COMMISSIONER OF INCOME TAX Vs. SIVASUBRAMANIAM

JUDGEMENT

(1.) THE assessee, an individual, was a partner in the firm of Messrs. Premier Match Works, as per the terms of a deed of partnership dated April 1, 1974. THEreunder, the brother of the assessee, S. K. Pandia Nadar, the assessee, the two sons and daughter-in-law of S. K. Pandia Nadar, were the partners, having made their contributions to the capital in the sums of Rs. 9,000, Rs. 33,000, Rs. 6,000, Rs. 6,000 and Rs. 6,000, respectively. THE share of profits of the firm payable to them under the terms of the deed of partnership was fixed at 15%, 55% and 10% each to the other three partners. On June 24, 1974, S. K. Pandia Nadar, one of the partners of Messrs. Premier Match Works and the brother of the assessee, executed a deed of trust constituting a trust of the name of Lalitha Trust and appointing S. S. Sankaralingam and Bhuvaneswari as trustees for the benefit of the two minor daughters. Shyamala and Sharmila, of the assessee through his first wife, Lalitha. A sum of Rs. 11,200 was paid by S. K. Pandia Nadar to the trustees with a direction that the net income from the trust fund and such other amounts as may form part of the trust should be enjoyed by the two beneficiaries, Shyamala and Sharmila, in equal shares. Subsequently, on October 1, 1974, there was a reconstitution of the firm, Messrs. Premier Match Works, in that Lalitha Trust, represented by the trustees, was taken in as a partner in the firm. As per the terms of the partnership deed dated October 1, 1974, the profit-sharing ratio was also refixed at 15% to S. K. Pandia Nadar, 35% to the assessee, 10% each to the two sons and daughter-in-law of S. K. Pandia Nadar and 20% to Lalitha Trust. Represented by its trustees. By this process, the share of profits of the assessee which was earlier 55% was reduced to 35% and, on a reallocation of the share of profits as per the deed of partnership dated October 1, 1974, Lalitha Trust became entitled to a share of 20% of the profits of the firm with no liability for losses. In the course of the assessment proceedings for the assessment years 1975-76 and 1976-77 relating to the assessee, it was found that the share or profits of the trust amounted to Rs. 33,566 and Rs. 36,274, respectively. THE Income-tax Officer applied the Provisions of section 64 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), on the conclusion that the minor daughters of the assessee had been admitted to the benefits of the partnership firm in which the assessee was a partner and that the trust was only an artificial cloak concealing the real owner and beneficiary of the income and there was a direct connection between the trust and the beneficiaries and clubbed the income of the minors with that of the assessee for both the assessment years. On appeal by the assessee, the Appellate Assistant Assistant Commissioner took the view that the minor children cannot be treated as having been admitted to the benefits of the partnership as found by the Income-tax Officer but that, by the application of clause (iv) for the assessment year 1975-76 and clause (v) for the assessment year 1976-77 of section 64(1) of the Act, there was a transfer by the assessee to the trustees of lalitha Trust, of the assessee's right to share in the profits of the firm, Messrs. Premier Match Works, without consideration and that would constitute a direct transfer resulting in the arising of income from the transferred assets for the benefit of the minor children of the transferor, i.e., the assessee. In the result, the Appellate Assistant Commissioner upheld the clubbing, applying section 64 of the Act. On further appeal by the assessee to the Tribunal, it found that the creation of Lalitha Trust was not by the assessee, but by the brother of the assessee, S. K. Pandia Nadar, another partner of the firm, and the assessee had not transferred any of his assets either directly or indirectly to the Lalitha Trust so as to attract the application of section 64 of the Act justifying the clubbing of the income of the trust with the share income of the assessee in the firm of Messrs. Premier Match Works. Ultimately, the Tribunal deleted the addition of the share income of Lalitha Trust in the assessment of the assess for the two assessment years in question. That is how the following common question of law, as reframed, under section 256(1) of the Act, at the instance of the Revenue, has been referred to this court for its opinion :

(2.) LEARNED counsel for the Revenue contended that the right of a partner to a share in the profits of a firm is property capable of transfer and a redistribution of the share of profits between one partner and other partners would involve a transfer of that right leading to a diminution in the interest of a partner and, at the same time, correspondingly increasing the share of the other partners and that was tantamount to a transfer by the assessee of assets, either directly or indirectly, in favour of the minor children of the assessee otherwise than for adequate consideration, justifying the clubbing of the income of the minors with that of the assessee. Strong reliance in this connection was also placed upon the decision reported in CGT v. V. A.M. Ayyar Nadar [1969] 73 ITR 761 (Mad). On the other hand, learned counsel for the assessee submitted that a consideration of the mechanics of the transfer involved would disclose that there was no transfer of assets either directly or indirectly by the assessee to his minor children and, in the absence of a nexus between the transfer of the asset by the assessee and the arising of income to the minors, the provisions of section 64 of the Act cannot be applied. It was also further submitted that a redistribution of the profit-sharing proportion was brought about by the event of the agreement between the partners on October 1, 1974, reconstituting the firm and that cannot be attributed to any act of transfer either directly or indirectly on the part of the assessee without consideration. Attention was drawn by learned counsel in support of this to the decisions in CIT v. Prem Bhai Parekh , CGT v. Ali Hussain M. Jeevaji [1980] 123 ITR 420 (Mad) and CIT v. Prahladrai Agarwala . Reference was also made to Circular No. 204, dated July 24, 1976 - [1977] 110 ITR (St.) 21 explaining the scope of clauses (iv) and (v) of the amended sub-section (1) of section 64 of the Act.