BHAICHAND JIVRAJ MUCHHALA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference relates to a question pertaining to inclusion of the income of a wife as a partner of a firm on the ground that the requisite capital to be subscribed by her was contributed out of gifts made by the assessee, her husband, in favour of the wife. The matter relates to the asst. year 1960 61, for which the corresponding accounting year is the calendar year 1959. Assessee, Bhaichand, carried on business in partnership with his brother, Mathuradas, in the name and style of Chandravadan & Co. some time in August, 1953, and the terms of the partnership were reduced to writing by a partnership deed dated July 24, 1954. In this partnership the assessee, Bhaichand, was entitled and liable to bear 10 annas share in the profits and losses, while his brother, Mathuradas, was entitled and liable to bear 6 annas share in the profits and losses. There was no term in the deed of partnership relating to ownership of goodwill and tenancy rights of the premises where the partnership business was carried on. The assessee retired from this partnership w.e.f. October 23,1957. A deed of retirement was actually drawn up between the parties on April 11, 1958. With effect from October 24, 1957, a new partnership firm consisting of the continuing partner, Mathuradas, Tarabai, wife of the assessee, Bhaichand, Mukundlal and Sumanlal, was constituted. The partnership deed for the new partnership was executed on April 11, 1958. The deed of partnership for the new firm provided that the partnership shall carry on business in the name and style of Chandravadan & Co.; that the assets and liabilities of the old firm were taken over by the new partnership. Mathuradas, the brother of the assessee, was a working partner in the new partnership and was not to contribute any amount towards the capital of the firm. The capital of the new partnership was to be contributed by Tarabai, wife of the assessee, and the other two partners, Mukundlal and Sumanlal. It was to comprise of an amount of Rs. 2 lakhs. Interest at the rate of 6per cent per annum was to be paid to the partner upon his capital contribution in the new firm standing to the credit. The partners of the new firm were entitled to share the profits and liable to bear the losses in the following proportion, namely:

(2.) MATHURADAS , the brother of the assessee, was to be a working partner and was to devote his entire time and attention to the business of the firm. He was not to engage in any business competing with the business of the firm directly or indirectly except with the consent in writing of the other parties. Upon the dissolution of the new firm, Tarabai was entitled to take over the godown and the shop but she was liable to pay to the partnership the value thereof. So far as the firm name was concerned, she was entitled thereto upon dissolution without paying any amount to the partnership.

(3.) EVEN though the question referred to us related to the total sum of Rs. 31,778, Mr. Pandit on behalf of the assessee has fairly conceded that a sum of Rs. 6,000 being the interest on the capital amount of Rs. 1 lakh contributed by wife, Tarabai, in the firm should be included in the total income of the assessee, as this capital contribution of Rs. 1 lakh was out of the sum gifted by the husband to the wife. He has contended that the balance amount of Rs. 25,778 is not liable to be included in the total income of the assessee for the assessment year. His submission is that provisions of S. 16(3)(a)(iii) are only attracted when there is a proximate connection between the transfer of an asset by the husband to the wife and the income derived therefrom. His argument was that any income derived by the wife by reason of her share in the profits of the firm or by reason of any capital contribution made by her from her own moneys cannot be included in the total income of the husband by reason of the provisions of S. 16(3)(a)(iii). Strong reliance was placed by him upon the decision of the Supreme Court in the case of CIT vs. Prem Bai Parekh (1970) 77 ITR 27 (SC). Mr. Joshi, on behalf of the Revenue, has not been able to meet the contention urged on behalf of the assessee in view of the decision of the Supreme Court. Sec. 16 (3)(a)(iii) of the Act, inter alia, provides that: