MAHESH PRASAD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a case stated under section 66(1) of the Indian Income-tax Act. The question referred is :

(2.) THE material fact are these. THE relevant assessment year is 1957-58, the previous year being Diwali Samvat 2013. THE assessee was assessed to tax in the status of an individual. THE assessee, Mahesh Prasad, and two others, Gopi Nath and Kashinath, were partners with equal shares in the registered firm of Messrs. Vishwanath Prasad Mahesh Prasad at Farrukhabad, hereinafter referred to as the Farrukhabad firm. On 29th January, 1956, the assessee, Mahesh Prasad, joined another firm Messrs. Sidh Gopal Amar Nath, Bareilly (hereinafter referred to as the Bareilly firm), as an employee on a salary of Rs. 200 per mensem. Subsequently, under an instrument of partnership dated December 4, 1955, Mahesh Prasad was made a partner in the Bareilly firm with a share of four annas with effect from 22nd June, 1955. THE Bareilly firm was also registered under section 26A of the Act. Prior to the execution of the said instrument of partnership, the assessee, Mahesh Prasad, had contributed during the months of June and July three amounts totalling Rs. 5,002 as capital. This amount was found credited in the capital account of Mahesh Prasad. Some time there after, Mahesh Prasad entered into an agreement on 24th February, 1956, with the said Gopinath and Kashinath his old partners in the Farrukhabad firm, whereby he agreed to share the income that fell to the share of four annas in the Bareilly firm with them in equal proportion. THE relevant clause of this agreement runs :

(3.) THE short question to be considered is whether the sub-partnership only enabled him to divert the income received by the assessee after it was earned by him as partner in the Bareilly firm or it created an overriding obligation ? THE matter now stands concluded by a decision of the Supreme Court in Fatehchand Murlidhar v. Commissioner of Income-tax, where the decision of the Bombay High Court in Ratilal B. Daftari v. Commissioner of Income-tax was approved and that of the Collector High Court in Mahaliram Santhalia v. Commissioner of Income-tax on which the Tribunal placed reliance was overruled. THE distinction sought to be drawn by the Tribunal and pressed before us by the learned standing counsel is a distinction without substance. Whether the sub-partnership was contemporaneous or not is not very material. Reading the sub partnership agreement as a whole and reasonably, it is quite clear that the share of capital invested by the assessee in the Bareilly firm was taken entirely from the Farrukhabad firm. THErefore, that fact alone, apart from anything, would have been sufficient ordinarily to establish that the other partners of the Farrukhabad firm had a share in the Bareilly firm, and further that the assessee was only a partner in that firm as representative of the Farrukhabad firm. It is also plain that the investment of capital was made more or less contemporaneously with the assessees joining the Bareilly firm as partner. THE mere fact that the actual sub-partnership came to be recorded a little later will not in any way detract from the genuineness of the sub-partnership. In any event, the genuineness of the sub-partnership has not been doubted by the authorities. That being the position and when the loss from the Bareilly firm has been agreed to be shared by the other partners of the Farrukhabad firm, there cannot be the slightest doubt that the agreement created an overriding obligation upon him to pay to the sub-partners a share therein, and, as such, the whole of the share of income from the partnership cannot be said to be that of the assessee. This not being a diversion of income after it earned by the assessee, only 1/3rd thereof will fall to be assessed in his hands.