TaxTMI 
TaxTMI 
1980 (7) TMI 19
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....9-70, the relevant previous years ending on December 31, 1965, December 31, 1966, December 31, 1967 and December 31, 1968, respectively. Lala Prag Narain Agarwal constituted an HUF, and died on June 18, 1938, leaving behind him six sons and movable and immovable properties and certain business. After the death of Lala Prag Narain, his sons constituted a firm under a deed of partnership dated January 25, 1941, and on the dissolution of the firm, the business at Aligarh was allotted to Sri Shiv Narain Agarwal, the assessee in this case, and his brother Karmendra Narain Agarwal. Both the brothers then formed a firm on December 2, 1947, with 50% share both in the capital, as well as in the profits and losses. Sri Shiv Narain Agarwal was a partner in the firm as karta of an HUF. On July 1, 1953, his son Shri Ajay Narain Agarwal was made a partner in his individual capacity, and he separated from the family vis-a-vis the business. Similarly, on January 1, 1957, the assessee's other son Sri Vinay Narain also become a partner having two shares in his own right, and severed his interest in the family in so far as the business was concerned. The firm was granted registration by the AAC. Sri ....
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....rs, viz., 62 shares each, by Mohini Agarwal. The transference shall be got done as soon as possible in favour of the respective members and steps shall be taken to have these shares registered in the company in the names of the above named members. The above shares are now no longer jointly owned and would henceforth be the property of the above named parties individually to the extent of their respective shares. Any sum found to the credit of Sri S.N. Agarwal with M/s. S.K. Agencies P. Ltd., would also be divided in equal shares of 1/4th each between Sri S.N. Agarwal, Smt. Vishwa Mohini Agarwal, Sri S.N. Agarwal Sri V.N. Agarwal; And, whereas, on January 1, 1964, it was also declared by Sri S.N. Agarwal, that the share of his wife Smt. Vishwa Mohini Agarwal in asset No. (ii) above which remained invested in the firm of M/s. Shiv Narain Karmendra Narain through Sri S.N. Agarwal will no longer remain joint. And, whereas, pursuant to the above declaration proper book entries of the joint capital as on December 31, 1962, have been made in the account books maintained by Sri S.N. Agarwal showing the division in two equal shares; And, whereas, it was further declared by him, th....
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....rm M/s. Shiv Narain Karmendra Narain was effected on December 31, 1962, which was reduced in writing in the form of a memorandum dated January 2, 1963, the relevant part of which we have already extracted. Relying on the decision given in the assessee's wealth-tax appeal, wherein it had been held by the Tribunal that 1/2 share of the capital invested in the said firm did not belong to the assessee, he held that the assessee's income from the share should be taxed at only 2 annas of the profits. On appeal, the Tribunal found that his two sons Sri Ajay Narain and Sri Vijay Narain Agarwal had separated on July 1, 1953 and January 1, 1957. Thereafter, the capital investment of Rs. 3,79,433.75 as on December 31., 1962, outstanding in the name of Sri Shiv Narain in the books of the firm was jointly owned by him and his wife, Smt. Vishwa Mohini Agarwal. On December 31, 1962, Sri Shiv Narain Agarwal declared that the assets no longer were joint and would be divided. Pursuant to that declaration, entries were made in the account books maintained by Sri Shiv Narain Agarwal showing the division of the capital in two equal shares as on December 31, 1962, and Sri Shiv Narain Agarwal agreed to p....
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....could not make a claim against the firm, as she was not a partner, and likewise the assessee could not withdraw the investments in the firm unless he either retired from the partnership, or claimed a dissolution of the partnership, and took his share after accounts, and divided the profits between himself and his wife. Thus, the business assets came to be owned by the assessee and his wife as tenants-in-common and the HUF no longer owned the assets. See Charandas Haridas v. CIT [1960] 39 ITR 202 (SC). We have also extracted the declaration made by the assessee on January 1, 1963, in respect of the capital invested in the firm. Paragraph 12 of the declaration states that the share of the wife in the firm no longer remained joint with her husband, and paras. 14 and 15 recited that as for the future the assessee will pay 2 annas share of profits to his wife on account of her separate share in the capital investment in the said business. This payment was to continue so long as her capital remained invested in the business through Sri Shiv Narain Agarwal. Paragraph 16 recites that the profits referred included losses, and makes the wife liable to pay losses, if incurred by the firm to t....
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....into account the real relationship between the parties as shown by all the relevant facts taken together. Explanation I to it states that mere sharing of profits of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. Explanation 2 lays down that the receipt by a person of a share of the profits of a business or of a payment contingent upon the earning of profits or varying with the profits earned by business does not of itself make him a partner with the persons carrying on the business. Thus the entire circumstances have to be seen in order to determine as to whether a partnership has come into existence. Now, in the present case, the existence of partnership is sought to be proved on account of the following facts: (i) that the share of the capital of the wife was kept invested in the firm through the assessee ; (ii) that the wife was entitled to two annas share in the profit of the firm and also liable for losses. The question is as to whether this is sufficient to constitute a partnership. An agreement to share the profits and losses of a business may be said to be characte....
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....to distribute and hand over their respective share of profits as stipulated. The question was as to whether a sub-partnership had come into existence between the assessee, his wife, his major son and three minor sons. It was held that a sub-partnership did not come into existence, for some of the parties to the arrangement were minors, and further that these minors shared losses of the firm, which could not be validly done under the partnership Act. The court also took into account, while reaching this conclusion, the fact that the agreement did not talk of creating a partnership between the members of the family. This case does not help, for, the decision turned in favour of the assessee mainly on the consideration that the minors could not validly enter into a partnership agreement. In CWT v. J.K.K. Angappa Chettiar [1979] 116 ITR 456 (Mad), the HUF consisted of the assessee and his two minor sons. The assessee was partner in various partnership firms as karta of the HUF. A partition took place in the family on March 31, 1961, as a result of which the capital of the HUF was divided between the assessee and his two sons. During wealth-tax assessments, the assessee claimed that ....
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.... interest in the adventure being carried on in fact, no concealment of name, no verbal equivalent for the ordinary phrases of profit or loss, no indirect expedient for enforcing control over the adventure will prevent the substance and reality of the transaction being adjudged to be a partnership; and I think should add, as applicable to this case, that the separation of different stipulations of one arrangement into different deeds will not alter the real arrangement, whatever in fact that arrangement is proved to be. And no 'phrasing of it' by dexterous draftsmen, to quote one of the letters, will avail to avert the legal consequences of the contract." The case of Re Jane Exparte, The Trustee [1914] 110 LT 556, wherein it was held that the mere agreement to share profits and losses does not constitute a partnership, and the decision in Walker v. Hirsch [1884] 27 Ch D 460 was distinguished. The case was found to be close to the case of Moore v. Davis [1879] 11 Ch D 261 wherein at page 265, it was held that there was nothing in the agreement or in the circumstances in which it was entered into or the manner in which it was performed or carried out to displace the presumption ....
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....artnership. The Full Bench of the Lahore High Court in the case of M/s. B.C.G.A. (Punjab) Ltd. v. CIT [1937] 5 ITR 279 (Lahore), is also not much of help for all that it lays down is that the mere circumstance that a person is to share profits only, and not losses, does not by itself militate against the presumption of partnership. The decision in Champaran Cane Concern v. State of Bihar [1963] 49 ITR 152 (SC), on which the assessee strongly relied, in our considered view, does not clinch the issue. In that case, two persons had purchased certain farms jointly and had appointed a common manager for the agricultural operations. The Agrl. I.T. authorities, assessed the assessee on the footing that it was a partnership on the consideration that the name of the assessee was " Champaran Cane Concern ", that two individuals joined together in appointing a common manager for the supervision of cultivation, and the cultivation was made jointly on behalf of them, and the profits arising therefrom were distributed in proportion to their respective share. It was held that, in order to determine as to whether the relationship of a co-owner or partnership existed, both the form and substance of....
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....er to determine whether a group of persons is or is not a firm or whether a person is or is not a partner in a firm, the real relationship between the parties has to be seen. In this very case, the Supreme Court looked into the real relationship between the parties and negatived the contention on the ground that inasmuch as the complete control of the business had been given to one person, a partnership had not come into existence. Now, let us examine as to whether, in the present case, a partnership came into existence by a look at the agreement, on the basis of which the Revenue contends that the husband and the wife constituted a sub-partnership. Both the husband and the wife were entitled to share in the profits of the firm and liable for its losses. This is the prima facie evidence of a partnership, for s. 4 of the Partnership Act says so. Then s. 6 of the Partnership Act and the cases to which we have referred earlier, require us to examine the entire circumstances of the case in order to determine as to whether the assessee and his wife were really partners. We have seen that after the partition, the assessee and his wife owned the capital invested in the firm as tenants-....
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....64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly (i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner." It has been contended that the sub-partnership does not carry on any business as it is the firm of M/s. Shiv Narain Karmendra Narain which carried on the business and all that is done is that the income received by Shiv Narain from the firm, M/s. Shiv Narain Karmendra Narain, is divided between himself and wife. It is suggested that this division of profits does not amount to carrying on a business, which is a necessary element of s. 64(1)(i) of the I.T. Act. The question then is whether the alleged sub-partnership (for we have already held in answer to question No. 1, that there was no sub-partnership which came into existence) can be said to be carrying on a business. In Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC), it was held that the word " business " connotes some substantial and systematic organised course of activity or conduct with a set purpose. Now if there was a sub-partnership that....