FATEHCHAND MURLIDHAR AND ANR vs. COMMISSIONER OF INCOME-TAX, CALCUTTA
What did the Supreme Court hold?
The Tribunal held that the High Court was in error in its previous decisions. It found that the new partnership constituted a valid sub-partnership in respect of Murlidhar Himatsingka's share in the registered firm. The Tribunal reasoned that a sub-partnership creates a superior title, diverting the income before it becomes the income of the partner in the main firm. While a sub-partner may not have a direct claim against the main firm, this does not preclude considering the changed character of the income for tax purposes. The Tribunal clarified that Section 23(5)(a) is for apportioning income among partners, but after apportionment, the Income Tax Officer must ascertain the 'real income'. If this real income belongs to another entity, like a sub-partnership, it can be assessed accordingly. The Tribunal overruled the decision in Mahaliram Santhatia v. Commissioner of Income Tax and followed the principles laid down in Charandas Haridas v. Commissioner of Income Tax and Commissioner of Income Tax, Bombay v. Sitaldas Tirathdas. The Tribunal concluded that there was nothing in Section 23(5)(a) preventing the income from Basantlal Ghanshyamdas from being treated as the income of Fatehchand Murlidhar and Section 23(5)(a) being applied again. The appeals were allowed, and the High Court's judgment was set aside.
What were the facts?
The assessee, Murlidhar Himatsingka, was a partner in the registered firm M/s Basantlal Ghanshyamdas. On December 21, 1949, he entered into a sub-partnership with his sons and grandson, forming the firm Fatehchand Murlidhar. The deed stipulated that Murlidhar Himatsingka's share of profits and losses from Basantlal Ghanshyamdas would belong to Fatehchand Murlidhar and be divided among its partners. The Income Tax Officer included Murlidhar Himatsingka's share income from Basantlal Ghanshyamdas in his individual assessment for assessment years 1952-53, 1953-54, and 1955-56. The assessee appealed, and the matter reached the High Court via references from the Income Tax Appellate Tribunal. The High Court upheld the Income Tax Officer's view, leading to the present appeals.
What were the issues?
1. Whether the income of Murlidhar Himatsingka for his share in the firm of Messrs. Basantlal Ghanshyamdas for the assessment years 1952-53 and 1953-54 was rightly excluded from the income of the applicant firm (Fatehchand Murlidhar). 2. Whether 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. Assessee's contentions: The assessee argued that the sub-partnership deed effectively diverted the income from his share in Basantlal Ghanshyamdas to the new firm, Fatehchand Murlidhar, and therefore, it should not be included in his individual assessment. They relied on the principle that income diverted at source cannot be taxed in the hands of the original recipient. Revenue's contentions: The revenue contended that Murlidhar Himatsingka remained the partner in Basantlal Ghanshyamdas, and as per Section 23(5)(a) of the Income Tax Act, his share of income was assessable in his hands. They argued that a sub-partnership does not alter the legal position of the partner vis-à-vis the main firm for income tax purposes and cited cases like K. A. Ramachar v. Commissioner of Income-tax, Madras.
Which sections of the Income-tax Act were involved?
23(5)(a)
AI-generated summary — verify with the full judgment below
F l • ' ~ i .... . J " ,, ' 1 • A B c E F FATEHCHAND MURLIDHAR AND ANH • v. COMMISSIONEH OF INCOME-TAX, CALCUTTA July 19, 1966 [K. N. WANCHOO ANDS. M. S!KRI, JJ.] Income-tax Act (11 of 1932), s. 23(5)(a:-Scope of-Partnership- Sub-partnership between a pa.rtner and strangers-Agreement-to share profits and loss~s of partner in the Partnershqr--Income from the Partnership-Whether belongs to partner or sub-partnership.
The assessee was a partner in a registered firm. In 1949, he entered into a partnership with persons v.rho \vere strangers to the registered firm and a deed of partnership was executed between them.
It recited that the profits and losses for the share of the asscssce in the registered firm should belong to the new firm and be divided and borne by the partners of the new firm in accordance with the shares specified in the deed.
On the question whether the income of the assessee from the registered firm for the years 1952-53, 1953-54 and 1955-56, should be jncluded in his individual assessment, HELD: The income should be included in the assessment of the new firm and not in the personal assessment of the assessee. (i) The new partnershi
The order continues below.
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