Cursetji J. Dubash v. Commissioner Of Income-Tax, Bombay City Ii.

Tambe, A.C.J:— This is a reference under sub-section (i) of section 66 of the Indian Income-tax Act. The facts leading to this reference in brief are:

Mrs. Katie, wife of the assessee and mother of Gulu, was the lessee ‘of the cinema theatre known as “Kasturba Talkies” situate at Malad, a suburb in the City of Bombay. On 31st July, 1951, she entered into an agreement with one Pirojsha Rustomji Irani, for the running of the said theatre on certain terms and conditions as mentioned in the deed, annexure “A” to the statement of the case. This agreement was treated as an instrument of partnership between herself and P.R Irani. She died intestate on ist February, 1957, and according to the personal law governing her, her heirs were her husband, the assessee before us, and her minor daughter, Gulu. A new agreement for the running of the theatre “Kasturba Talkies” was entered into between C.J Dubash, the assessee before us, acting for himself and as father and natural guardian of the minor daughter, Gulu, on the one hand, and P.R Irani and S.P Irani, on the other, on certain terms and conditions, as mentioned in the deed of 27th March, 1957, annexed to the statement of the case as annexure “B”. An application for renewal of registration under section 26A was made. It was signed by the assessee for himself and for Gulu. In the relevant assessment year, 1958-59, with which we are here concerned, the Income-tax Officer rejected this application for renewal of registration on the ground that this new firm had not been granted registration at any time before and as such the question of granting renewal does not arise. The assessment of the firm was made under section 23(3) read with section 23(5)(b), and the total income of the firm was allocated amongst the partners as shown in annexure “F”. It appears that no appeal has been filed against the assessment order of the firm determining the amount of total income or its allocation amongst the partners under section 23(s)(b). The assessment order which is annexure “D” to the statement of the case shows that Gulu, the minor daughter of the assessee, was shown as a partner in the firm.

2. Now, the assessment order in the individual case of the assessee is not on record. But a copy thereof has been filed before us by the counsel for the assessee, and no objection thereto was raised. This copy of the assessment order in the case of the assessee shows that to his other income has been added Rs. 9,000 as his share of income in the firm, and also in his income is added Rs. 11,000 as his (assessee's) minor daughter's share under section 16(3) subject to rectification pending intimation. The assessment order in the assessee's case was made on 23rd February, 1959, while the assessment order of the firm was made on 28th June, 1959. As the assessment of the firm was after the assessment of the individual case of the assessee, it appears that the inclusion of the minor daughter's income under section 16(3) was subject to rectification pending intimation. Now, the reference with which we are concerned arises out of the individual assessment of the assessee. As already stated, in the assessment of the assessee, the share of his minor daughter, Gulu, in the cinema theatre, “Kasturba Talkies”, has been added under section 16(3) to his income. Against this assessment order, the assessee appealed and contended that the share income of his minor daughter could not be included, in his income under section 16(3) of the Act. The appeal before the Appellate Assistant Commissioner failed. The assessee took a further appeal to the Tribunal, and before the Tribunal the assessee again objected to the inclusion under section 16(3)(a)(ii) of the sum of Rs. 11,000 in his income. Before the Tribunal, a preliminary objection was raised on behalf of the department that the second proviso to sub-section (1) of section 30 prevented the assessee from raising the question of assessment or apportionment of the firm's income. The preliminary objection was upheld by the Tribunal, and the appeal of the assessee was dismissed on that ground. In the view taken by it, and the disposal of the appeal on the preliminary objection, the Tribunal has expressed no opinion as to whether the arrangement arrived at on 27th March, 1957, constituted a partnership agreement or merely an arrangement under which the two Iranis were to manage the business. On an application made by the assessee under section 66(1), the Tribunal has stated the case, raising the following two questions:

“1. Whether, on the facts and in the circumstances of the case, the appeal of the assessee was barred under the second proviso to section 30(1) of the Act? and

2. Whether the income falling to the share of the assessee's minor daughter, Gulu, could be included in the assessee's assessable income under section 16(3)(a)(ii) of the Act?”

