THE COMM.OF INCOME TAX RAJAHMUNDRY vs. M/S Y.RAMA KRISHNA AND OTHERS

O/TAXAP/87/2003 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 87 of 2003

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE KS JHAVERI Sd/- and HONOURABLE MR.JUSTICE K.J.THAKER Sd/-

================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? No 2 To be referred to the Reporter or not ? No 3 Whether their Lordships wish to see the fair copy of the judgment ? No 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? No 5 Whether it is to be circulated to the civil judge ? No ================================================================ COMMISSIONER OF INCOME TAX....Appellant(s) Versus M/S.KANDLA SHIPPING SERVICES....Opponent(s) ================================================================ Appearance: MR PRANAV G DESAI, ADVOCATE for the Appellant(s) No. 1 MR SN SOPARKAR, Ld. SENIOR COUNSEL with MRS SWATI SOPARKAR, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 11/11/2014 ORAL JUDGMENT Page 1 of 7

O/TAXAP/87/2003 JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. Heard learned Counsel for the parties. 2. By way of this Appeal, the appellant has challenged the judgment and order of the Income Tax Appellate Tribunal, Rajkot Bench dated 31.05.2002 in ITA No.1695/93 for the Assessment Year : 1989-90 3. While admitting the matter on 29.04.2003, the following substantial question of law was framed :- “Are the profits paid by a partner by carrying on any business of the same nature as competing with that of the firm which are required to be paid to the firm under Section 16(b) of the Indian Partnership Act, 1932, required to be taxed in the hands of such partner.” 4. The facts in brief giving rise to this Tax Appeal are as under :- The Assessing Officer made an addition of Rs.4,55,015/- on protective basis in the hands of the assessee firm and on substantive basis in the hands of Shri Page 2 of 7

O/TAXAP/87/2003 JUDGMENT Satpal Lakhanpal, partner of M/s. Kandla Shipping Services and Proprietor of M/s. Palson Enterprise, which was accounted for in the books of accounts of the firm. While finalizing the assessment, the Assessing Officer found the same to be assessable in the hands of one of the partners of the firm, i.e. Shri. Satpal Lakhanpal who had entered into an agreement with West Asia Enterprise in his individual capacity as a proprietor of M/s. Palson Enterprise although the same was accounted for in the books of the firm and its business receipts. As such, the amount in question was considered for addition on substantive basis in the individual hands of Partner Shri Satpal Lakhanpal who was proprietor of M/s. Palson Enterprise. At the same time, since the receipt in question was covered in the books of accounts maintained by the firm, the amount was also taxed on protective basis. The CIT(A) deleted substantive addition made in the case of Partner Shri Satpal Lakhanpal on the ground that Section 16 of the Partnership Act stipulates that the profit earned from the business connections of the firm and using assets Page 3 of 7

O/TAXAP/87/2003 JUDGMENT of the firm will actually have to be accounted for to the firm and not in the hands of partner individually. The Appeal was decided on 15.04.1993 holding that the receipt in question is correctly assessable in the hands of the firm and the addition need not be on protective basis and it should be on substantive basis in the firm's case. The ITAT's decision in the individual case of Shri Satpal Lakhanpal in ITA No.1691/AHD/93 dated 01.04.2002 has not been accepted and an Appeal u/s. 260A has been preferred earlier before this Court, i.e. Tax Appeal No.399/2002. Being aggrieved and dissatisfied by the order of the ITAT, Rajkot this appeal has been preferred. 5. At this stage, it is necessary to reproduce the findings of the ITAT which reads as follows :- 3. Ground No.1 : The first grievance of the revenue pertains to a direction issued by the CIT(A) vide which the Assessing Officer has been directed to assess

the

income

of Rs.4,15,015/- substantively int eh hands of the firm instead of Page 4 of 7

O/TAXAP/87/2003 JUDGMENT protectively assessed by the Assessing Officer. One of the partners, Shri Satpal Lakhanpal was running a proprietary concern, namely, M/s. Palson Enterprises. The business of a proprietary concern was similar to that of the firm i.e., the assessee. The partner Shri Satpal Lakhan Pal entered into an agreement with M/s. West Asia Enterprises

through

the proprietary concern for speedy unloading of the goods from the ships. The goods were unladed within the stipulated period and the proprietary concern received a sum of Rs.45,51,500/- from M/s. West Asia Enterprise. The alleged proprietor credited the above amount in the accounts of the firm. While framing the assessment order in the case of the proprietary concern, the Assessing Officer was of the opinion that the assessee has not used the assets, name, or other facility of the firm. Therefore, on substantive basis, he assessed the income in the hands of the proprietor-ships

and

on protective basis the income has been assessed in the hands of the assessee firm. On appeal, the ld. CIT(A) deleted the addition in the case of Shri Satpal Lakhan Pal and observed that on substantive basis it is required to be assessed in the hands of Page 5 of 7

O/TAXAP/87/2003 JUDGMENT the firm. In ITA No.61/1993 we have confirmed the order of the ld. CIT(A) vide which the alleged amount was required to be assessed on substantive basis in the hands of the firm. Hence, respectfully following our order we do not see any good reason to interfere with the findings of the ld. CIT(A). The first ground of

appeal,

therefore, rejected. The amount of Rs.4,55,015/- as observed by the ld. CIT(A) in para 10 is required to be assessed in the hands of the assessee on substantive basis.” 6. Having heard learned Counsel for the parties and having perused the records of the case, more particularly the order passed by the Income Tax Appellate Tribunal, we are of the view that the order of the Tribunal is in conformity with the settled legal position of law. 7. In the aforesaid circumstances, the question of law framed for consideration is to be answered against the revenue and in favour of the assessee. The Appeal is dismissed. Sd/- (K.S. JHAVERI, J.) Page 6 of 7

O/TAXAP/87/2003 JUDGMENT Sd/- (K.J. THAKER, J) CAROLINE Page 7 of 7