AI Drafter 
TaxTMI 
TaxTMI 
1996 (7) TMI 163
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....e latter reference the question referred was "whether on the facts and circumstances of the case the income of Murlidhar Himatsingka for his share in the firm of Messrs. Basantlal Ghanshyamdas for the assessment year 1955-56 was rightly included in his personal assessment for that year." The facts and circumstances out of which these references were made are common because the real question raised by these references is whether the income of Murlidhar Himatsingka, from the firm of M/s. Basantlal Ghanshyamdas, in which he was a partner should be included in his personal assessment or in the assessment of the firm of Fatehchand Murlidhar to which Murlidhar Himatsingka had purported to assign the profits and losses from M/s. Basantlal Ghanshyamdas. It is sufficient to take the facts from the statement of the case in Income-tax Reference No 21 of 1959 made at the instance of Murlidhar Himatsingka. Murlidhar Himatsingka was carrying on business in shellac, jute, hessian, etc, under the name and style of " Fatehchand Murlidhar " at 14/1, Clive Row and 71, Burtolla Street, Calcutta. He was also a partner in the registered firm, Messrs. Basantlal Ghanshyamdas, having 2 as. 8 ps. share. ....
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....s hereto ". Clause 16 provides that " the net profits of the partnership after payment of all outgoings, interest on capital or loans and subject to the creation and maintenance of any reserve or other fund shall belong to the parties and the losses, if any, shall also be borne and paid by the parties in proportion to their shares as stated in clause 10 hereof. " For the assessment year 1955-56 the Income-tax Officer included the income from the share in the registered firm of Basantlal Ghanshyamdas in the individual assessment of Murlidhar Himatsingka. Murlidhar Himatsingka appealed to the Appellate Assistant Commissioner. Referring to section 23(5)(a) of the Act, he held that as Murlidhar Himatsingka was a partner in the registered firm of Basantlal Ghanshyamdas, his share had to be assessed in his hands. He further held that the agreement was merely an arrangement which came into force after the profits were earned and not before they were earned. He held that this agreement being a subsequent disposition of profits, after they had been earned, had to be disregarded. Murlidhar Himatsingka appealed to the Income-tax Appellate Tribunal. The Appellate Tribunal heard this appe....
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....rst point that arises is whether the agreement dated December 21, 1949, has succeeded in diverting the income from Murlidhar's share in M/s. Basantlal Ghanshyamdas to M/s. Fatehchand Murlidhar before it reached Murlidhar. What is the effect of the agreement ? In our opinion the agreement dated December 21, 1949, constituted a sub-partnership in respect of Murlidhar's share in M/s. Basantlal Ghanshyamdas. The High Court in this connection observed: "At best it could be called a sub-partnership entered into by Murlidhar with strangers in respect of his share of the partnership." In arriving at this conclusion we attach importance to the fact that losses were also to be shared and the right to receive profits and pay losses became an asset of the firm, Fatehchand Murlidhar. In Commissioner of Income-tax v. Sitaldas, Tirathdas, Hidayatullah J. speaking for the court, laid down the following test for determining questions like the one posed above. After reviewing a number of authorities, he observed: " In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it....
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....five parties would share the profits and losses in proportion to their individual contribution. It was also mentioned that the terms and conditions mentioned in the registered partnership were to be applicable and binding on them. The Bombay High Court held that the assessee was liable to be assessed only in respect of his share of the profits of the registered partnership. In coming to this conclusion, the High Court relied on two other decisions of the same court, namely, Seth Motilal Manekchand v. Commissioner of Income-tax and Sitaldas Tirathdas v. Commissioner of Income-tax. As pointed out by the learned counsel for the respondent, Mr. Hajarnavis, Sitaldas Tirathdas v. Commissioner of Income-tax was reversed by this court in Commissioner of Income-tax v. Sitaldas Tirathdas. Hidayatullah J., at page 374 of his judgment, reversing the judgment of the Bombay High Court, had also referred to Seth Motilal Manekchand v. Commissioner of Income-tax, but did not expressly dissent from this case. In our opinion, the case of Ratilal B. Daftari v. Commissioner of Income-tax was rightly decided, although the reasoning given by the learned judges of the High Court has to some extent not bee....
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....b-partnership, he cannot treat the income as his own. Prior to the case of Cox v. Hickman, sub-partners were even liable to the creditors of the original partnership. Be that as it may, and whether he is treated as an assignee within section 29 of the Indian Partnership Act, as some cases do, a sub-partner has definite enforceable rights to claim a share in the profits accrued to or received by the partner. The decision of this court in Charandas Haridas v. Commissioner of Income-tax seems to support, at least by inference, this conclusion. In that case the facts were as follows : Charandas Haridas was the karta of a Hindu undivided family consisting of his wife, his three minor sons and himself. He was a partner in six managing agency firms and the share of the managing agency commission received by him as such partner was being assessed as the income of the family. By a memorandum executed by the coparceners of the family a partial partition of the income from the managing agency was brought about. The memorandum stated : "We have decided that... in respect of the commission which accrues trom 1st January, 1946, and received after that date each of us becomes absolute owner....
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....r, in other words, an agreement by which he was applying or distributing an income which he had already himself earned and received. Such application or distribution would be a voluntary act of Mahaliram Santhalia in respect of a sum which, it was conceded, had rightly been included in his own total income and, therefore, was his own income. If the moment the share of the income from the Benares Steel Rolling Mills was allocated to Mahaliram Santhalia, it became his income and liable as such to be included in his own total income for the purpose of his personal assessment, an agreement by him with other persons regarding the rights to that income could only be a voluntary disposition of his income by him. No question of a diversion by superior title could possibly arise. " With respect, we are unable to agree with most of this reasoning. In our view, in the case of a sub-partnership the sub-partnership creates a superior title and diverts the income before it becomes the income of the partner. In other words, the partner in the main firm receives the income not only on his behalf but on behalf of the partners in the sub-partnership. The Calcutta High Court also seems to be, in o....
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....idar alone who can be assessed in respect of the income received by him. In conclusion we hold that the High Court was in error in holding that there was no question of an overriding obligation in this case and that the income remained the income of Murlidhar Himatsingka in spite of the sub-partnership created by him under the agreement dated December 21, 1949. The second contention raised by Mr. Hajarnavis was not debated in the High Court, but in our opinion, there is no substance in this contention. We have already mentioned that a benamidar can be a partner in a firm. Now if Mr. Hajarnavis's contention is right, under section 23(5)(a) of the Act it is only he who could be assessed, but there is no warrant for this proposition. In Commissioner of Income-tax v. Kalu Babu Lal Chand this court mentioned with approval Kaniram Hazarimull v. Commissioner of Income-tax where income from a partnership received by a karta was held to be assessable in the hands of the Hindu undivided family. This court observed at page 128 as follows : " If for the purpose of contribution of his share of the capital in the firm the karta brought in monies out of the till of the Hindu undivided fa....