P. Nagalingam vs Commissioner of Income Tax

M.N. Rao, J.—At the instance of the assessee, the following question was referred by the Income Tax Appellate Tribunal for the opinion of this court u/s 256(1) of Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the income arising to the assessee from his share in the partnership firm, M/s. Pabbati Nagalingam, was liable to be included in the individual assessment of the assessee in accordance with the provisions of section 64(2) of the Income Tax Act, 1961?"

The relevant assessment year is 1976-77. The assessee, Sri Nagalingam, is a partner of the firm, M/s. Pabbati Nagalingam, in which he holds 90% share and the remaining 10% is held by Smt. V. Jayalaxmi. A sum, of Rs. 30,000 was debited to the personal account of Sri Nagalingam and he converted the same into an asset of the joint family consisting of himself, his wife and his minor son by means of a declaration dated June 19, 1975. The transfer was treated as a gift and assessed to gift-tax. The amount of Rs. 30,000 was invested in the partnership concern of M/s. Pabbati Nagalingam. The Income Tax Officer applied section 64(2)(b) of the Income Tax Act, 1961 (for short "the Act"), and held that the entire income that came to the share of the assessee must be treated as his personal income. The contention raised by the assessee that the interest part in relation to the said sum of Rs. 30,000 which worked out to Rs. 3,346 alone was attributable to the converted property with in the meaning of section 64(2) of the Act and, therefore, the rest of the income should be taxed as belonging to the Hindu undivided family was negatived by the Income Tax Officer. The Appellate Assistant Commissioner, on appeal, the Income Tax Appellate Tribunal, agreeing with the view taken by the assessing authority and the first appellate authority, held :

"...... the converted property has been transformed into a share interest in the partnership in which the appellate in one of the partners. In other words, whatever income is derived by employing the converted property should revert back to the individual and it should be assessed only in the hands of the individual".

At the instance of the assessee, the aforesaid question was referred to this court.

Sri Ratnakar, learned counsel for the assessee, contends relying on the decision of the Supreme Court in Commissioner of Income Tax, West Bengal, Calcutta Vs. Prem Bhai Parekh and Others, , that there is no connection between the investment of Rs. 30,000 in the partnership business and the income derived by the assessee and, therefore, the assessee is liable only to the extent of the interest the said sum of Rs. 30,000 had fetched. We are unable to agree with this contention. In the Supreme Court case, one Ajitmal Parekh was a partner of the firm, M/s. Ajitmal Kanhaiyalal, having 7 annas share therein. On July 1, 1954, he retired from the firm. Thereafter, he gifted to each of his four sons Rs. 75,000. Three of his sons were minors at that time. there was a reconstitution of the firm with effect from July 2, 1954. The major son became a partner of the reconstituted firm and the three minor sons were admitted to the benefits of the partnership in the reconstituted firm. In the assessment year 1956-57, the Income Tax Officer held that the income arising to the minors by virtue of their admission to the benefits of the partnership came within the purview of section 16(3) (a) (iv) of the Indian Income Tax Act, 1922, and in that view included that income in the total income of the assessee for that year. The Supreme Court dealing with this aspect held (at page 30) :

"There is no dispute that the assessee had transfer to each of his minor sons, a sum of Rs. 75,000. It may also be that the amount contributed by those minors as their share in the firm came from those amounts. But the question still remains whether it can be said that the income with which we are concerned in this case arises directly or indirectly from the assets transferred by the assessee to those minors. The connection between the gifts mentioned earlier and the income in question is a remote one. The income of the minors arose as a result of their admission to the benefits of the partnership. It is true that they were admitted to the benefits of the partnership because of the contribution made by them. But there is no nexus between the transfer of the assets and the income in question. It cannot be said that that income arose directly or indirectly from the transfer of the assets referred to earlier".

In the case on hand, there is no warrant for drawing the inference that there was no nexus between the income derived by the assessee and the investment of Rs. 30,000 in the partnership concern. On facts, the Appellate Tribunal found :

"It is not disputed on behalf of the assessee that a sum of Rs. 30,000 was debited to the personal account of Shri Nagalingam and Shri Nagalingam converted the same into joint family asset by means of declaration dated June 19, 1975. It is also not disputed that Shri Nagalingam, invested this amount, after conversion into the joint family asset in the firm, viz., M/s. Pabbati Nagalingam, in which he along with Smt. V. Jayalaxmi figured partners holding 90% and 10% shares, respectively".

Section 64(2)(b) of the Act specifically enjoins that the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family. The Explanation to sub-section (2) of section 64 says that the property includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property. When admittedly the amount of Rs. 30,000 was invested in the partnership business, that amount becomes a converted property within the meaning of section 64(2) of the Act. That money which hitherto belonged to the assessee was thrown into the common stock of the family and to this effect he made a positive declaration also on June 19, 1975. So it was this converted property which fetched income during the previous year relevant to the assessment year in question. Therefore, the income derived from the converted property must be deemed to arise to the individual, viz., the assessee, and not to the Hindu undivided family of the assessee.

For the foregoing reasons, the question is answered in the affirmative, in favour of the Revenue and against the assessee. There shall be no order as to costs.