Bombay High Court
Bhogilal Laherchand vs Commissioner Of Income-Tax, Bombay ... on 15 September, 1955
Equivalent citations: [1955]28ITR919(BOM)
Author: Chief Justice
Bench: Chief Justice
JUDGMENT 1. By this application, the assessee requires the Appellate Tribunal to refer to the High Court one question of law, which is said to arise out of the Tribunal's order in I. T. A. No. 2277 of 1953-54. Inasmuch as in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case agreed to by the parties and refer it to the High Court of Judicature at Bombay under section 66(1) of the Indian Income-tax Act. 2. The assessee, Bhogilal Laherchand, was partner in a firm doing business in jewellery and precious stones in the name of Bhogilal Laherchand and in machinery in the name of Batliboi & Company with effect from 17th March, 1942. Two minor sons of the assessee namely, Arvind and Mahesh, were admitted to the benefits of this partnership. A copy of the partnership deed dated 14th April, 1943, is annexure "A" and forms part of the case. The minor son, Arvind, attained majority on 22nd August, 1950. He elected to become a partner in the firm. No public notice was given of his election to become a partner. A fresh partnership deed was, however, executed on 28th August, 1950. A copy of this fresh partnership deed is annexure "B" and forms part of the case. Arvind died on 31st August, 1950, in an air crash. 3. The accounts of the firm are closed at the Diwali time. The year of account of the firm is thus the samvat year. The profits of the firm for S. Y. 2006 were determined at a certain figure. On a proportionate basis the profits of the firm up to 31st August, 1950, were determined and allocated. The share in the profits of the firm that fell to Arvind up to 31st August, 1950, was computed at Rs. 2,64,450. On a proportionate basis the share in the profit up to 22nd August, 1950, was computed at Rs. 2,49,459. The figure is not in dispute if the answer to the question of law raised is against the assessee. While making the assessment on the assessee for the year 1951-52, the year of account being SY. 2006, the Income-tax Officer included the sum of Rs. 2,49,459 in the assessee's total income under section 16(3) (a) (ii) of the Act. 4. On appeal before the Appellate Tribunal, it was contended on behalf of the assessee that this sum of Rs. 2,49,459 was not liable to be included in the assessee's income. This contention was not accepted by the Appellate Tribunal for the reasons recorded by it in its order, a copy of which is annexure "C" and forms part of the case. 5. The only question of law that therefore arises is : "Whether the sum of Rs. 2,49,459 could legally be included in the assessee's total income of S. Y. 2006 liable to be assessed in the assessment year 1951-52, " N. A. Palkhivala, for the assessee. The Advocate-General and G. N. Joshi, for the Commissioner. JUDGMENT Chagla, C.J.
6. An interesting question arises on this reference as to the liability of the father to pay tax on the income of his minor son. The question might have presented some difficulty but for the fact that the recent decision of the Supreme Court really makes it almost impossible to come to any other conclusion than the one to which we have arrived.
7. The facts are that on Bhogilal had three sons-Pratap, Arvind and Mahesh. Bhogilal started a partnership with his three sons under a deed of partnership dated the 14th April, 1943. At that date Pratap was a major and Arvind and Mahesh were minors and therefore Arvind and Mahesh were admitted to the benefits of the partnership. Arvind attained majority on the 22nd August, 1950. He elected to continue to remain a partner of this firm and a fresh partnership deed was executed between Bhogilal, the father, and Pratap, Arvind and Mahesh on the 28th August, 1950. Arvind died on the 31st August, 1950. The year of account of Bhogilal who is the assessee as an individual before us is Samvat Year 2006 and the profits which were ascertained on the 31st August, 1950, as coming to the share of Arvind was Rs. 2,64,450 and the Income-tax department calculated the proportionate profits coming to the share of Arvind on this basis as of the 22nd August, 1950, when he attained majority at Rs. 2,49,459, and the contention of the department was that this sum of Rs. 2,49,459, constituted the income of Arvind as a minor and under section 16(3) of the Income-tax Act this sum must be included in the assessment of Bhogilal, the father, and Bhogilal must pay tax on this amount. The Tribunal held in favour of the department and Bhogilal has now come before us on this reference.
