- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax, Tamil Nadu-I v. Smt. Lakshmi Narayan
Judgment Summary — Sethuraman, J.
Factual and Procedural Background
This reference arises under s. 256(1) of the Income-tax Act, 1961 on a question posed by the Commissioner of Income-tax:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that only 1/7th of the income from the firm of M/s. Southern Mercantile Corporation, Madras, should be assessed in the assessee's hands?”
The material facts, as recited in the opinion, are:
- The assessee is the widow of Shri S. Narayan, who died on 16 November 1968. Shri Narayan had been a partner in M/s. Southern Mercantile Corporation with a capital share worth Rs. 40,000.
- With effect from 17 November 1968 the partnership was reconstituted, and the assessee was admitted as a partner “in the place of her husband.” The partnership deed's recital expressly records her admission at her request.
- Shri Narayan left a widow and six children (one of whom was a minor at the relevant time).
- The income attributable to the partner's share was assessed in the assessee's hands. The assessee contended she should be assessed only on 1/7th of that income corresponding to her share in her husband's estate; the ITO and the AAC rejected this contention.
- The Appellate Tribunal held that the widow, being the sole person shown as partner after reconstitution, effectively represented all heirs and so could be assessed only with reference to a 1/7th share; that Tribunal order is the subject of the present reference.
Legal Issues Presented
- Whether the Appellate Tribunal was correct in holding that only 1/7th of the income from the firm should be assessed in the assessee's hands (i.e., whether the widow, admitted as partner in place of her husband, should be assessed only to her 1/7th share of the deceased's estate rather than to the full partner's share of firm income).
Arguments of the Parties
Assessee's Arguments
- The assessee (through her counsel) relied on provisions of the Hindu Succession Act to contend that she was entitled only to a 1/7th share in the deceased husband's estate and that other heirs were separately entitled to 1/7th each.
- It was argued that she could be assessed only with reference to her share in the estate; where funds of a co-owned estate are used to invest or to join a partnership, the contributor remains accountable to the estate and the income must be assessed with reference to actual ownership among co-owners.
- The assessee maintained there was no evidence that she entered into the partnership only for and on behalf of the other heirs; absent contemporaneous proof that she represented the other heirs, her share of partnership income should be taxed in her hands alone.
- Assessee's counsel also relied on the case CIT v. Smt. Shajathi Alias Jainabi ([1977] 110 ITR 738) as an instance where an overriding title in favour of minors (set-apart shares) precluded inclusion of those shares in another person's assessment.
Other Submissions Noted in the Opinion
- The opinion records consideration of analogous assessment approaches (e.g., assessing sub-partnerships, joint families, or trusts) but emphasises that those situations depend on either personal law or explicit contractual/trust arrangements creating fiduciary or representational relationships.
- The Tribunal's position — that the widow represented all heirs and thus only her 1/7th should be taxed — is described and analysed by the court.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Smt. Shajathi Alias Jainabi, [1977] 110 ITR 738 | Held that where a partnership deed set apart shares payable to minors (or other heirs) before division among admitting partners, there arose an overriding title in respect of those shares and those amounts could not be included in the assessment of another person under s. 64 (i.e., the minors were not admitted to partnership benefits and their shares were protected). | The court considered the decision but concluded it was distinguishable: in Shajathi the partnership deed expressly set apart shares for minors (creating an overriding title), whereas in the present case the partnership deed mentions only the assessee as the admitted partner and contains no provision setting apart income for other heirs. Therefore Shajathi was not applicable to the facts before the court. |
Court's Reasoning and Analysis
The court's analysis proceeds by close examination of the partnership deed recitals and the evidentiary record (or absence thereof):
- Documentary foundation: The partnership deed expressly recites that the parties agreed to take the assessee as a partner “in the place of her husband” at her request. There is no recital or document indicating that other heirs authorized or requested that she represent them in the partnership.
- Evidentiary gap: The Tribunal's statement that “it appears that the capital originally contributed by Shri Narayan was transferred to the credit of the assessee” was not supported by annexed accounts or contemporaneous entries. The court treats the phrase “it appears” as not amounting to a firm factual finding regarding the capital transfer or its nature.
- Representation and authority: There is no proof that the assessee entered the partnership as a representative or fiduciary of the other heirs; absent evidence of an agreement among heirs or of an express trust or fiduciary appointment, the court is unwilling to treat the assessee as a mere agent or representative for the estate.
- Distinction from other institutional relationships: The court recognises that assessments sometimes treat persons shown as individual partners as representatives of joint families, sub-partnerships or trusts, but emphasises that those outcomes rest on either personal law, explicit contractual arrangements, or an express or implied trust/fiduciary relationship. None of those elements is present here.
