SETH MOTILAL MANEKCHAND Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THERE was a joint family consisting of Motilal Manekchand and his son Maganlal. Motilal, Maganlal and Motilal's wife Bhagirathibai were appointed managing agents of the Pratap Mills at Amalner and the father and son were appointed managing agents of the New Pratap Mills at Dhulia. It is common ground that the managing agency belonged to the joint and undivided Hindu family. This Hindu family was partitioned on the 1st July, 1948, and a document was drawn up on the 29th June, 1949, to give effect to that partition. There are three schedules to this deed of dissolution allocating joint family properties to the three parties who were entitled to equal shares on the partition of the joint Hindu family, viz., the father Motilal the son Maganlal, and the wife or the mother Bhagirathibai. There was a provision with regard to the managing agency commission and the provision was that Motilal and Maganlal were entitled to equal shares in this managing agency commission of the two mills, but they both undertook to pay to bhagirathibai 2 annas and 8 pies share each our of their respective 8 annas share, and when we turn to the three schedules we find that in the schedules dealing with the father's and the son's property, what is credited to them is 8 annas share of the managing agency commission of both the mills less 2 annas and 8 pies, and when we turn to the schedule dealing with Bhagirathibai's properties we find that the 2 annas 8 pies share in each of the managing agency commission is credited to her, and it is significant to note that in each schedule the total properties allocated comes to Rs. 13,03,646 and this amount is arrived at after taking into consideration the managing agency commission. After the dissolution of the family the father and son constituted a partnership and acted as the managing agents of these two mills, and the contention was put forward both by the firm and by each individual partner that the managing agency commission received by them and in respect of which they were liable to pay tax was not the full 16 annas received by them but 16 annas less the amount which went to Bhagirathibai. This contention was rejected by the Department and the Tribunal accepted the view of the Department. The assessee had now come before us.

(2.) NOW , the real question that we have to consider is this. What is the real income of each of the two partners, viz., the father Motilal and the son Maganlal ? Is his income 8 annas in the managing agency commission of the two mills, or is part of that income diverted so that the real income of the partner is not 8 annas but 8 annas less the amount which is diverted so that the real income of the partner is not 8 annas but 8 annas less the amount which is diverted in favour of Bhagirathibai ? Now, it is necessary to remove one or two misunderstandings that might have been caused by certain contentions put forward by the assessee before the Tribunal. In the first place, this is not a case where a claim is made in respect of any deduction under the provisions of the Income -tax Act. If such a claim had been put forward, then we would have to consider the various sections of the Act in order to determine whether the deduction is justified. But is clear position in law, as we shall presently point our, that even though an assessee may not be allowed to claim a particular amount as a deduction falling within the provisions of the Act, he would be entitled to urge that his real income should be considered and if a certain amount is to be deducted in order to ascertain his real income, such deduction would have to be made notwithstanding that the Income -tax Act made no provision for such a deduction. In all cases or tax, what has got to be considered is what is the income of the assessee, and when that question arises what has got to be considered is the real income and not any artificial income, and for the purpose of ascertaining that real income every part of that income which May seem to be his income, if in fact its not his income, if that part has been diverted and never constituted his real income, has got to be excluded. The other misunderstanding that was caused was by the claim made by the partnership that in the assessment of the partnership which is a registered firm this deduction should be allowed. Now, the partnership which constitutes the managing agency did no enter into any agreement with Bhagirathibai. The deed of dissolution to which attention has been drawn was between the three members of the joint family and it was as individuals that they were partitioning the joint family property, and therefore the Tribunal was right when it took the view that as far as the partnership was concerned it could not contend that its income as managing agents was in any way diverted by a certain amount having to be paid to Bhagirathibai. But we have held that even though a registered firm may not be entitled to claim deduction, when we come to the assessment of the partners constituting that firm, it would be open to a partner to contend that in order to determine his real income qua the share which he has received from the firm, and legitimate deduction should be taken into consideration. Therefore, even though the amount to be paid to Bhagirathibai May not be considered in the assessment of the firm, that would not prevent the two partners from claiming that their real income as partners is not 8 annas share in the managing agency commission but 8 annas less the amount which Bhagirathibai was entitles to receive. See our observations in Shanti Kumar's case

(3.) NOW , it is necessary to consider a what was the real nature of the transaction that took place when the parties divided and distributed the joint family property and drew up the document of the 29th June, 1949. What they were dividing and distributing were the assets of the joint family and all the income received by the joint family, and there cannot be the slightest doubt that under this deed of dissolution what the parties agreed to was that only a portion of the managing agency commission should be the income of the two male parties, Motilal and Maganlal, and that a portion of the commission should also be the income of Bhagirathibai. If that is the true nature of the transaction, then it is clear that the income of the joint family property, to the extent that it was represented by the managing agency commission, was divided between the three members of the joint family, the father, the son and the wife. Therefore, when we ask ourselves the question as to what is the real income of the two partners, the clear answer to that question must be in view of this deed of dissolution that the real income is not 8 annas each in the managing agency commission but 8 annas less 2 annas and 8 pies and that the balance of the managing agency commission is the income of Bhagirathibai and not the income of the father and the son. The Advocate -General has emphasised the fact that what was sought to be done was the application or allocation of the income of the partners after they had received the income and after the managing agency commission had become their income. It is true that if this managing agency commission constitutes the income of the partners, then the Taxing Department is not concerned with how the partners apply or allocate this income. But the whole question before us is, looking to the true nature of the transaction, can it be said that the whole of the managing agency commission ever became the real income of the two partners, and in our opinion the answer must be against the contention of the Advocate -General.