COMMISSIONER OF INCOME TAX Vs. S ARUMUGHAM PILLAI

JUDGEMENT

(1.) THIS reference under section 66(1) of the Indian Income-tax Act, 1922, on an application by the department, arises out of an order of the Tribunal which accepted the contention of the assessee, that the share of profits received by him as partner of the firm, Erode Bleaching and Finishing Company, was not his real income, but was income which he was bound to share with other persons under an agreement therefor.The assessee is a partner of Jyothikrishnan and Company, Erode, which has two others as partners thereto. The assessee is entitled to a one-third share of the profits in this firm. The assessee is also a partner in the firm, Erode Bleaching and Finishing Company, Erode, in which there are four others as partners. Jyothikrishna and Company, hereinafter referred to as "J" firm, found the wherewithal for the Erode Bleaching and Finishing Company, hereinafter called the "B" firm, and advanced moneys from time to time to provide a building and machinery for the "B" firm. Such advances amounted up to Rs. 25, 000. THIS amount was treated, for mercantile purposes, as the capital of the assessee in the books of the "B" firm.

(2.) THERE was an understanding between the partners of the "J" firm which was later reduced to writing on August 15, 1951. Pursuant to the arrangement so recorded, and as there was no stipulation for payment of interest over the advances made as above by the "J" firm to the "B" firm it was agreed that the income of the assessee from the "B" firm as such partner therein, shall be shared by all the three partners of the "J" firm, including the assessee.The agreement dated August 15, 1951, which forms part of the record, inter alia, provides that such income of the assessee was divided as set forth above till the year ending March 31, 1951. The agreement postulates that the income to be secured by the assessee from the "B" firm shall for the years to come and until the advance is recovered, be similarly dealt with. For the assessment years 1951-52 and 1957-58 the revenue accepted the position that the share income of the assessee in the "B" firm was the real income of all the three partners of the "J" firm, and assessments were levied on that basis. But, for the assessment year 1958-59, the department made a departure and would not treat the income of the assessee in the "B" firm as that of the three partners of the "J" firm. For the assessment year 1959-60, the share income of the assessee in the "B" firm was determined at Rs. 34, 470. But the assessee only showed a third of this amount in his return for the year, as his real share income in the "B" firm. The Income-tax Officer rejected the return and treated the entire amount of Rs. 34, 470 as the income of the assessee.