CHHOTUBHAI GOPALBHAI PATEL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under S. 66(1) of the IT Act -hereinafter referred to as the Act. We are here concerned with the asst. year 1957 -58. The facts giving rise to this reference, as stated in the agreed statement of case, are that one Balaji Laxman and Vishweshwar Rao Dharmarao entered into a partnership some time in August, 1952, to exploit tendu leaves forest in Ahiri and Repanpalli ranges. In the said firm Balaji Laxman had 3/4th share and Vishweshwar Rao 1/4th share. The said partnership of the two carried on business during the years 1953, 1954 and 1955 tendu leaves season (the season usually beings in April and ends with June each year). In open auction, certain forests were taken up by this firm for exploitation during the year 1956 season. Before time came to exploit them, differences arose between the two. Hence the two, that is, Balaji Laxman and Vishweshwar Rao, agreed to separate and dissolve the firm and accordingly an agreement to dissolve the firm was got executed on 11th Feb., 1956. The said dissolution agreement mentions that the parties to it estimated that if the tendu leaves forests in the said Ahiri and Repanpalli ranges were to be exploited in partnership for the 1956 season, the firm would earn a profit of Rs. 60,000. Hence it was agreed that Balaji should pay Rs. 15,000 to Vishweshwar Rao and on making the payment, he (Balaji Laxman) was to be the sole person entitled to exploit the forests for the 1956 season. In the same deed, Vishweshwar Rao also acknowledged that he had received Rs. 15,000 from Balaji Laxman.

(2.) NEARLY a month thereafter, a new partnership was formed between Balaji Laxman, his sons and the assessee in the present case, namely, Chhotubhai Gopalbhai Patel. The terms on which this partnership was formed for exploiting the two forest ranges for the 1956 season were reduced to writing in a deed executed on 11th March, 1956. Clause (1) of the deed recites that the name of the firm shall be "Firm Balaji Laxman & Sons, Chanda" (referred to as the Chanda firm by the IT authorities). Clause (2) provides that the principle place of business shall be at Chanda. Clause (3) provides that the partnership is constituted to work forest, pluck tendu leaves and sell them off from the forest of tendu leaves taken on lease in the name of "Old Aheri Zamindari". Clause (4) recites that the partnership was to commence on the date of the execution of the deed and will terminate on the 31st March, 1957. It further provides that if all the partners decide to continue this partnership thereafter it shall continue for the period decided and determined by the partners. Clause (5) enumerates the shares of all the different partners. Suffice it to say that the share of the assessee was four annas in the business of the partnership. Clause (6) provides that each partner shall contribute his share of capital in proportion to his share in profit or loss of the business of the firm. It further provides that Balaji Laxman was the manager partner of the firm. Clause (9) provides :

(3.) IN the assessment of the Chanda firm for the asst. year 1957 - 58, that is, account year ending with 31st March, 1957, the profits of the firm were determined at a certain figure, and the assessee's share of the profits in the said firm was determined by the ITO at Rs. 4,044 and in his assessment the said figure was taken by the ITO as the assessee's income from this source, namely, the business of the Chanda firm. It has been the assessee's contention all along that in determining under S. 10 of the Act the quantum of his income from this source, that is, 1/4th share in the Chanda firm, the ITO should make a deduction of the said sum of Rs. 15,000 paid by him to Balaji Sahukar. This claim of the assessee has been rejected by the ITO, the AAC and the Tribunal. The view taken by the IT authorities and the Tribunal was that the payment of Rs. 15,000 to Balaji Sahukar was not an amount laid out or expended for the purpose of the business but was a payment made by the assessee to Balaji Sahukar for the purpose of acquiring a source of income, that is a share in the Chanda firm and, therefore, was not a permissible allowance under S. 10(2) of the Act. The assessee thereafter moved the Tribunal under S. 66(1) of the IT Act and the Tribunal has referred the following question to us :