Commissioner Of Income-Tax, Madras-Ii v. Smt. Shajathi (Alias) Jainabi And Another.

Sethuraman, J.:— This reference has been made under section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, Madras-II, Madras, raising the following question of law:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the department was not justified in clubbing the income of the minors with that of the assessee on the ground that the income did not arise from their admission to the benefits of partnership and that the profit shares were diverted by an overriding title?”

2. One Shahul Hameed was carrying on business.

3. He died on 25th May, 1965, leaving eight heirs consisting of his widow, one major son, two minor sons, two major daughters and two minor daughters. After the death of Shahul Hameed, the several heirs left by him were entitled to the following shares under the Muslim law:

S.M Habibullah (major son) … 14 shares S.S Kalimullah (minor son) … 14 shares Ashrof Ali (minor) … 14 shares Jaina Bibi (widow) … 10 shares Rahila Begum (married daughter) … 7 shares Rahimunnisa Begum (do) … 7 shares Vahirunnisa (minor) … 7 shares Nurunnisa (minor) … 7 shares

4. On 2nd July, 1965, a deed of partnership was entered into under which the partners were S.M Habibullah, the major son, Rahimunnissa Begum, the major daughter and Jaina Bibi, the widow. In the partnership deed, it is stated that the major daughter, Rahila Begum, did not want to join the partnership and, therefore, she and the other four minor heirs had to be paid their share of profits relatable to their shares in the business. The shares relatable to them came to 49 out of 80. The arrangement in the partnership was that from and out of the profits ascertained by the firm, 49 shares referable to the abovesaid five persons would be first set apart and the balance of 31 shares out of 80 shares would be apportioned as follows:

S.M Habibullah … 14 shares Jaina Bibi … 10 shares Rahimunnisa Begum … 7 shares 31

5. With reference to the reservation or setting apart of the 49 shares, it was stated that under the Muslim law, interest should not be paid and, therefore, they were paying the shares of profits to the persons whose shares of assets were employed in the business. This firm applied for registration under section 185 of the Income-tax Act for the assessment year 1967-68. The firm was granted registration. In making the assessment on the firm, the Income-tax Officer took the total income of the firm and apportioned it not only among the three partners of the firm but also among the four minors. Further, in making the assessment on Jaina Bibi, the widow, the Income-tax Officer included the share income of her minor children in respect of the said firm as if it was assessable in her hands as per the provisions of section 64 of the Income-tax Act, 1961, on the footing that the minors were admitted to the benefits of partnership.

6. Two appeals came to be filed, one by Jaina Bibi and the other by the firm in which the common contention was that the minors had not been admitted to the benefits of the partnership. With reference to the assessment on Jaina Bibi, the contention was that the amount referable to the minors should not be assessed in her hands and in the case of the firm the contention was that 49 out of 80 shares reserved for the heirs who were not included in the firm should first be excluded and the balance of the income alone should be computed in the hands of the firm. The Appellate Assistant Commissioner did not accept these submissions and he confirmed the assessment. The matter thereafter came before the Tribunal at the instance of the widow as well as the firm. The Tribunal accepted the submissions of the assessees. Taking into consideration the facts and circumstances of the case, the Tribunal was of the view that the minors had not been admitted to the benefits of partnership and that they were to be paid the shares due to them in view of the overriding title and the balance was to be apportioned among the partners. The Tribunal was further of the view that the department was not justified in clubbing the income of the minors with that of Jaina Bibi and that the income of the minors was independent and not an income arising from their admission to the benefits of the partnership.

7. As mentioned already, at the instance of the Commissioner, the question as set out earlier has been referred for the opinion of this court.

8. The only point that arises for consideration in this case is whether the minors were admitted to the benefits of partnership. If the minors had been admitted to the benefits of partnership, then it would be proper to assess the income referable to the minors in the hands of the firm and also to club the income with that of Jaina Bibi, the widow. The document of partnership is in Tamil. The translation thereof as given in the Tribunal's order and in the statement of the case is not quite correct. In the Tribunal's order and in the statement of the case, it is stated: “Whereas the minors are entitled to share the profits alone and cannot bear the losses”. No such statement occurs in the Tamil document, which is annexure “A” to the statement of the case. What is provided in the document is that with reference to heirs, who were not the partners, there will be a separation or setting apart of the share of profits and that after excluding the said 49 shares, the balance alone will be the subject of division among the three partners who constituted the firm. As far as the losses are concerned, it is clearly stated that only the three partners who constituted the firm would bear them. The way in which the document is drafted will clearly show that the minor sons and daughters were not admitted to the benefits of the partnership. In these circumstances, the Tribunal's conclusion that their shares could not be included in the assessment of the respective assessees has to be upheld. The Tribunal has taken the view that the share of the minors came to them by reason of an overriding title. This is because the said persons were entitled under the Muslim law to a share in the assets of the deceased. It is the income from the assets referable to the minors which was first set apart and, thereafter, alone, the balance was subject to division amongst the partners. Therefore, there was to that extent an overriding title in respect of the minors' shares. The Tribunal was right in taking this view.

9. For the foregoing reasons, we answer the question referred to us in the affirmative and in favour of the assessees. The assessee represented before us will be entitled to his costs. Counsel's fee is fixed at Rs. 250.