Patna High Court
Commissioner Of Income-Tax vs Smt. Rani Lalita Rajya Laxmi on 7 February, 1986
Equivalent citations: 1987(35)BLJR20, [1986]159ITR186(PATNA)
JUDGMENT Uday Sinha, J.
1. The following two questions have been referred to us for our opinion under Section 256(1) of the Income-tax Act, 1961:
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in deleting the amount of interest of Rs. 23,575 from the assessment of the assessee for the assessment year 1958-59 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in deleting the amount of interest of Rs. 82,957 from the assessment of the assessee for the assessment year 1959-60 ? "
The second question, quoted above, related to the assessment year 1959-60, which had given rise to Tax Case No. 23 of 1975, That case was disposed of earlier on March 21, 1977, by a Bench presided over by D.P. Sinha and C.N. Tiwary JJ. The order of that date reads as follows :
" 3. 21-3-77--It is submitted by learned counsel for the Income-tax Department that the matter has now been settled and the tax case will not be proceeded with and that it may be permitted to be withdrawn. The prayer is allowed and the Reference Application No. 23/75 is permitted to be withdrawn. "
We are unable to appreciate how a reference by the Department could be withdrawn by one of the parties to the reference. We, therefore, read the above order of the High Court as saying that in view of the attitude of the parties, the High Court refused to answer the question referred to this court. Question No. 2, quoted above, therefore, does not fall for consideration before us.
2. The assessee was a partner in M/s. Ramgarh Industries (Coal) Company. She had twelve annas interest in the partnership business. The partnership deed was executed on August 1, 1954. Clauses 4 and 5 thereof were as follows :
" 4. The capital of the partnership shall be contributed in the shares or proportions in which the partners are to share in the net profits of the business as hereinafter provided.
5. If any partner shall with the consent of the majority of the partners bring in additional working capital to that required of him under the last preceding clause, the same shall be considered as a debt due to him from the partnership and shall bear interest at the rate of six per cent, per annum payable yearly. "
On June 9, 1958, the partnership underwent a change by a supplementary partnership deed executed on that date. By this deed, Tika Indra Jitendra Narain Singh, son of the assessee, was inducted as a partner having a share of 8 annas 10 pies in the rupee. It is not known whose share was reduced for the purpose of introducing Tika Indra Jitendra Narain Singh, but that is not material for us. On June 27, 1957, the firm again underwent another change. The change was that the assessee retired from the partnership and she relinquished her share in favour of Indra Jitendra Narain Singh, son of the assessee. While the assessee was a partner, i. e., before June 27, 1957, she had advanced substantial sums of money to the firm from time to time. On March 31, 1957, her loan to the firm stood at Rs. 16,58,781. In terms of the partnership agreement, if any of the partners advanced any loan, he would be entitled to interest on the advances. On the basis of the credits of the assessee to the firm, the Income-tax Officer added interest on the said sum of rupees sixteen lakhs odd during the assessment year 1957-58. The interest was calculated at Rs. 86,817. The loans were written off by the assessee on March 31, 1957, leaving a balance only of Rs. 30,000 to the credit of the assessee. The assessee further advanced certain amounts to the firm between April 1, 1957, and March 31, 1958, and the balance standing to her credit in the books of the firm on March 31, 1958, was Rs. 8,31,322. The interest thereon worked out to Rs. 23,575. The Income-tax Officer took the view that the relinquish-ment after the relevant assessment year did not make any change and that the interest on the sums due were liable to be added to the assessee's total income.
3. It appears that the assessee had filed a suit before the Calcutta High Court claiming interest from the firm on the sums to her credit. It is not known when the suit was filed. All that we know is that before the assessment order could be passed, the assessee had compromised the matter and the suit had been disposed of in terms of the compromise whereunder she relinquished her claim for interest. Neither the plaint nor the decree nor the compromise petition of the money suit before the Calcutta High Court is before us. All that we know is that the claim was given up.
4. The stand of the assessee was, as before us, that the claim having been given up, there was no interest to be paid and thus the interest claimed originally by the assessee could not be added to her total income.
