COMMISSIONER OF INCOME TAX Vs. KHODIDAS MOTIRAM PANCHAL

JUDGEMENT

(1.) THE assessee, a registered partnership firm, is engaged in the manufacture of machinery spare parts since November, 1967. The partnership then consisted of two adults and two minors were admitted to the benefits of the partnership. Minor, Chandrakant Ambalal, attained majority on 31st Jan., 1970, which necessitated a change in the constitution of the firm. Accordingly, the firm was reconstituted under the partnership deed of 2nd Feb., 1970, Annexure "F", to the statement of the case. According to this partnership deed, three adults, namely, (1) Ambalal Khodidas, (2) Kashiben Khodidas, and (3) Chandrakant Ambalal, constituted the firm with minor, Manubhai Ambalal, admitted to the benefits of the partnership. The minor was given 20 ps. share in the profits with no liability to share the losses. The rest of the 80 ps. were divided amongst the three partners, Ambalal taking 30 ps. in a rupee and the other two partners 25 ps. each. However, so far as the liability to share the losses was concerned, Ambalal was liable to the extent of 50 ps. in a rupee while the other two adult partners were each made liable to the extent of 25 ps. in a rupee. The partnership was at will.

(2.) IT appears that the firm desired to insure the lives of its partners Ambalal Khodidas, Chandrakant Khodidas as well as the minor, Manubhai Khodidas. The firm submitted proposals in that behalf to the Life Insurance Corporation of India. The Life Insurance Corporation by their letter dt. 28th Feb., 1970, informed the firm that ordinarily a partnership firm does not have an insurable interest on the life of any of the partners per se, but it will have an insurable interest if by the death of any partner, it will sustain a loss or pecuniary liability. In view of this, it expressed willingness to consider the proposals only after the partners entered into an agreement to the effect that the insurance money will be payable to the firm on the death of the insured partner and the firm will purchase the share of the deceased from the amount of insurance money received by it by paying off the heirs of the deceased partner. The firm was also directed to furnish information regarding the current valuation of interest of each partner with supporting proof. On receipt of this letter, the three adult partners of the firm entered into an agreement dt. 31st March, 1970, Annexure "A" to the statement of the case. The introductory part of this agreement gives two reasons for the execution thereof expressed in the following words :

(3.) THE Revenue, feeling dissatisfied with the view which found favour with the AAC as well as the Tribunal, sought a reference under S. 256(1) of the Act. Thereupon, the Tribunal has referred the