3. Mr. Kolah, appearing for the assessee, has contended before us that on a proper construction of the deed of date 27th March, 1957, it would be noticed that Gulu, who is a minor, has been made a full-fledged partner along with the other partners, and has not been admitted to the benefits of partnership; the deed of partnership has been signed on her behalf, and no provision for sharing losses is also made in the deed of 27th March, 1957. No partnership, as such, therefore, is constituted under the said deed. Reliance is placed by Mr. Kolah in support of his contention on the decisions reported in Commissioner Of Income Tax, Bombay v. Dwarkadas Khetan & Co. [1961] 41 I.T.R 528; Commissioner of Income-tax v. Khetan & Co. [1962] 45 I.T.R 170. and M.P Davis v. Commissioner Of Agricultural Income Tax [1959] 35 I.T.R 803 S.C..

4. Mr. Joshi, on the other hand, contends that the assessee not having appealed against the assessment of the firm, the second proviso to section 30(1) precludes the assessee from raising a contention that under the deed of 27th March, 1957, no valid partnership has been constituted in law. In the alternative, Mr. Joshi contends that on a true construction of the deed of 27th March, 1957, a valid partnership has been constituted between the three major partners and the minor, Gulu, has only been admitted to the benefits of the partnership.

5. It is first necessary to see whether the failure on the part of the assessee to prefer an appeal against the assessment order of the firm precludes the assessee from contending that no valid partnership has been constituted under the aforesaid deed. Now, as already stated, the assessment of “Kasturba Talkies” has been made under section 23(3) read with section 23(5)(b). It may also be stated that an application was made for renewal of registration of this firm, which has been signed by the assessee himself. At the time of this assessment, no objection was raised that there was no partnership firm in existence. As already stated, the Income-tax Officer did not allow the application for renewal of registration on the ground that the firm constituted under the deed of 27th March, 1957, was a new firm, and as such firm had not been granted registration at any time before, and therefore there was no question of renewal of registration. Sub-section (5) of section 23 deals with assessment of firms. The material part thereof is in the following terms:

“23-(5) Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (4), as the case may be,—

(a) in the case of a registered firm,

(i) the income-tax payable by the firm itself shall be determined; and (ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined.…

[The provisos to clause (a) are not material for the purposes of this case.]

(b) in the case of an unregistered firm, the Income-tax Officer may, instead of determining the sum payable by the firm itself, proceed to assess the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, and determine the tax payable by each partner on the basis of such assessment, if, in the Income-tax Officer's opinion, the aggregate amount of the tax including super-tax, if any, payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually, if separately assessed; and where the procedure specified in this clause is applied to any unregistered firm, the provisos to clause (a) of this sub-section shall apply thereto as they apply in the case of a registered firm.”

6. The scheme, in short, appears to be that the total income of the partnership firm which is an assessable unit under section 3 of the Act is first determined either under sub-section (1) or sub-section (3) or sub-section (4) of section 23. There is no option to the Income-tax Officer in the case of a registered firm. He has to determine the income-tax payable by the firm itself, and also to distribute the total income of trfe firm amongst the partners in accordance with their shares. In other words, in the case of a registered firm, the total income of the firm gets taxed in the hands of the partners in accordance with their shares. In the case of an unregistered firm, however, there is an option given to the Income-tax Officer. He may assess the total income of the firm in the hands of the firm itself, or he may, if the conditions mentioned in clause (b) of sub-section (5) are fulfilled, tax the total income of the unregistered firm in the hands of the partners in accordance with their shares. Thus, the questions that get determined in an assessment under Sub-section (5) of section 23 are the determination of total income of the firm and its apportionment amongst the persons who have been held to be the partners by the Income-tax Officer. Keeping these things in mind, it will have to be considered as to what is the effect of the failure on the part of a partner to file an appeal against the assessment of the firm under the second proviso to section 30(1) of the Act. Section 30 relates to appeals, and sub-section (1) confers a right on the assessee to file an appeal in certain circumstances mentioned in sub-section (1). The right conferred by the sub-section is on the assessee, and, as already stated, in the case of the assessment of the firm, the assessee is the firm. The second proviso, however, confers certain rights on partners to file an appeal against the assessment of the firm, and it reads as follows:

“Provided further that where the partners of a firm are individually assessable on their shares in the total income of the firm, and such partner may appeal to the Appellate Assistant Commissioner against any order of an Income-tax Officer determining the amount of the total income or the loss of the firm or the apportionment thereof between the several partners, but in respect of matters which are determined by such order may not appeal against the assessment of his own total income.”

