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1962 (7) TMI 64

..... a reference under section 66 of the Indian Income-tax Act and the question that has been referred to us is as follows : "Whether the assessment of the aforesaid sum of ₹ 15,232 is legal?" The assessee, a private limited company, advanced a loan of ₹ 5 lakhs in 1954 to one Ramaswami Naidu. It is alleged that this amount was lent to Ramaswami Naidu with a view to enable him to acquire 4,000 shares of the face value of ₹ 100 each in Kadiri Mills Ltd., and to enable him to obtain a 6 annas share in the firm of Messrs. Krishna & Co., who are the managing agents of the mills. It is now common ground that this loan was repaid by Ramaswami Naidu to the assessee partly in cash and partly by transfer of 2,000 shares of the Kadiri Mills Ltd. valued at ₹ 3 lakhs. The assessee and Ramaswami Naidu entered into an agreement, the terms whereof were reduced to writing and embodied in an instrument dated October 30, 1956. We shall refer to the terms of the agreement in detail later. The substance of the agreement is that the assessee should get 3 annas share from Ramaswami Naidu out of his 14 annas share in the managing agency remuneration earned by Krishna & .....

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..... Act by the Tribunal. Mr. Swaminathan, learned counsel for the assessee, urged the following contentions before us. 1. The assessment of the amount in question of ₹ 15,232 is illegal and improper as such an assessment would amount to a double taxation of income which is not permissible. 2. The assessee and Ramaswami Naidu are members of an unregistered firm, and the sum of ₹ 15,232 received by the assessee is exempt from taxation under section 14(2)(a) of the Act. 3. In the alternative if the plea of partnership covered by ground No. 2 fails, the relationship of the assessee and Ramaswami Naidu must be regarded as an "association of individuals" and that the amount would not be taxable by reason of the exemption contained in section 14(2)(b) of the Act. It will now be convenient to refer to the terms of the agreement dated October 30, 1956, between the assessee and Ramaswami Naidu. Ramaswami Naidu is referred to therein as the first party and the assessee as the second party. The document recites that the first party was in need of financial assistance and that the second party advanced a sum of ₹ 5 lakhs in 1954, and that the first party utilised that am .....

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..... d/or his or their descendants in the male line, have at least a three annas share in the managing agency of the Kadiri Mills (Coimbatore) Ltd., Oddarpalayam, whether such managing agents be Messrs. G. Krishna & Co. or any other individual, firm or body corporate, (ii) That the second party and/or its nominees now holding 2,000 shares in the capital of the Kadiri Mills (Coimbatore) Ltd. continue to hold the same, unless the whole or any part thereof has been dealt with in accordance with clause 6 below .... 5. The first party shall not, during the time this agreement is in force, voluntarily part with or transfer any more than a eleven annas share out of the fourteen annas share he now owns in the partnership of G. Krishna & Co. except with the consent in writing of the second party." The terms of the above document are fairly clear and do not admit of any doubt or ambiguity. Ramaswami Naidu was entitled to a fourteen annas share of the managing agency remuneration earned by G. Krishna & Co. of which he was a partner. Out of this fourteen annas share he carved out a three annas share and agreed to hand it over to the assessee each year within thirty days after the m .....

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..... Act does not contain any express prohibition against repeated taxation of the same income in the hands of the same assessee, first as income from one source, and next as income from another source. But it is implicit in the statute that income is chargeable only once. Income-tax is one tax and it would be manifestly unjust to hold that income assessed under one head or source should again be taxed under a different category. To quote the observation of Lord Sumner in Bradbury v. English Sewing Cotton Co. Ltd. [1923] 8 Tax Cas. 481, 513: "Though the Acts nowhere say so, this principle has long been assumed. Whether the contention may ever be raised that the Crown is not bound by mere conventions of fair-play current from time to time, hitherto, at any rate, the binding force of this principle has not been questioned." Now the precise scope of this principle is not that income which has borne tax in the hands of a particular individual becomes wholly immune from taxation in all its subsequent stages of devolution or passage. To understand the rule against "double taxation", as it is called, in this fashion would be to misconceive and misinterpret the provisions o .....