- Accounting versus assessment: Even if, on some view, the deceased's capital was used by the assessee for the partnership and that fact gave rise to accounting rights among co-owners, those are matters of accounting between co-owners and do not, in the court's view, determine who is chargeable to tax on the partnership income in the absence of proof that the assessee acted only in a representative capacity.
- Distinguishing precedent: The court analysed CIT v. Smt. Shajathi and explained that the overriding title that protected minors' shares in that case arose from the specific terms of the partnership deed. No analogous provision exists in the present partnership deed.
- Conclusion of error: Given the absence of evidence that the assessee was acting as representative of the estate or that an overriding title existed in respect of other heirs, the Tribunal erred in restricting assessment to 1/7th of the firm's income in the assessee's hands.
Holding and Implications
Holding: The referred question is answered in the negative and in favour of the revenue. The court made clear that the assessee must be assessed with reference to her entire share income from the firm.
Direct consequences imposed by the court:
- The assessee will be assessed on the whole of her partner's share of income (not limited to 1/7th).
- The Commissioner is entitled to costs; counsel's fee is fixed at Rs. 500; “One set.”
Implications beyond this case: The opinion does not articulate any new general rule or precedent beyond the decision on the facts; it rests on application of existing principles concerning evidentiary proof of representative/fiduciary roles, the content of partnership deeds and the distinction between accounting rights among co-owners and tax incidence. No broader change in law is announced.
Sethuraman, J.:— At the instance of the Commissioner of Income-tax, the following question has been referred to this court under s. 256(1) of the I.T Act, 1961:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that only 1/7th of the income from the firm of M/s. Southern Mercantile Corporation, Madras, should be assessed in the assessee's hands?”
2. The assessee is the widow of one Shri S. Narayan who died on November 16, 1968. He was a partner of the firm, M/s. Southern Mercantile Corporation, with a share worth Rs. 40,000 therein. With effect from November 17, 1968, i.e, the day after he died, the partnership was reconstituted taking the assessee as a partner in his place. The Tribunal has stated: “It appears that the capital originally contributed by Shri Narayan was transferred to the credit of the assessee and she continued to have the same share in the firm.” The Tribunal has not referred to, nor has it annexed, any account or entries on the basis of which this statement has been made. The said Shri Narayan left behind him his widow and six children, one of whom was a minor at the relevant time. The share income from the firm was assessed in the hands of the assessee. The objection of the assessee was that she was assessable only on 1/7th of the income as she had only an 1/7th share in the estate left by her husband. The ITO rejected this contention. The assessee appealed to the AAC and contended that she could not be the absolute owner of the entire income in view of the fact that her husband had left behind him six other heirs. The AAC also rejected this contention and, therefore, the assessee took the matter on appeal to the Tribunal. The Tribunal held that the fact that the widow alone was a partner of the firm could not make a difference to the enjoyment of the income by her and her children. In the view of the Tribunal, she was only representing all the heirs of her husband and their right to succeed to the estate could not be defeated by the fact that she alone was shown as the partner in the reconstituted firm. The Tribunal was of the opinion that she could be assessed only with reference to her 1/7th share in the firm. It is this order of the Tribunal that has been brought up on a reference. In the partnership deed, the following statement occurs in the recital portion:
“Whereas the parties of the first, second and third parts (there being the other surviving partners of the firm) together with Sri S. Narayan were carrying on business in partnership under the name and style of SOUTHERN MERCANTILE CORPORATION under the partnership deed dated 1-10-1964;
And whereas the said Mr. S. Narayan died on 16-11-1968 and whereas at her request the parties of the first, second and third parts hereto have agreed to take the party of the fourth part as a partner as and from 17-11-1968, in the place of her husband (deceased);
And whereas the parties hereto have now agreed to continue and carry on the said business of SOUTHERN MERCANTILE CORPORATION in partnership among themselves on the following terms and conditions.”
3. Thus, the partnership deed itself shows that it was the assessee who represented to the other partners that she might be taken as a partner with effect from November 17, 1968, in the place of her husband. There is absolutely no mention of any of the other heirs having made any such representation. There is also no evidence to show that there was any kind of agreement among the heirs prior to the reconstitution of the firm, as a result of which she was asked to represent the other heirs in the partnership. As mentioned earlier, apart from the mere statement in the order of the Tribunal that the capital originally provided by Mr. Narayan was transferred to the credit of the assessee, there is no clear finding in the order of the Tribunal that the capital account so transferred formed the capital contribution of the lady. The words “it appears” cannot be taken as giving any definite finding with reference to a fact like this. She can conceivably indent on the estate's resources for her own purposes. Even, otherwise, the question would be whether she represented the estate as such. As indicated earlier, there is absolutely no proof that she represented the estate and in fact in the teeth of the recitals in the partnership deed itself, it cannot be said that she represented any one at all, except herself.
