result, direct or indirect, of a deposit made by him in the firm of the sum of money which he got on transfer from his father. Section 16 (3) (a) (ii) specifically says: "In computing the total income of any individual for the purpose of assessment, there shall be included so much of the income of a wife or minor child of such individual as arises directly or indirectly from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner." When this language is contrasted with section 16 (3) (a) (iv) it is abundantly clear that the share which the minor gets in the business is due to the fact that he has been admitted to the benefits of the partnership and not directly or indirectly as the result of the transfer of the money to him. The argument of Mr. Choudhuri is that as the minor has been admitted to the benefits of the partnership in lieu of his depositing Rs. 74,721 which he got on transfer from his father in the accounts of the firm, the profits which he gets in the business arise out of the transfer of the assets to him. The share of the minor in the partnership business is his income and this income has arisen out of the transfer of the assets. If this argument is accepted, then even if the minor had deposited Rs. 1,000 out of the sum of Rs. 74,721, in the accounts of the firm, the profit to the extent of the whole of his share would be regarded as arising from the deposit made by the minor. This interpretation would not be justified on the language of the section. As I have already indicated earlier, the share of profits which the minor gets in the partnership business is the result of his being admitted to the benefits of the partnership and not the result of his deposit. In our opinion, therefore, both the questions referred to us are to be answered in the negative and the minor's share of profit in any of these firms is not liable to be included in the assessment of the father, that is, the assessee. Questions answered in the negative.