5. The stand of the assessee did not find favour with the Income-tax Officer nor did it find favour before the Appellate Assistant Commissioner. The Appellate Tribunal, however, took a different view of the matter. It held that since the assessee had relinquished her claim to interest, the addition of interest on the credits of the assessee could not be sustained. The Tribunal further held that since there was no stipulation for payment for interest on the sums advanced by the assessee to the firm after she had retired from the partnership, the assessee had no claim to interest and, therefore, no interest accrued to her. The addition of interest during the assessment year 1959-60 was also liable to be quashed. Thus, the assessee succeeded on both counts before the Tribunal.
6. The Revenue being dissatisfied with the order of the Tribunal moved the High Court for reference under Section 256(1) of the Income-tax Act. The Tribunal has thus referred the two questions mentioned above.
7. In considering the questions referred to us, two things which must be firmly borne in mind are that the assessee was following the mercantile system of accounting and that the firm of which the assessee was a partner had been assessed as an unregistered firm. The importance of following the mercantile system of accounting is that the sum becomes income the moment it has accrued. The payment or the remittance of the sum is not relevant for the purpose of assessment. We find that the assessee was a partner of the firm till June 27, 1957. Thus, for part of the assessment year, she continued to be a partner. The sums advanced by her to the partnership till then would, therefore, carry interest in terms of Clause 5 of the partnership agreement quoted earlier. The outstanding as loan to the firm would, therefore, earn interest. The submission urged on behalf of the assessee is that in a money suit instituted before the Calcutta High Court, the assessee gave up her claim to interest and, therefore, no interest accrued to the assessee. The sums advanced till March 31, 1958, was Rs. 8,31,322. It is, however, not disputed that these sums were loans advanced to the firm. On that footing, the assessee filed a suit claiming interest on the said sums. It was never the case of the assessee that these were gifts to the firm or to her son, Indra Jitendra Narain Singh. The interest on the said sums advanced was Rs. 23,575. The disclaimer of interest by compromise before the Calcutta High Court took place much after 1958-59. The time relevant for ascertaining whether the said sum of Rs. 23,575 had accrued to the assessee or not was March 31, 1958. Till that date, there was no disclaimer or relinquishment by the assessee. It is thus obvious that interest had accrued to the assessee on April 1, 1958, in regard to the sums advanced to the firm. If the assessee chose not to charge interest which had accrued to her on April 1, 1958, that relinquishment would amount to a gift. Once interest had accrued to an assessee (following the mercantile system of accounting), the assessee becomes accountable to tax. In that view of the matter, the fact that the assessee by compromise effected on April 18, 1961, gave up her claim for interest which she had originally claimed in the suit would not alter the situation so far as the accrual of income is concerned. It is true that the assessee having filed a suit for realisation of interest on the sums advanced by her was free to give up her claim, but that was irrelevant for the Revenue. Once an income had accrued, what the creditor does in regard to the accrued sum is his personal concern. He may do whatever he likes with that income, but for the Revenue that sum becomes taxable the moment it has accrued.
8. In regard to the assessment year 1958-59, the Tribunal divided it into two parts--one before the retirement of the assessee from the partnership, i.e., prior to June 27, 1957, and the other subsequent thereto till March 31, 1958. In regard to the earlier period, the Tribunal also was of the view that interest on the loans then subsisting had accrued to the assessee. That was Rs. 1,206 but it held that the said sum could not be included in the taxable income of the assessee, as allocation of profits to the partner had not taken place. The Tribunal observed that no allocation in the name of the assessee had been done nor was there any mention of adjustment of interest. It, therefore, followed the verdict of the Tribunal in the previous year. I regret, the Appellate Tribunal erred in this behalf. The fact that that question was still sub judice before the High Court is an entirely different question, but I am of the view that the reasoning of the Tribunal is fallacious for the reason that no allocation to the partners could have been done. In this connection, it is relevant to point out once again that the partnership had been assessed as an unregistered firm. Allocation of profits is done only in the case of registered firms. In CIT v. Murlidhar Jhawar and Puma Ginning and Pressing Factory, [1966] 60 ITR 95, the Supreme Court held that partners of an unregistered firm may be assessed individually or they may be assessed collectively in the status of an unregistered firm. It follows, therefore, that assessment of the firm is not a pre-requisite for assessment of a partner in an unregistered firm. The position in law is that where a partnership constitutes a registered firm, the individual partners cannot be assessed on their personal income until the firm has been assessed and the allocation effected for each partner. I am clearly of the view that it was open to the Department to assess the assessee without assessing the firm and without allocation of profits to the partners. The view which I have taken finds support in L. Satish Chand v. ITO, [1970] 75 ITR 623 (All). The same view was propounded by the Allahabad High Court in Hazari Ram Mohan Ram v. CIT, [1962] 46 ITR 766 (All) and of the same High Court in Joti Prasad Agarwal v. ITO, [1959] 37 ITR 107 (All).
