1985 (7) TMI 55 - HC - Income Tax

Summary

Issues Involved:
1. Liability of the firm M/s Alisher Contractors to pay tax on its income.
2. Whether the levy of tax on the sub-partnership constitutes double taxation.

Detailed Analysis:

Issue 1: Liability of the Firm M/s Alisher Contractors to Pay Tax on Its Income

The Tribunal had initially held that the firm M/s Alisher Contractors was not liable to pay any tax on its income. The case involves a registered firm where Alisher and Bhanwar Singh took an excise contract for country liquor. Due to insufficient finances, Alisher entered into a sub-partnership with Shafi Mohd., who provided necessary finances in exchange for 50% of Alisher's share of profit in the main firm.

The Income-tax Officer found that it was a sub-partnership and assessed the income accordingly. However, the Appellate Assistant Commissioner observed that taxing the share of the original firm in the hands of the sub-partnership would result in double taxation, thus deleting the tax levied by the Income-tax Officer on the sub-partnership.

The Tribunal upheld this view, stating that if Alisher subdivided his profit with Shafi Mohd., he would not be required to pay further tax as it would amount to double taxation.

Upon review, the High Court referenced legal principles from Lindley on the Law of Partnership and previous judgments such as Sitaldas Tirathdas v. CIT and Murlidhar Himatsingka v. CIT. The court concluded that in the case of a sub-partnership, the income is diverted before it becomes the income of the partner in the original firm. Therefore, the sub-partnership creates a superior title and diverts the income from the main firm before it becomes the income of the partner.

The court held that the Tribunal was not right in holding that the assessee-firm is not liable to pay any tax on its income. Thus, Question No. 1 was answered in the negative, in favor of the Revenue.

Issue 2: Double Taxation on the Sub-partnership

The Tribunal had also held that the levy of tax on the sub-partnership amounted to double taxation. The Appellate Assistant Commissioner had similarly observed that taxing the share of the original firm in the hands of the sub-partnership would result in double taxation.

The High Court, however, disagreed with this view. It referred to the principles laid down in Murlidhar Himatsingka's case, which indicated that in a sub-partnership, the income is diverted before it reaches the partner in the original firm. Therefore, the income of the sub-partnership is distinct and separate from the income of the partner in the original firm.

The court concluded that there is no double taxation in charging tax on the sub-partnership. Consequently, Question No. 2 was also answered in the negative, in favor of the Revenue.

Conclusion:
Both questions were answered in the negative, indicating that the firm M/s Alisher Contractors is liable to pay tax on its income and that the levy of tax on the sub-partnership does not constitute double taxation. The judgment was delivered in favor of the Revenue and against the assessee, with no order as to costs.