TMI Blog1991 (1) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... two minor daughters, Shyamala and Sharmila, of the assessee through his first wife, Lalitha. A sum of Rs. 11,200 was paid by S. K. Pandia Nadar to the trustees with a direction that the net income from the trust fund and such other amounts as may form part of the trust should be enjoyed by the two beneficiaries, Shyamala and Sharmila, in equal shares. Subsequently, on October 1, 1974, there was a reconstitution of the firm, Messrs. Premier Match Works, in that Lalitha Trust, represented by the trustees, was taken in as a partner in the firm. As per the terms of the partnership deed dated October 1, 1974, the profit-sharing ratio was also refixed at 15% to S. K. Pandia Nadar, 35% to the assessee, 10% each to the two sons and daughter-in-law of S. K. Pandia Nadar and 20% to Lalitha Trust, represented by its trustees. By this process the share of profits of the assessee which was earlier 55% was reduced to 35% and, on a reallocation of the share of profits as per the deed of partnership dated October 1, 1974, Lalitha Trust became entitled to a share of 20% of the profits of the firm with no liability for losses. In the course of the assessment proceedings for the assessment years 1975 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the sum of Rs. 33,566 and the sum of Rs. 36,274 being the share income belonging to the minor daughters of the assessee should not be clubbed in the hands of the assessee for the assessment years 1975-76 and 1976-77, respectively, under section 64(1)(iv)/64(1)(v) of the Income-tax Act, 1961 ?" Learned counsel for the Revenue contended that the right of a partner to a share in the profits of a firm is property capable of transfer and redistribution of the share of profits between one partner and other partners would involve a transfer of that right leading to a diminution in the interest of a partner and, at the same time, correspondingly increasing the share of the other partners and that was tantamount to a transfer by the assessee of assets, either directly or indirectly, in favour of the minor children of the assessee otherwise than for adequate consideration, justifying the clubbing of the income of the minors with that of the assessee. Strong reliance in this connection was also placed upon the decision reported in CGT v. V. A. M. Ayya Nadar [1969] 73 ITR 761 (Mad). On the other han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of his minor children or for their benefit may now be considered. Under the deed of partnership dated April 1, 1974, the share of profits of the assessee was 55% and that share had been reduced to 35% under the terms of the partnership deed dated October 1, 1974, reconstituting the firm taking in Lalitha Trust as a partner and making available to it a 20% share in the profits of the firm. We gather from the order of the Income-tax Officer that the object of the trust was to invest the sum of Rs. 11,200 belonging to the trust for purposes of yielding income and the trustees were, therefore, at liberty to invest that amount in whatever manner they liked to secure the objects of the trust and the trustees invested the amount as capital contribution of the trust in the firm in order to enable the firm to admit the trust as a partner in the firm. Viewed thus, the reduction in the share of profits of the assessee from 55% to 35% is not relatable to any act of transfer on the part of the assessee, for, there is no transfer as such by the assessee of 20% share of the profits in favour of Lalitha Trust. It is in this connection that it has to be borne in mind that the reduction in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, the reliance placed upon the decision in CGT v. V. A. M. Ayya Nadar [1969] 73 ITR 761 (Mad) does not, in any manner, assist the Revenue. CIT v. Prem Bhai Parekh [1970] 77 ITR 27 (SC), relied on by learned counsel for the assessee, lays down, though with reference to section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, that, before an income can be held to come within the ambit of section 16(3)(a)(iii) or (iv) of the Indian Income-tax Act, 1922, it must be proved to have arisen directly or indirectly from transfer of assets made by the assessee in favour of his wife or minor children and the connection between the transfer of assets and the income must be proximate and the income must arise as a result of the transfer and not in some manner connected with it. Further, on the facts of that case, it was held that the connection between the gifts made by the assessee and the income of the minors from the firm was a remote one and it could not be said that the income arose directly or indirectly from the transfer of the assets and the income arising to the minor sons of the assessee by virtue of their admission to the benefits of partnership in the firm could not be included i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that too by the trust and not by the minor children, though it may be that the trust was for the benefit of the minor children. Thus, Explanation 3 would not, in any manner, affect the position in this case with reference to the requirements regarding the clubbing as laid down in CIT v. Prem Bhai Parekh [1970] 77 ITR 27 (SC). We may now refer to CGT v. Ali Hussain M. Jeevaji [1980] 123 ITR 420 (Mad). There also the question that arose was whether the relinquishment of shares by the two partners would constitute gifts liable to tax under the Gift-tax Act. It was found that there was a transfer by the two partners in the firm to their sons for consideration and the consideration consisted of accumulation of the share of profits till such accumulation amounted to Rs. 20,000 which should be treated as capital brought in by the two incoming partners. It was held that contribution of capital, rendering of service, sharing in future liabilities and losses would all constitute consideration for the admission of new partners into the firm. On the principle of this decision, even on the assumption that the assessee had indirectly transferred his share of profits to the extent of 20% in f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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