4. Learned counsel for the assessee relied on the provisions of the Hindu Succession Act as showing that the was only entitled to an 1/7th share in the estate and that the other heirs were separately entitled to 1/7th share each. In his submission, the assessee could be assessed only with reference to her share in the estate. Partnership arises out of the agreement between the parties. It is open to any one of the co-owners of the estate to take the funds from the estate and invest the same in any manner he or she liked, so long as he or she is accountable to the estate as such. In the present case, in the absence of any contemporaneous evidence to show that she entered into the partnership only for and on behalf of the other heirs of the deceased, it is to be taken that she utilised the funds available in the estate for the purpose of joining the firm. Even assuming that a firm finding can be spelt out from the order of the Tribunal, that the amount available to the credit of the deceased was taken over by her for contribution of her share of capital, it would be a question of accounting between her and other co-owners, as regards the asset employed in the firm's business and the income derived therefrom. In the present reference, we are not determining the rights of the parties. We are concerned in the present reference only with the question as to who is assessable on the share income. In the absence of any evidence to show that she entered into partnership in any other capacity, her share income would have to be taxed only in her hands.
5. Learned counsel drew our attention to the assessments being made in the case of joint families or sub-partnership or trusts taking into account the respective features, even though the particular person, who is shown in the deed of partnership as partner, may be an individual. In other words, the point sought to be urged is that, just as it is possible to assess a sub-partnership, a joint family, or a trust with reference to the income of the firm, similarly, in the present case, the assessment should be done on the several heirs separately. He even went to the length of suggesting that there is some kind of overriding title. In all these cases, viz., trust sub-partnership or joint family, the matter is dependent upon either the personal law of the parties or the contract between the parties. In the absence of anything in the personal law vesting in one of the heirs, a fiduciary character, when he or she embarks upon a partnership with the assets of the estate, it would not be possible to postulate that he or she earns the income only on behalf of the other persons who are the heirs of the deceased. There is no contract between the parties so as to invest the transaction with the character of a sub-partnership, nor is there any question of trust because there is no trust, express or implied. There is nothing in the Hindu Succession Act specifying that in a case like this an heir represents only the estate and that he or she cannot be taken as a full owner of the income. We are not concerned here to find out the extent of her share in the estate. There is no diversion by overriding title of 6/7ths of the share income. In these circumstances, we consider that the Tribunal acted erroneously in holding the assessee liable to the extent of only 1/7th share of the income from the estate.
6. Learned counsel for the assessee drew our attention to a decision of this court in CIT v. Smt. Shajathi Alias Jainabi, [1977] 110 ITR 738. That was the case of a Muslim who died leaving behind eight heirs including two minor sons and two minor daughters. As one married daughter did not want to become a partner in the partnership formed to carry on the business run by the deceased, the three other major heirs entered into a partnership, under which the shares, to which the two minor sons, the two minor daughters and the major daughter, who did not want to become a partner, would be entitled under the Muslim law, were set apart from the profits and gains of the partnership, and the balance of profit was agreed to be shared by the three persons in the same ratio to which they would be entitled under the Muslim law. The losses of the firm were also agreed to be divided among the three persons in the same ratio. The firm was granted registration. In making the assessment of the widow, the ITO included in her total income the amounts paid to the two minor sons and two minor daughters, by applying s. 64 of the I.T Act, 1961. The Tribunal held that the minors were to be paid their shares due to them in view of the overriding title. The income arising to the minors was held as not being due to their admission to the benefits of the partnership, with reference to which alone s. 64 could apply. On a reference to this court, it was held that the way in which the deed was drafted would clearly show that the minor sons and daughters were not admitted to the benefits of the partnership and that the Tribunal's view that their shares could not be included in the assessment of the widow had to be upheld. As the minors were entitled under the Muslim law to a share in the assets of the deceased and as it was the income from the assets referable to the minors, which was first set apart and, thereafter, alone the balance was subject to division among the partners, it was held that there was to that extent an overriding title in respect of the shares of the minors. The overriding title had arisen by virtue of the manner in which the partnership came into existence. That is not the position here. In the present case, there is no mention in the deed of partnership of any person other than the asseesee being entitled to the income from the partnership. In these circumstances, it is not possible to apply the decision of this court in CIT v. Smt. Shajathi, [1977] 110 ITR 738, to the facts of the present case.
7. The result is that the question referred to us is answered in the negative and in favour of the revenue. We make it clear that our answer implies that the assessee will have to be assessed with reference to her entire share income. The Commissioner will be entitled to his costs. Counsel's fee Rs. 500. One set.
Alert