1973 (4) TMI 10 - HC - Income Tax

Court excludes wife's partnership income from husband's tax assessment under Income-tax Act

Prahladrai Agarwala Versus Commissioner of Income-Tax, West Bengal II, Calcutta.

The court ruled in favor of the assessee, determining that the share of profit earned by the assessee's wife from a partnership firm should not be ... Assessee had been and at the material time also was a partner in a firm called M/s. Ramesh & Co. In this firm the assessee had 8 annas share and the balance was shared by three other partners, Kunjilal, assessee's father, Hariram, assessee's brother, and one Jagdish Prosad, a stranger. From his account with the said firm the assessee made two gifts to his wife, Kaushalya Debi, Rs. 21,000 on 10th November, 1960, and Rs. 30,000 on the 28th November, 1960. The assessee also made a gift of Rs. 11,000 to his mother, Smt. Chilli Bai, on 28th November, 1960, by similarly drawing from his account with the firm. - ' Whether, on the facts and in the circumstances of the case, the share of the profit of assessee's wife was includible in the total income of the assessee under section 64(iii) of the Income-tax Act, 1961 ? ' Issues Involved:1. Inclusion of the share of the profit of the assessee's wife in the total income of the assessee under section 64(iii) of the Income-tax Act, 1961.Issue-Wise Detailed Analysis:1. Inclusion of the share of the profit of the assessee's wife in the total income of the assessee under section 64(iii) of the Income-tax Act, 1961:The primary issue in this case is whether the share of the profit earned by the assessee's wife from a partnership firm should be included in the total income of the assessee under section 64(iii) of the Income-tax Act, 1961. The relevant assessment year is 1962-63.The assessee, an individual, was a partner in a firm named M/s. Ramesh & Co. He made gifts of Rs. 21,000 and Rs. 30,000 to his wife, which she then used as capital contributions to become a partner in a newly constituted firm, M/s. Kunjilal Hariram & Co. The Income-tax Officer included the profits earned by the wife from this firm in the assessee's total income under section 64(iii).The Appellate Assistant Commissioner upheld this inclusion, and the assessee's appeal to the Income-tax Appellate Tribunal was dismissed. The Tribunal concluded that the share of the profit should be included under section 64(iii) because the wife was admitted to the partnership due to her capital contribution, which was a pre-condition for her admission. The Tribunal also found no distinction between the interest earned by the wife and her share of the profit, both of which should be included in the assessee's income.The court examined whether the share of profit earned by the wife could be considered as income arising directly or indirectly from the assets transferred by the assessee. The court referred to the Supreme Court's decision in Commissioner of Income-tax v. Prem Bhai Parekh, where it was held that the connection between the gifts made by the assessee and the income of the minors from the firm was too remote. The income arose due to the minors' participation in the partnership, which depended on the agreement between the partners, not on the gifts.The court distinguished this case from Potti Veerayya Sresty v. Commissioner of Income-tax, where the Andhra Pradesh High Court found no nexus between the income earned and the asset transferred. The court also referred to Smt. Mohini Thapar v. Commissioner of Income-tax, where the Supreme Court held that income derived from investments made from gifted cash should be included in the total income of the assessee under section 16(3)(a)(iii) of the Indian Income-tax Act, 1922.In the present case, the court concluded that the profits earned by the wife as a partner arose primarily because the partnership made a profit, and this was not a direct result of the gift. The income arose due to the wife's participation in the partnership, which was based on an agreement with other partners. Thus, the connection between the income and the gifts was too remote to be included under section 64(iii).The court noted that the Tribunal's inability to distinguish between interest earned and share of profit was flawed. Interest earned from an investment is similar to interest earned from a bank deposit and can be included under section 64(iii), but the share of profit involves active participation in the business, which is not the result of the gift alone.Conclusion:The court answered the referred question in the negative, ruling in favor of the assessee. Each party was ordered to bear its own costs.