8. Under section 16(1) (c) certain income is deemed to be the income of an assessee. The income which the department is seeking to tax in the hands of Bhogilal is not his own income; it is the income of his minor son; but by reason of section 16(3) that income in the eye of the law is looked upon as income of the father and the father is liable to pay tax. But before the income can be looked upon as income of the father, it must be obviously in the first place the income of the minor. It is only if we are satisfied that the amount claimed by the department was the income of Arvind in the year of account that the question would arise whether it is properly assessed to tax under section 16(3). The relevant provisions of the section are that in computing the total income of any individual for the purpose of assessment, there shall be included so much of the income of a minor child of such individual as arises directly or indirectly from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner. Therefore, the conditions which have got to be satisfied before this income is included in the total income of an assessee are that in the first place the assessee must be a partner in a firm and that his minor son must be admitted to the benefits of that partnership, and further the income which is sought to be included in the total income of the assessee must arise directly or indirectly from the fact of the minor being admitted to the benefits of the partnership.
9. The real question that has to be decided on this reference is, what is the proper meaning that should be given to the expression used in this sub-section, viz., "as arises directly or indirectly". Two views are possible. It may be suggested that although the sum of Rs. 2,64,450 was computed as the share of Arvind on the dissolution of the partnership when he died on the 31st August, 1950, it is possible to apportion that income between the period when Arvind was a minor and the period after he ceased to be a minor. It may be said that this sum of Rs. 2,64,450 is a composite amount consisting of profits earned at different stages of the partnership. If this were the proper view, then the department could conceivably urge that inasmuch as Rs. 2,49,459 was earned by Arvind up to the 22nd August, 1950, that was the income of Arvind earned by him while he was a minor and therefore that income must be included in the total income of his father under section 16(3). The other view, which as we sill presently point out is the correct view and which has now been pronounced to be the correct view by the Supreme Court, is that what we have to consider is whether in the year of account the minor had any right to receive any income from his being admitted to the benefits of the partnership. It is not enough that he should earn any income in rather a loose sense of that expression. He must have acquired a right to receive the particular income in the year of account which is being included in the total income of his father. Therefore, when the department includes Rs. 2,49,459 in the total income of the assessee, the question that must be asked and answered is, did Arvind have the right to receive this amount from the partnership at any time in the year of account, and there can be no doubt that in law the minor never had the right to receive this amount from the partnership.
10. Let us look at what the position in law is with regard to a minor who has been admitted to the benefits of a partnership and who attains majority. It is a commonplace that a minor can never become a partner but he can be admitted to the benefits of a partnership, and section 30 of the Partnership Act regulates the rights of a minor who has been admitted to the benefits of a partnership, and broadly speaking the rights of a minor, when he attains majority, are that he has the option either to retire from the partnership or to continue in the partnership and a locus penitentiae of six months is given to him to make up his mind. If he elects to continue as a partner then the partnership does not come to an end, the partnership continues, and sub-section (7) (a) of section 30 expressly provides that his rights and liabilities as a minor continue up to the date on which he becomes a partner but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of the partnership. On the other hand, if he elects, not to become a partner, then he is entitled to claim whatever amount was due to him as computed at the date when he gives the public notice provided in sub-section (4) which gives certain rights to the minor to sue the partners for an account of payment of the share of the minor when the minor severs his connection with the partnership. Therefore it is clear that if a minor son attaining majority elects to continue as a partner, the partnership does not come to an end. The partnership continues, and the minor having become a partner he is entitled to his profits as computed at the end of the year regulated by the partnership deed. On the other hand, if the minor elects not to be a partner, it is equally clear that he severs all his connection with the partnership and he becomes entitled to whatever amount is due to him at the date when he makes the election not to become a partner. Therefore, whereas in the first case there is no break in the continuity of the partnership and there is no need to make up any accounts otherwise than in the ordinary course, in the latter case there is a break in the partnership and accounts have to be made up as of a particular date because the minor who has become a major has the right to claim a specific amount as due to him on a particular date.
11. It is important to note that under both the partnership deeds, the partnership deed of the 14th April, 1943, and the partnership deed of the 28th August, 1950, it is specifically provided that on the Divali in each year during the continuance of the partnership, accounts will be taken of all the assets and liabilities for the time being of the partnership and a balance-sheet and profit and loss account is to be made up on a certain basis. Therefore, the profits or the losses of this partnership from the commercial point of view can only be ascertained on the Divali of each year, and it would be impossible to predicate of this partnership that it had made any profit or any loss on any day preceding or prior to the Divali of a particular year. Of course, a partnership may come to an end by operation of law; a partner may die or a partner may retire, in which case the law provides that accounts would have to be made up on that particular day irrespective of the provision in the partnership deed for making up the accounts in the ordinary course. In the case of the minor also the law provides that by operation of law accounts would have to be made up on a particular day if the minor elects not to be a partner. But the law does not provide that there is any break in the partnership or there is a discontinuance of the partnership if the minor on attaining majority elects to continue as a partner.