7. Now, the right conferred by this proviso is on an individual partner of a firm, in the event the partners have been held to be individually assessable under Sub-section (5) of section 23. The partners are individually assessable where a registered firm is assessed under the provisions of section 23(5)(a). The partners of the unregistered firm are also individually assessable on their share in the total income of the firm when the Income-tax Officer treats the unregistered firm as a registered firm under clause (b) of subsection (5) of section 23. In the instant case, the Income-tax Officer has refused the renewal of registration, but has treated the firm as a registered firm under clause (b) of sub-section (5). Now, the appeal that is contemplated under the second proviso to section 30(1) is against the determination of the amount of total income or loss of the firm and apportionment thereof between the several partners. Admittedly, the assessee who has been treated as a partner of this firm has not appealed under the second proviso, though he had a right of appeal either against the determination of the total income of the firm,” or apportionment of that income amongst the partners. That being the position, even if it is assumed that there was no validly constituted firm under the aforesaid deed of 27th March, 1957, the assessee would be precluded from contending that no firm was constituted under the deed of 27th March, 1957. The assessee would also be precluded from challenging the determination of the total income of that firm, and he would also be precluded from challenging the allocation of the total income of the firm as amongst its four partners—C.J Dubash, the assessee before us, Gulu C.J Dubash, the daughter of the assessee, and P.R Irani and S.P Irani. In our opinion, therefore, it is not necessary to consider further whether the instrument of 27th March, 1957, brings into existence a valid partnership, and in this view of the matter, the first contention raised by Mr. Kolah should fail.

8. This, however, is not sufficient to hold, as held by the Tribunal, that the assessee had no right to file an appeal at all before the Tribunal. The contention of the assessee, apart from whether a valid partnership was constituted or not under the said instrument, was in respect of the inclusion of Gulu's share income in his own income. As already stated, the Income-tax Officer who dealt with the individual assessment case of the assessee, has included Gulu's share income under section 16(3) of the Act. The appeal filed by the assessee to the Appellate Assistant Commissioner was dismissed, and the ground on which it was dismissed is stated in the following terms in paragraph 8 of the statement of the case:

“8. The assessee appealed against the said assessment to the Appel-: late Assistant Commissioner who dismissed the appeal on the ground that the contention of the assessee, that there was no firm in existence during the accounting year, was not borne out by the facts and the provisions of section 16(3)(a)(ii) were absolute and unqualified in terms and not subject to any exception.”

9. In other words, it appears that the view taken by the Appellate Assistant Commissioner is that if the minor is a partner in the firm, then in view of section 16(3)(a)(ii) it is obligatory on the income-tax authorities to include the share income of the partner in the income of the father. It is against this view of the Appellate Assistant Commissioner that an appeal has been filed, and the first sentence of the order of the Tribunal is, “The assessee, who is the father of his minor daughter, Gulu, objects to the inclusion under section 16(3)(a)(ii) of the sum of Rs. 11,000 in his income.” As already stated, the Income-tax Officer has included the amount of Rs. 11,000 in the total income of the assessee as the approximate share of Gulu subject to rectification.

10. These being the contentions raised by the assessee, in our opinion, it is necessary to examine as to whether the said amount of Rs. 11,000 could be included in the assessee's total income under section 16(3)(a)(ii). In ourview, it was necessary for the Tribunal to go into the question even though it has held that the failure on the part of the assessee to file an appeal under the second proviso to sub-section (1) of section 30 precluded the assessee from contending that there was no firm validly constituted under the said instrument of 27th March, 1957. section 16(3)(a)(ii) is in the following terms:

“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—….

(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner.”

11. It would be noticed that, to enable the Income-tax Officer to include the income of a minor child in the income of an individual, it must first be established that the individual is a partner in a partnership firm, and that the minor has been admitted to the benefits of that partnership. In the view taken by us, the assessee is precluded from contending that he was not a partner in the partnership firm; but that does not preclude him from agitating that the income of his minor daughter, Gulu, cannot be included in his own income because Gulu had not been admitted to the benefits of partnership. This question has not been decided by the Tribunal. Mr. Joshi stated before us that as this question had not been decided by the Tribunal, we should send back the case to the Tribunal, calling upon the Tribunal to submit a supplemental statement of the case on this aspect of the case. According to Mr. Joshi, mere construction of the deed is not sufficient; along with, the application for renewal of registration of the firm which has been made, will have to be considered, and that would necessitate an inquiry into the question of fact. According to Mr. Joshi, that application had neither been signed by the minor, Gulu, or on her behalf, and it is therefore necessary to ask for a supplemental statement of the case. Mr. Kolah, on the other hand, contends that the statement of the case clearly shows that the application for renewal of registration was signed on behalf of Gulu. This is the agreed statement of the case, and it is not necessary to ask for a supplemental statement of the case. The matter solely rests on the construction of the deed. He referred us to paragraph 5 of the statement of the case, which runs:

“An application for renewal of registration under section 26A on the strengh of the application signed by them and the assessee for himself and Gulu was presented for the relevant assessment year 1958-59. This application shows that the assessee and his daughter were partners along with P.R Irani and S.P Irani. The share of the daughter was stated to be 5 annas, of the assessee 4 annas, of P.R Irani 3 annas and of S.P Irani 4 annas.”

12. It is clear from this statement of the case that the application for renewal of registration was signed on behalf of Gulu. It is also clear that in the application Gulu has been shown as a partner and not as a person admitted to the benefits of partnership. Mr. Joshi, however, contends that that is not the correct position, and the matter should be sent back calling upon the Tribunal to make a supplemental statement of the case. In our opinion, we will have to proceed with the reference on the aforesaid agreed statement of the case, and we would not be justified in asking for a supplemental statement of the case, because the facts stated in the statement of the case agreed to by the parties are now challenged before us at the stage of the argument of the reference. The question, therefore, whether Gulu has been admitted to the benefits of the partnership or not, or whether she has been made a partner along with other partners, is a matter purely of the construction of the deed of date 27th March, 1957. We do not, therefore, consider it necessary to call for a supplemental statement of the case.

13. Before we proceed to examine the deed, it would be convenient, to see whether any finding has been recorded by the Income-tax Officer or the Appellate Assistant Commissioner, that Gulu had been admitted to the benefits of partnership. The assessment order of the assessee has been placed on record. In that order, the Income-tax Officer observed:

“He has become a partner in the firm of Kasturba Talkies, Malad, during the year under review in place of his wife who was a partner in that firm previous to her death. The assessee has not contributed any capital during the year. His minor daughter, Miss Gulu C.J Dubash, is also a partner. Share of profit of his minor daughter will be included in the hands of the assessee under the provisions of section 16(3) of the Act. Total income is computed on overleaf.”

(I) Share Rs. 9,000 (2) Assessee's minor daughter's share u/s 16(3) subject to rectification pending intimation Rs. 11,000.”

14. In the computation of income, it is stated:

“Add: Share from Kasturba Talkies subject to rectification pending intimation from the 1st I.T.O, B.S.D

Latur Description Parbhani Rs. Rs. 1,64,928 Opening debit balance 46,725 68,030 Credits during the year 26,436 57,349 Debits during the year 24,743 1,54,247 Closing debit balance 45,033 10,681 Reduction in the debit balance 1,692

15. As would be seen from the above, the finding of the Income-tax Officer is that the minor, Gulu, is also a partner along with the assessee in the said firm and it is on this basis that her income has been included in the income of the assessee. Mr. Joshi, however, contends that Gulu's share income has been included under section 16(3) and, therefore, it is implicit in that order that the Income-tax Officer has held that Gulu had been admitted to the benefits of partnership, because section 16(3) only permits inclusion of the share income of the minor child in the income of the individual only when the minor child is admitted to the benefits of partnership. It is indeed true that the share income of the minor child could be included in the income of the individual only when the minor child has been admitted to the benefits of the partnership. But it is difficult to infer from that that when the Income-tax Officer includes the share income of a minor child in the income of the individual, we must in that order read a finding recorded by the Income-tax Officer to the effect that, in his opinion, the minor child has been admitted to the benefits of partnership. It is much more difficult to do so when the Income-tax Officer in terms states that the minor daughter, Gulu, is also a partner. Mr. Joshi, however, contends that the word “partner” used in the order of the Income-tax Officer should be read in the light of the definition contained in section 2(6B) of the Act. That section is in the following terms:

“(6B) ‘firm’, ‘partner’ and ‘partnership’ have the same meaning respectively as in the Indian Partnership Act, 1932 (9 of 1932), provided that the expression ‘partner’ includes any person who being a minor has been admitted to the benefits of partnership.”