9. Learned counsel for the assessee placed reliance upon CIT v. Maharani Lalita Rajya Laxmi Saheba, [1980] 121 ITR 1012 (Pat), in relation to the very same assessee before us. That case related to the assessment year 1956-57, where it was held that a partner cannot be assessed unless and until the firm of which he is a partner has been assessed. Section 23(5) provides for assessment of firms. Sub-section (5)(a) deals with provisions in regard to assessment of registered firms. Sub-section (5)(b) provides for provisions in regard to assessment of unregistered firms. Sub-section (5)(b) clearly provides that in the case of an unregistered firm, the Income-tax Officer may proceed to assess the total income of each partner of the firm (instead of determining the sum payable by the firm itself). It, therefore, clearly implies that even if the firm has not been assessed, the Income-tax Officer may proceed to assess the total income of each partner of the firm including his share of its income, profits, gains of the previous year. The Income-tax Officer may thus determine the tax payable by each partner on the basis of such assessment. In this behalf, the provisos to Clause (a) of Sub-section (5) shall apply to the assessment of partners of unregistered firms as they would apply to those of registered firms. Having done that, Sub-section (6) of Section 23 of the Indian Income-tax Act of 1922, enjoined the Income-tax Officer to notify to the firm in writing the total income on which the determination has been based and the apportionment thereof among the several partners. Thus, a partner may be assessed even without the firm having been assessed. The reliance placed by learned counsel for the assessee on the decision in CIT v. Maharani Lalita Rajya Laxmi Saheba, [1980] 121 ITR 1012 (Pat) cannot be of any assistance as the firm had already been assessed. In that context, their Lordships held that the Income-tax Officer, Hazaribagh, had no jurisdiction to assess her income from the firm afresh. The situation is different in the instant case. Herein, the firm, it is not disputed, had not been assessed. In that view of the matter, the interest of Rs. 1,206, accrued till the day the assessee retired from the partnership, was liable to be added to the taxable income of the assessee.
10. The special treatment given by the Tribunal to the period from June 28, 1957, to March 31, 1958, was fallacious. It is true that the assessee retired from the partnership. She, however, went on advancing loans. That the loans were not without interest is obvious from the fact that she had filed a suit for realisation of interest. It is, therefore, difficult for us to accept the position that there was no understanding for payment of interest on the loans advanced by the assessee. That is why she claimed interest for the second period of the assessment year as well. Interest must, therefore, be deemed to have accrued to the assessee. That is in consonance with the normal course of events. Thus, although there was no agreement after the assessee had retired from the partnership, her advances were in terms of Clauses 4 and 5 of the partnership agreement.
11. To conclude, my view is that the Tribunal was not correct in deleting the amount of interest of Rs. 23,575 from the assessment of the assessee for the assessment year 1958-59.
12. The question, referred to us in Tax Case No. 22 of 1975 is, therefore, answered in the negative, in favour of the Revenue and against the assessee without costs.
13. Let a copy of this judgment be transmitted to the Income-tax Appellate Tribunal in terms of Section 260 of the Income-tax Act, 1961.
Nazir Ahmad J.
14. I agree.