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1962 (7) TMI 64

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..... hereof 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 & Co. of which he was a partner. In pursuance of this agreement, the assessee received from Ramaswami Naidu a sum of ₹ 15,232 in January, 1957. This amount was computed as follows : "Assessee's share of commission out of the net managing agency commission : ₹ 27,639 ; deduct income-tax and super-tax thereon : ₹ 12,407; balance ₹ 15,232." In respect of the calendar year 1956, the previous year for the assessment year 1957-58, Krishna & Co. was assessed as an unregistered firm, but treated as a registered firm under section 23(5)(a), and Ramaswami Naidu was assessed on his share income of the firm. The sum of ₹ 12,407 is perhaps included in the amount paid by Ramaswami Naidu by way of income-tax and super-tax in respect of his share income of the firm of Krishna & Co. There are no materials to show that Ramasw .....

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..... 6, 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 amount and acquired 4,000 shares of the Kadiri Mills (Coimbatore) Ltd. and 6 annas share in the partnership and goodwill of G. Krishna & Co., the managing agents of the - said mills. The document further recites that this loan of ₹ 5 lakhs had been repaid by the first party by transferring 2,000 shares of the Kadiri Mills of the total agreed value of ₹ 3 lakhs, and by paying in cash another ₹ 2 lakhs. In consideration of this financial assistance rendered by the second party to the first party, the first party agreed to pay to the second party a three annas share out of his 14 annas share of the managing agency remuneration earned by Krishna & Co. as the managing agents of Kadiri Mills. The following clauses are relevant and may therefore be extracted : 1. The first party shall pay to the second party 3/14ths of the net managing agency .....

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..... it 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 managing agents became entitled to receive the remuneration from the Kadiri Mills. The agreement of Ramaswami Naidu to pay the three annas share to the assessee amounts to a disposal of a portion of the income earned by him as a partner of Krishna & Co. It has to be noted that the assessee became entitled only to a three annas share of the net managing agency remuneration and that net amount was to be arrived at by deducting a sum of ₹ 9,000 said to be the salary of the managing partner, irrespective of the actual salary paid to him, and deducting all taxes and public charges levied by the Central Government or the State Government or any other local body. What is transparently clear is that the assessee is not entitled to participate directly or indirectly in the whole or part of the managing agency remuneration earned by Krishna & Co. Indeed th .....

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..... rinciple 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 of the taxing Act. An assessee is no doubt saved from the harassment and inconvenience of two income-taxes on the same income in his hands. But it would be a misnomer to call the amount in his hands that remains after payment of tax as an "income-tax free" fund which can never be subjected to taxation whatever destination it reaches and whichever way it may pass through. We cannot do better than quote the observations of Rowlatt J. in Commissioners of Inland Revenue v. Sanderson [1921] 8 Tax Cas. 38as the learned judge combined vast experience in tax law with happy felicity of expression. At page 44 the learned judge observed : "It is often said, but not always understood, that in income tax the same income is not taxed twice. That means that you cannot tax it more than once on one passage of the money in the form of one sort of income. If a man .....

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..... ts 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 all the elements necessary to constitute a partnership as the term is defined in the Partnership Act. Section 4 of the Partnership Act is in these terms : " 'Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm' and the name under which their business is carried on is called the 'firm name'." In order to attract the above definition the following ingredients must be conjointly present: (1) An agreement between two or more competent persons ; (2) This agreement must be to share the profits of a business ; (3) the business must be carried on by all or any of the contracting parties acting for all. "Business&q .....

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..... e 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 that case there was an express clause in these terms: "It (the quarter share of the managing agency commission) is to be paid to the plaintiff-company in the capacity of a sleeping partner." Even so the Bombay High Court held that a partnership was not constituted. At page 180, Lokur J. observed thus : "Thus although the right to participate in the profits of a business is a strong test of a partnership, yet whether that relationship does or does not exist must depend on the real intention and contract of the parties. The true test is whether such a participation of profits constitutes the relationship of principal and agent between the person taking the profits and those actually carrying on the business. In the present case there is nothing in the agreement to suggest that the defendant-company was to carry on the business of the mills-company .....

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..... stand 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 be a sub-partnership without the requirements of law regarding the constitution of partnership being fully satisfied. A sub-partnership is as much a partnership as the main partnership and if it is impossible to infer the relationship of partners between the parties to the so called partnership, there cannot, of course, be a sub-partnership in law. Mr. Swaminathan referred us to the decision of the Supreme Court in Steel Brothers & Co. Ltd. v. Commissioner of Income-tax [1958] 33 ITR 1 (SC). The question there was whether a document constituted a partnership between three companies, A, B and C, or whether it was a partnership only between A and B companies. A and B were two companies carrying on business in Burma rice. C was another such company. A held all the shares of the C company and was also its managing agent. An agreement was entered into between .....

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..... 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 can be treated as an association of individuals within the meaning of the said expression under the Act. An association of persons is no doubt a unit of assessment under the Act. A combine for a joint venture or grouping for a common enterprise is a distinctive feature of "an association of persons", which has been personified by the Act. It is the income earned as a result of the common endeavour that is chargeable to tax as the income of the associated personnel. A mere joint receipt is not sufficient to club the persons receiving it as such an association. Again we have to look into the document dated October 30, 1956, to find out whether the assessee and Ramaswami Naidu banded themselves together for the common endeavour of earning the managing agency remuneration payable by the mills. In our opinion, the terms of the document cannot and do not .....

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