COMMISSIONER OF INCOME TAX Vs. KANORIA M D

JUDGEMENT

(1.) ONE Mahavirprasad Kanoria, who had two sons, Murlidhar and Beniprasad, Murlidhar being the assessee in this reference, died on August 26, 1962. The assessee, Murlidhar, was a partner in two firms, namely, M/s. Banarsilal Mahavirprasad and M/s. Banarsilal Kanoria, having invested joint family funds in the partnerships and he was a partner for and on behalf of the joint family of which he was the karta. After the death of Mahavirprasad, the firm, M/s. Banarsilal Mahavirprasad, whose principal place of business was at Khalilabad, was reconstituted and the other firm, M/s. Banarsilal Kanoria, whose place of business was at Nagpur, was dissolved and was later reconstituted. The partnership deeds evidencing the reconstitution of both these firms are annex. A1 and A2 to the statement of the case.

(2.) THE family of the assessee consisted of himself, his wife, Snehalata, and two minor sons, Ajayprakash and Brahmaprakash. The capital standing in the name of the assessee in the Khalilabad firm was Rs. 1,54,710.21 and in the Nagpur firm it was Rs. 2,96,177. There was a partition of the joint family of the assessee on August 27, 1962. At that partition the capital amount standing in the name of the assessee in two two firms also came to be equally divided between the members of the joint family of the assessee. The partition effect on August 27, 1962, was later reduced to writing and the memorandum of partition is annex. B dated September 15, 1962. The recitals of the memorandum of partition show that the profits of the 'Khalilabad firm' and the firm 'Kanoria Brothers', which was the name of the reconstituted firm at Nagpur, 'shall be the profits the name of the reconstituted firm at Nagpur, 'shall be the profits or losses of the members of the joint family (including party No. 1) severally in their own respective individual right and interest, in the proportion stated hereinafter'. The proportion specified in the document was one fourth share in the profits of each of the separated members of the joint family, i.e., the assessee, his wife and his two minor sons. The memorandum of partition specifically provided that the assessee alone was to remain as a partner in the two partnership firm but it also provided that 'the profits or losses in the said two partnership falling to the share of said party No. 1 shall be the profits or losses of the members of the joint family (including party No. 1) severally in their own respective individual right and interest, in the proportion stated hereinafter'. According to the memorandum, except Murlidhar, the other members of the family did not have any right whatsoever in the conduct of the affairs of the partnership firm. There is a specific clause in the memorandum which provided that the minors shall not be liable for any loss and the losses had to be borne by the assessee and his wife.

(3.) FOR the assessment year 1964 -65, the assessee filed a return showing income from business as share of profits from M/s. Kanoria Brothers, Nagpur, and the Khalilabad firm. The ITO observed that for the assessment year 1963 -64, the assessee was the karta of the family of which there was a partial partition which had taken place and which was recognised by the ITO by an order made under s. 171 of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), and held that for the assessment year 1964 -65, there was a change in the constitution of the firm as the assessee was a partner in his individual capacity and not as karta. Considering the memorandum of partition, the ITO added for the assessment year 1964 -65, one -fourth share of the profits in the hands of the assessee as a protective measure and observed that the entire share income would be assessable in the hands of the 'AOP' as per the view of the ITO for the assessment year 1963 -64. The case of the assessee before the ITO was that there was not only a division of the capital but that after the division, though the assessee alone was to continue as a partner, the assessee was liable to give to the individuals, i.e., the erstwhile members of the joint family, their respective shares having regard to the memorandum of partition. This contention was, however, rejected by the ITO who took the view that s. 64 of the Act was attracted to the case of the assessee. For the assessment years 1967 -68 to 1970 -71, the facts were identical except that additionally during those years the assessee was a partner in a firm called M/s. Khare and Tarkunde and there was a similar partition between the members of the joint family of the assessee of the capital amount of Rs. 15,000 which was invested in the name of the HUF in the said firm. As in the case of the Nagpur and Khalilabad firms, there was also a partition in the year 1966, between the members of the joint family of the assessee, the terms of which are evidenced by the memorandum dated April 4, 1966, and the arrangement with regard to the profits of the firm of M/s. Khare and Tarkunde is the same, namely, each of the four persons were to have one -fourth share in the profits but the losses were to be borne by the assessee and his wife half and half.