12. The simple question, therefore, that we have to consider is whether in the circumstances of this case Arvind could ever have claimed from the partnership the sum of Rs. 2,49,459. As soon as the partnership deed of the 28th August, 1950, was executed and he elected to continue as a partner, the only right that Arvind had was to receive his share in the profits when the accounts were made up at Divali. He had no right to receive the profits that may have arisen when he attained majority on the 22nd August, 1950. Let us look at this matter from a different point of view. In this case, as it so happens, Arvind unfortunately died, but assuming he had lived and the partnership had gone on working till the Divali of Samvat Year 2006 and assuming the partnership had made a loss, then Arvind's share of the loss would have been debited to him. The extraordinary claim of the department is that although the partnership might result in a loss, although in fact Arvind as a partner may have debited to him his share of the loss, yet Arvind's father must pay tax on profits of the partnership which profits have been ascertained by computing them as of a particular date. As we said before, it is entirely fallacious to contend that it could ever be said of a partnership that there were profits in that partnership on any particular day. On the facts of this case the date 22nd August, 1950, has no particular charm or magic. Arvind may have attained majority on that date, but what we have to consider is what Arvind did after he attained majority and unless he exercised his option to get out of the partnership, it could not be said that on the 22nd August, 1950, the partnership had either made profits or losses.
13. The Advocate-General says that section 16 is based on a fiction. It undoubtedly is, but the fiction is that the income of the minor becomes the income of his father. But the Advocate-General wants to add a second fiction to the fiction already embodied in section 16(3) and the second fiction is that although a certain amount is not the income of the minor, still you must look upon it as his income and make the father pay tax on that income. We refuse to countenance the attempt on the part of the department to add a second fiction to the fiction contained in section 16(3) which is sufficiently burdensome upon the assessee who happens to be the father.
14. Whatever view was possible to be taken with regard to the theory of apportionment between profits earned up to a particular date and profits earned subsequently, the decision of the Supreme Court in E. D. Sassoon and Company Ltd. v. Commissioner of Income-tax, makes it impossible to take any view of this case than the one we are suggesting to be the correct one. In that case we had held that when a managing agency is assigned by the managing agents, then the income earned by the assignor for the period during which they acted as managing agents should be apportioned with the income earned by the assignees during the period that the assignees acted as managing agents. In other words, we refuse the attempt of the department to tax the whole of the managing agents' income in the hands of the assignees because the income had accrued at the end of the relevant year at which date the managing agents happened to be the assignees and not the assignors. This decision of ours was found by the Supreme Court not to be a correct decision and the Supreme Court held that the managing agency commission could not be apportioned between the assignor and the assignee, that the commission had accrued to the assignee, and the assignee must pay tax on the whole of the commission. There are some very important passages in the judgment of Mr. Justice Bhagwati which have a direct bearing on the facts of this case. At page 51 the learned Judge says :
"It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro... Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him."
15. Applying this test, it is impossible to suggest that any debt, to use the language of Mr. Justice Bhagwati, was created in favour of Arvind at the time. Nor could it be said that the sum of Rs. 2,49,459 was a debt due at any time by the partnership to Arvind. Again at page 52 the learned Judge says :
"A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or, in other words, a debitum in praesenti, solvendum in future, it cannot be said that any income has accrued to him. The mere expression 'earned' in the sense of rendering the services etc. by itself is of no avail."
16. The only debt that came into existence and with regard to which Arvind or rather his estate acquired a right to receive the payment was a debt which could only be ascertained on making up the accounts of the partnership as of the 31st August, 1950. The position is made even clearer by the learned Judge at page 55 :
"What has however got to be determined is whether the income, profits or gains accrued to the assessee and in order that the same may accrue to him it is necessary that he must have acquired a right to receive the same or that a right to the income, profits or gains has become vested in him though its valuation may be postponed or though its materialisation may depend on the contingency that the making up of the accounts would show income, profits or gains."
17. Therefore, the Advocate-General would be right that the mere fact that computation could not be made on the 22nd August, 1950, and it could be made only later, will not necessarily militate against the position that Arvind had acquired the right to receive the amount on the 22nd August, 1950. But if he had no right to receive the amount at all, the mere computation will not create a right which did not exist.
18. Therefore, in our opinion, the Tribunal was in error when it took the view that the sum of Rs. 2,49,459 represented profits of the partnership to which Arvind as a minor was entitled. If the Tribunal was in error in taking that view, then clearly this amount could not be included in the assessee's total income of Samvat Year 2006.
19. We must therefore answer the question submitted to us in the negative. Commissioner to pay the costs.
20. Reference answered in negative