16. It is the argument of Mr. Joshi that according to this definition, partner includes a minor who has been admitted to the benefits of partnership, and it is in the light of this definition that we must understand the word “partner” in the order of the Income-tax Officer. Now, it is true that the definition contained in the interpretation clause of the Act is taken as guide in understanding those words used in the Act itself. But it would be difficult to interpret the orders of an officer with the aid of the interpretation clause of the Act. Turning to the order of the Appellate Assistant Commissioner, we have already reproduced paragraph 8 of the statement of the case, which states the ground on which the Appellate Assistant Commissioner has rejected the assessee's appeal. It does not appear that the Appellate Assistant Commissioner has recorded any finding that Gulu had been admitted to the benefits of partnership.

17. This brings us to the deed. But before we examine it, it would be necessary to refer to certain provisions of section 30 of the Partnership Act, which relates to a minor's admission to the benefits of partnership. Sub-section (1) provides that a person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership. Sub-section (2) provides that such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the firm. Sub-section, (3) provides that a minor's share is liable for the acts of the firm, but there is no personal liability on the minor for any such act. These provisions show that the minor is not a party to the agreement of formation of the partnership. The agreement for the formation of the partnership is between adult members, and when all these adult members consent, a minor gets admitted to the benefits of partnership. When he is admitted to the benefits of partnership, he is entitled to a share in the profits. His share, as agreed to by the major partners, is liable for the acts of the firm, but there is no personal liability on him for the acts of the firm. It is necessary to consider whether these conditions have been fulfilled in the instrument of 27th March, 1957. Now, the preamble of this agreement shows that Gulu, who is a minor, herself has been shown as a party to the instrument. The preamble of the instrument shows that the agreement is between the assessee acting for himself and as natural guardian of his minor daughter, Gulu, party of one part, and Phirozesha Rustomji Irani and Soli Phirozesha Irani as parties of the other part. Clause 4, which relates to the distribution of profits is in following terms:

“4. The net profits of the business after deducting all costs, charges and expenses and outgoings will be divided as follows:

The said Cursetji Jamshedji Dubash and the said Gulu will together be entitled to nine annas share out of which the said Cursetji will be entitled to four annas share and the said Gulu will be entitled to five annas share; and

The said Phirozesha Rustomji Irani and the said Soli Phirozesha Irani will be entitled to the remaining seven annas share, the said Phirozesha taking three annas and the said Soli taking the remaining four annas share.”

18. This deed has been signed by the assessee for himself and also for Gulu in his capacity as father and natural guardian of his daughter, Gulu, a minor. The deed also is signed by P.R Irani and S.P Irani. In view of the circumstances that the deed nowhere says that Gulu has been admitted only to the benefits of partnership, the assessee acting both on his own behalf and on behalf of his minor daughter, showing both of them as parties to the instrument, as signing the instrument on behalf of both as other partners have, the distribution of profits to Gulu as to any other partner, and absence of any saving clause in respect of the liability of Gulu for loss, in our opinion, it is not possible, on a true construction of the instrument, to hold that Gulu has been admitted only to the benefits of partnership and has not been admitted as a partner. Thus, Gulu not having been admitted to the benefits of partnership, it is difficult to uphold the orders of the income-tax authorities and of the Tribunal including her share income in the income of the assessee under section 16(3)(a)(ii) of the Act. Mr. Joshi has referred us to certain observations at page 243 of the decision reported in Pt. Deo. Sharma v. Commissioner of Income-tax:

“In this connection, it has to be kept in view that the very fact that the income of Sharma & Co. was actually assessed under section 23(5) itself means that the existence of this firm as a firm was recognised because, under that provision of law, only a firm can be assessed.”

19. It is contended that the minor being a partner of the firm, it must be assumed that she is admitted to the benefits of partnership, the assessment being on a firm. We have discussed above that an unchallenged assessment of the firm may preclude a person shown as partner of the firm from contending that there was no valid firm in existence, though in fact there may be no firm validly constituted brought into existence. But that by itself, in our opinion, would not preclude the said partner from contending in his personal assessment that the share income of the minor partner should not be included in his income because the minor partner has not in fact been admitted to the benefits of partnership.

20. For the reasons stated above, in our opinion, the answer to the first question is that the appeal of the assessee was not barred as regards the contention that Gulu had not been admitted to the benefits of partnership and therefore her share income was not liable to be included in his income. Our answer to the second question is in the negative. The Commissioner shall pay the costs of the assessee.

21. Questions answered accordingly.