RAMACHANDRA REDDIAR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) An ingenious attempt on the part of two assessees who were partners of a firm called "Good Morning Stores, Alleppey' to get the individual tax liability reduced, attracted differing judgments from two judges of this Court constituting the Bench, and therefore, in accordance with S.9 of the Kerala High Court Act read with S.23 of the Travancore High Court Act and S.259 of the Income Tax Act, 1961, the matter comes before me for decision according to the opinion of the majority.

(2.) The main point to be considered is whether the income from assets transferred by the firm in the name of the wives of the two partners of the firm can be included in the individual assessment of the partners as their income. We are concerned with the assessment years 1970-71 and 1971-72, for which the accounting years ended on 16-8-1969 and 16-8-1970 respectively.

(3.) The assessees are partners of the firm 'M/s. Good Morning Stores, Alleppey, which carried on business in textiles and also in dry cleaning and tailoring under the name and style of "Bright Dry Cleaners". By agreement dated 18-8-1969, the machinery and equipments used in the dry cleaning and tailoring business were sold to the wives of the two partners who constituted the firm. Apart from the two partners, viz. M/s. P. Ramachandra Reddiar and P. Arjunal Reddiar, there are no other partners in the firm. The wives of the assessees constituted a partnership to carry on the business. The five employees who had been working in the old firm joined the new firm. The old firm discontinued the dry cleaning business and the new firm carried on the business in the same premises. The consideration for the transfer was the written down value of the machinery and the equipments. Not only the machinery and equipments, but the very business itself was transferred. The consideration was inadequate for the transfer of the business undertaking. The Income Tax Officer applied the provision of S.64(1)(iii) of the Income Tax Act, 1961 (for short 'the Act') as it then stood and computed the income of the assessee by clubbing the assessees' income with the share income derived by the wives as partners of the new firm. On appeal, the Appellate Assistant Commissioner sustained the assessment. The assessees carried the matter in further appeal before the Tribunal, and the Tribunal ultimately dismissed the appeal by a consolidated order on 20-3-1981. In dismissing the appeal, the Tribunal rejected the contention of the assessees that because it was a direct transfer by the firm, S.64(1)(iii) was not applicable. The further contention that the nexus between the assets transferred and the income produced was remote was also not accepted by the Tribunal. The Tribunal accepted the contention of the Revenue that there was an indirect transfer of assets by the assessees to their respective spouses, that income arose from the assets transferred, which was the business itself, and, therefore, the profits attributable to the share of the Assessees' spouses in the business arose only from the transfer of the assets by the assessees. The Tribunal held that the assets of the partnership vested in the partners collectively in proportion to their share and direct transfer by the partners representing the firm resulted in an indirect transfer by the partners of their share in such assets in favour of their spouses. Since the business itself was transferred which produced the income of the assessees' spouses, the Tribunal also found that the profit atributable to the share of the assessees' spouses in the business arose direct from the transfer of such assets. In so holding, the Tribunal relied on the decision of the Bombay High Court in Chaturbhujdas Karnani v. Commissioner of Income Tax, Bombay City ( 1958 (34) ITR 553 ). The Tribunal was satisfied that all the requirements of S.64(1)(iii) of the Act were satisfied and the income derived by the assessees' wives was includible in the total income of the assessees.