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..... the assessee the amount did not represent the managing agency remuneration. It was a mere receipt of income by the assessee under a valid contract entered into by it with Ramaswami Naidu. The first contention of the learned counsel for the assessee, therefore, fails. The second contention that was urged was on the footing of an alleged partnership between the assessee and Ramaswami Naidu. The question whether there is a partnership as alleged depends almost entirely on the terms of the agreement set out above. Did the parties thereto agree to engage in a business with a view to profit ? The answer to this question must be derived from the construction of the document. If on its true construction the relationship of co-partners between the parties can properly be inferred, the failure of the parties to describe themselves as partners may not avail to defeat its legal effect. "If they have in fact stipulated for all the rights of partners an agreement that they shall not be partners is an useless protest against the consequences of the real agreement." (Lindley on Partnership, page 50). We have, therefore, to ascertain the true import of the document, whether it contains a .....

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..... ts reconstruction was submitted to and sanctioned by the High Court of Bombay. In accordance with that scheme, the plaintiff-company surrendered its managing agency to the defendant company for a period of 15 days on condition that it should be paid a quarter of the commission earned by the defendant-company from the managing agency. The mills went into liquidation and before that the defendant-company earned commission as managing agents of a sum of ₹ 39,958-5-4. The plaintiff filed the suit to recover the sum of ₹ 11,584 due for a quarter share of the commission in terms of the scheme of reconstruction. Of the several defences raised to the action one was that the suit was not maintainable as there was a partnership between the plaintiff and the defendant and the partnership was not registered as required by section 69 of the Partnership Act. The question for consideration, therefore, was whether under the terms of the reconstruction by which the plaintiff-company became entitled to a quarter share of the managing agency remuneration, a partnership was validly constituted. It was held that on those facts a partnership could not be inferred. We must point out that in t .....

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..... o say, it makes the parties to it partners inter se; but it in no way affects the other members of the principal firm." A sub-partnership must, as the term itself connotes, be itself a partnership. If the relationship between the alleged sub-partners cannot be that of partners, there cannot be a sub-partnership merely because the subject-matter in respect of which the parties entered into an agreement relates to a partnership business. The passage from Lindley quoted above makes this much clear, namely, that if one of the partners of a partnership business enters into another partnership in respect of his share income, the latter partnership can be called a sub-partnership, which really means that there are two partnerships, a partnership within a partnership, the one main and the other subsidiary, the one primary and the other secondary. We do not understand the above passage as an enunciation of a legal principle that whenever a partner enters into an agreement regarding his share of the partnership income with another, irrespective of the terms and legal effect of such an agreement, a sub-partnership should be presumed. As stated already, it is inconceivable that there can .....

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..... ion. Thus all the ingredients of partnership were satisfied and it is futile to urge that the agreement was a hybrid document which was a tripartite agreement so far as the business of the Combination was concerned and was a partnership agreement only between two partners, viz., Steels and Ellermans." This decision turned on the terms of the document which came in for construction. We are unable to see how the decision can help the assessee in the present case to advance the contention that a partnership or a sub-partnership was constituted between Ramaswami and the assessee company. Incidentally, we may point out that the Supreme Court relied upon the subsistence of the agency of Steels to carrying on the combination business as one of the essential ingredients necessary to constitute a partnership in law. This was also the view of the Bombay High Court referred to above and with which we have already expressed our concurrence. In our opinion, the plea of the assessee that the document in question constituted a partnership between the assessee company and Ramaswami is not well founded. What remains is the consideration of the question, whether the assessee and Ramaswami Naidu .....

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..... was relied upon by Mr. Swaminathan is at page 305 : "................ten per cent. commission of the profits was being given to the M.S.M.M. firm in respect of its management of these properties. It seems to be fairly well established, therefore, that subsequent to this partition, the properties in question were managed by the M.S.M.M. firm, and that firm while taking to itself 10 per cent. of the profits as commission was crediting the balance in the M.M. Ipoh account to Meyyappa and his son, Chettiappa." In the case cited above, there was definite evidence of a joint enterprise by reason of a common management of the business. But such proof is lacking in the instant case. The allowance of ₹ 9,000 said to be salary in favour of Ramaswami Naidu cannot indicate or lead necessarily to the inference that Ramaswami was in management of the managing agency business on behalf of the assessee. Even as taxes and all public charges were allowed to be deducted an amount of ₹ 9,000 per year was also allowed to be reserved by Ramaswami Naidu in computing the net amount from and out of which the assessee was to be paid. In our opinion the right of Ramaswami Naidu to keep .....

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