Gauhati High Court
Commissioner Of Income-Tax vs Mahatta Construction Co. on 26 September, 1988
Equivalent citations: [1989]178ITR427(GAUHATI)
Author: S.N. Phukan
Bench: S.N. Phukan
JUDGMENT A. Raghuvir, C.J.
1. The following question has been referred to this court under Sub-section (1) of Section 256 of the Income-tax Act, 1961. The question reads as under :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Sri Mohanlal Choudhuri, one of the partners of the assessee-firm, Mahatta Construction Co., Tezpur, was entitled to withdraw Rs. 50,000 from the capital account and to make gift of the same to Miss Anju Mahatta and that the gift was a valid one and the interest payment of Rs. 3,375 and Rs. 4,711 relating to this gifted amount for the assessment years 1970-71 and 1971-72, respectively, was an allowable deduction in the case of the assessee-firm ?"
2. The firm, Mahatta Construction Co., at Ketekibari at Tezpur, is the assessee in this case. The question relates to the assessment years 1970-71 and 1972. Mohanlal Choudhury, a partner of the firm, had a credit balance of Rs. 36,619.82. In the relevant year, the profit to his credit was Rs. 36,619.12. Out of the total amount, he had withdrawn Rs. 50,000 and made a gift of the amount to his niece, Anju Mahatta, on July, 19, 1969. The closing balance for that year, i.e., 1970-71, was Rs. 10,805. The closing balance for 1971-72 was Rs. 20,830. The gift made by him was assessed under the Gift-tax Act.
3. The donee of the gift, after she received the amount, deposited Rs. 50,000 in the firm and became a creditor. She was paid on July 21, 1969, Rs. 3,375 towards interest for the assessment year 1970-71 and Rs. 4,711 towards interest in the succeeding year.
4. The Income-tax Officer held that the withdrawal of Rs. 50,000 by a partner was not legal and as a sequel disallowed the payment of interest of Rs. 3,375 and Rs. 4,711. The Appellate Assistant Commissioner held that a partner, under the Indian Partnership Act, 1932, is entitled to withdraw the amount unless it was agreed to the contrary. Once the amount was withdrawn, the gift of that amount to the partner's niece and the donee's deposit with the firm was proper. Therefore, on the above reasoning, the appeal was allowed. On further appeal by the Revenue, the Appellate Tribunal confirmed the order of the appellate authority in all its perspectives. Later, at the instance of the Revenue, the above question is referred to this court.
5. We see that the question is in three parts : (a) Whether the partner, Mohanlal Choudhury, was entitled to withdraw Rs. 50,000 and make a gift of the amount; (b) whether the gift was valid ; and (c) whether the payment of interest to the donee was an allowable deduction ?
6. In this case, it is argued on behalf of the Revenue that there is no provision in the deed that a partner can withdraw money from the capital account. In the absence of any contract, there is no presumption that a partner could withdraw the money. Because other partners have withdrawn money, that does not mean there is no prohibition to withdraw the amount. It was on this ground that the Revenue contended that the withdrawal was improper and that the payment of interest to the niece or to the creditor was properly disallowed by the Income-tax Officer.
7. Learned counsel appearing for the assessee argued that this court is to call for findings on these aspects, viz., whether there was an express agree-
ment between the partners to withdraw money, whether Mohanlal Choud-hury was contractually obliged to bring in original capital, whether Mohanlal Choudhury contributed any capital originally, whether the account in the name of Mohanlal Choudhury was purely a capital account or a loan account or an account of accumulated profits or a composite account, whether the opening capital of Rs. 36,861.82 represented the original capital or advance or past profits or all these put together. What was the past conduct of the various partners in operating the respective accounts with the firm ? Was there any implied contract enabling the partners to withdraw from the original capital ?
8. We have, in the instant case, seen that two findings are recorded by the appellate authority. There is no prohibition in the partnership deed to withdraw the amount. There was another finding recorded that the partners were withdrawing the amounts, that some after withdrawal purchased immovable property and that some gifted the amounts withdrawn to their kith and kin as happened in this case.
9. In this case, it may be apposite to extract Section 11 of the Indian Partnership Act:
"11. Determination of rights and duties of partners by contract between the partners.--(1) Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and such contract may be expressed or may be implied by a course of dealing".
10. If there is a finding that the partners Were withdrawing the amounts, then it can be taken that there was an implied agreement allowing withdrawals as held in the appeals. There is no necessity to call for any additional finding from the Tribunal as argued by learned counsel for the assessee.
11. On the conclusions reached, there was no impropriety in withdrawing the amounts. The fact that in the instant case, the gift was made and tax was levied on the gifted amount shows there was per se no illegality in the transaction. We, for all the aforesaid reasons, do not see any illegality when the depositor was paid interest as has been done in this case.
12. A large number of cases have been cited in this instant case but we do not see any necessity to refer to those cases.
13. We answer the question in the affirmative, against the Revenue and in favour of the assessee. No costs.
S.N. Phukan, J.
14. I agree.