Commissioner of Income Tax vs Sakina Bai Ibrahim and Sons

Ratnam, J.—In these tax cases, the following common question for the assessment years 1970-71 and 1971-72 has been referred by the

Tribunal at the instance of the Revenue under s. 256(2) of the I.T. Act, 1961 (hereinafter referred to as ""the Act"") :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in confirming the order of the Appellate Assistant

Commissioner cancelling the assessment made on the assessee in the status of an unregistered firm ?

One Taharally Sarafally was a partner of M/s. Abbasbhoy Taharally & Company, having a one-third share therein. On his death on April 26,

1951, a fresh partnership deed was executed and Begum Sakina Bai, wife of Taharally Sarafally, was take in as a partner in place of her deceased

husband and was also given her deceased husband''s one-third share in the partnership. At the time of the death of Taharally Sarafally, he had also

left behind him two sons and three daughters, besides his widow and all the children were minors. Though originally all the heris of the deceased

Taharally Sarafally were agreed to be taken in as partners in his place in the firm of M/s. Abbasbhoy Taharally & Company, ultimately Begum

Sakina Bai along was taken in as a partner, as the other heirs were all minors. When the sons and daughter of Taharally sarafally attained majority,

on April 15, 1963, they entered into an agreement with reference to the one-third share of the deceased Taharally Sarafally in the firm of M/s.

Abbasbhoy Taharally & Company. Thereunder, Begum Sakina Bai and the sons as well as the daughters of deceased Taharally Sarafally on April

26, 1951, Begum Sakina Bai had been taken in and treated as a partner in his place entitled to the share of the deceased Taharally Sarafally in the

firm of M/s. Abbasbhoy Taharally & Company, that she did so representing the heirs of Taharally Sarafally & Company belonged always to the

heirs in their definite and ascertained shares under their personal law, that Begum Sakina Bai was entitled to a one-eight share and that the two

sons were each entitled was entitled to a one-fourth share and the three daughters were each entitled to a 7/56th share therein and that as and

when the amounts standing to the credit Begum Sakina Bai in the books of M/s. Abbasbhoy Taharally & Company were paid by the firm, that

amount shall be distributed and divided amongst all the heirs according to their shares as mentioned above. For the assessment years 1970-71 and

1971-72, the ITO took the view that the affirmant created a sub-partnership between Begum Sakina Bai and her children to share the share

income occurring to Begum Sakina Bai from M/s. Abbasbhoy Taharally & Company and this income should be assessed in the status of an

unregistered firm and accordingly assessed the same. On appeal, the AAC found that the assessment had not been completed after a due

investigation and collection of the relevant materials therefor, that the mere circumstances that pursuant to a notice under s. 148 of the Act, the

assessee filed a return claiming that the share income of M/s. Abbasbhoy Taharally & Company should be assessed in the status of an unregistered

firm consisting of Begum Sakina Bai and her two sons and three daughters would not justify the assessment in the name of an alleged firm, which

had been presumed to exist and, therefore, the assessment orders were unsustainable. Aggrieved by that, the Revenue preferred appeals before

the Tribunal contending that Begum Sakina Bai, a partner in the firm of M/s. Abbasbhoy & Company, had entered intone agreement with certain

others to divide her share income with them and that established the existence of sub-partnership consisting of Begum Sakina Bai, her two sons an

three daughters justifying the assessment made by the ITO. The Tribunal took the view that merely on the basis of a return filed by the assessee on

a mistaken notion that assessment can be made in the status of an unregistered firm, no order could be passed to that effect, especially when there

had been no material to establish a sub-partnership as such and no investigation at all whether by such an agreement a superior title was created

and there was diversion of the share income from the main firm, M/s. Abbasbhoy Taharally & Company. In that view, the Tribunal sustained the

orders passed by the AAC and dismissed the appeals.

The learned counsel for the Revenue contended that on the terms of the agreement dated April 15, 1963, the existence of a sub-partnership

among the parties thereto had been clearly made out and, therefore, no exception could be taken to the assessment of the income in the status of

an unregistered firm. Reliance in this connection was placed by the learned counsel upon the decisions in Fatehchand Murlidhar and Another Vs.

Commissioner of Income Tax, Calcutta, , Commissioner of Income Tax, Gujarat Vs. Mahendrasingh Mohansingh, , Sunku Munuswami Chettiar

Vs. Sunku Narasimhalu Chettiar (died) and Others, , ADDL. COMMISSIONER OF Income Tax AND OTHERS Vs. CHANDULAL C.

SHAH AND OTHERS., , Shiv Narain Agarwal Vs. Commissioner of Income Tax, and K.D. Kamath and Co. Vs. Commissioner of Income Tax,

Mysore, . On the other hand, the learned counsel for the assessee submitted that under the agreement dated April 15, 1963, the share income of

Begum Sakina Bai in the firm of M/s. Abbasbhoy Thharally &Company was not agreed to be dealt with and divided among the parties thereto, but

that the agreement merely reiterated and declared the rights of the parties thereto which had already devolved on them, as sharers, according to the

personal law governing the parties and that no new rights in favour of others, in the one-third share of Begum Sakina Bai, were created under the

agreement. The learned counsel further submitted that there is no sub-partnership at all made out and no question, therefore, of an assessment in

the status of an unregistered firm arose.

In order to appreciate these rival contentions, it would be first necessary to refer to the terms of the agreement and then consider the legal effect

thereof. Annexure ""A"" to the statement of the case contains the agreement entered into between Begum Sakina Bai and her two sons and three

daughters on April 15, 1963. In the preamble portion of the agreement, it is stated that Taharally Sarafally was a partner of the firm, M/s.

Abbasbhoy Taharally & Company, and that on his death on April 26, 1951, leaving behind him the parties to the agreement as his heirs and

representatives under the Mohamedan law, all of them because entitled to their definite and ascertained shares under the Koranic law in the share

of Taharally Sarafally in the firm andd the amounts due to him from the firm. The agreement proceeds to further state that the surviving partners of

M/s. Abbasbhoy Taharally & Company had agreed to take in all the heirs of the deceased Taharally Sarafally as partners, but subsequently

decided only to take in Begum Sakina Bai as a partner and that she was treated as a partner in the firm of M/s. Abbasbhoy Taharally & Company,

as representing the share of Taharally Sarafally and that the entire amount which stood to the credit of Taharally Sarafally in the books of account

of M/s. Abbasbhoy Taharally & Company was transferred to the account of Begum Sakina Bai. There is a further reference in the preamble to the

shares of the parties thereto and the need to record such shares in order to avoid misunderstanding in the family in the future. In the body of the

agreement, it is recited that after the death of Taharally Sarafally, Begum Sakina Bai was treated as a partner in the place of and entitled to the

share of said Taharally Sarafally in the firm of M/s. Abbasbhoy Taharally & Company and that Begum Sakina Bai continued as a partner in the

firm of M/s. Abbasbhoy Taharally & Company as representing the heirs of the deceased Taharally Sarafally whose interests in the firm of M/s.

Abbasbhoy Taharally & Company continued with the firm as before. A further provision in the agreement is to the effect that the amounts in the

capital and current accounts standing to the credit of Begum Sakina Bai in the firm of M/s. Abbasbhoy Taharally & Company belonged always to

the parties to the agreement according to their defined and ascertained shares under the personal law of the parties and that as and when the

amounts were paid to Begum Sakina Bai by M/s. Abbasbhoy Taharally & Company, those amounts shall be distributed and divided amongst all

the parties according to their share mentioned in the agreement. A consideration of the terms of the agreement entered into between Begum Sakina

Bai and her children does not establish an agreement by Begum Sakina Bai to divide her share of the profits in the firm with the other parties to the

agreement. A sub-partnership is a partnership within a partnership. The vital requirement of a partnership is an agreement. If a partner agrees to

share the profits derived by him or her from a firm with a stranger or even with his or her children, by reason of such an agreement, the strangers or

his or her children do not become partners in the firm. Such an agreement whereunder provision is made for sharing the profits earned by a partner

in a firm by that partner as well as by others, be they strangers or relations, would constitute a sub-partnership, bringing into existence the

relationship of partner inter se amongst them, without in any manner affecting the partners of the firm. Essentially, therefore, a sub-partnership has

its origin in and is traceable to an agreement, whereunder, one of the parties to the agreement, who is already a partner in a firm and is in receipt of

a share of profits, agrees to divide or share such profits with the other parties to the agreement. Rights in a sub-partnership are thus referable to

and based on contract only. It is difficult on the terms of the agreement in this case to spell out a sub-partnership as normally understood and

recognises. No doubt, there is a reference to Begum Sakina Bai having taken the place of her deceased husband, Taharally Sarafally, in the firm of

M/s. Abbasbhoy Taharally & Company, in which he was a partner during his lifetime. The agreement does not, however, purport to provide for

the division of the share income of Begum Sakina Bai, which, in law, she is entitled to receive as a partner in the firm of M/s. Abbasbhoy Taharally

& Company. On the contrary, Begum Sakina Bai is not the only person who was entitled to the share of the deceased Taharally Sarafally in the

firm of M/s. Abbasbhoy Taharally & Company, as on his death, Begum Sakina Bai, her two sons and three daughters, all of them together became

entitled to shares therein under the Muslim law which governs them. In other words, under the terms of the agreement, the shares to which the

parties to the agreement became entitled to the share of the deceased Taharally Sarafally in the firm of M/s. Abbasbhoy Taharally & Company on

his death in accordance with their personal law, were merely declared and reiterated . The rights referred to under the agreement were not created

thereunder with reference to the share of Begum Sakina Bai in the firm of M/s. Abbasbhoy Taharally & Company. The agreement had merely

proceeded to declare the rights of the parties which had already devolved on them in accordance with the personal law governing the parties with

reference to the share of Taharallyy Sarafally on his death on April 26, 1951. Clearly, therefore, in this case, one of the essential requirement of a

sub-partnership, namely, agreement to share the profits of one of the partners with others, is absent. The terms of the agreement do not spell out a

partnership between Begum Sakina Bai and her children, as there is no agreement between Begum Sakina Bai and her children to share the profits

received or losses suffered by Begum Sakina Bai in the firm of M/s. Abbasbhoy Taharally & Company. This clearly negatives an agreement

between Begum Sakina Bai and her children to to divide the profits or losses referable to her share in the firm. We are, therefore, of the view that,

on the facts and in the circumstances of this case, no sub-partnership has been made out. Inasmuch as we have considered the question referred to

us on the basis of the terms of the agreement entered into between the parties, it is unnecessary to deal with the decisions relating to sub-

partnership and the effect thereof relied on by the learned counsel for the Revenue.

On a careful consideration of the terms of the agreement dated April 15, 1963, we are of the view that the Tribunal was right in its conclusion

that no assessment can be made in respect of the share income from the firm of M/s. Abbasbhoy Taharally & Company in the status of an

unregistered firm. We, therefore, answer the question in the affirmative and against the Revenue. The Revenue will pay the costs of the reference to

the assessee. Counsel''s fee Rs. 500 (one set).