1. These two departmental appeals arise out of the orders of the AAC, D Range, Madras, in the case of Shri A. Babu Chettiar of Panrutti for the assessment years 1976-77 and 1978-79.
2. Late Shri A. Babu Chettiar is an individual having share income from Singarappan Palayakat Co. and Palaniappa Palayakat Co. both at Pudupet.
The assessee had made two gifts totalling to Rs. 12,000 to his son's wife and of which Rs. 6,000 each was invested on 14-4-1974 as capital, in two firms, viz., Vijayalakshmi Colour Co. ('Vijayalakshmi') and Singarappan Palayakat Co. ('Singarappan'). The ITO inferred that she earned the share income because of her capital and that the share income is. therefore, includible in the assessee's hands under Section 64(1)(vi) of the Income-tax Act, 1961 ('the Act'). He, accordingly, included the shares from these two concerns at Rs. 21,756 and Rs. 9,967 for the assessment year 1976-77 and Rs. 5,561 and Rs. 5,530 for the assessment year 1978-79. The assessee's case before the first appellate authority was that the share income did not arise because of the capital. At any rate, it was contended that the amounts gifted had been subsequently withdrawn. The contentions were accepted in the first appeal. The departmental appeals are against this decision in both years.
3. It is argued by the learned departmental representative that there is a clear nexus between the gifts and the capital, on one hand and the capital and share income on other hand. It was claimed that the facts in the assessee's case could clearly justify inclusion and that the cases cited by the first appellate authority are based on facts which are clearly distinguishable. The learned counsel for the assessee relied on the order of the first appellate authority. According to him, the partnership deeds supported the conclusion of the first appellate authority rather than that of the ITO. Clause 2 of both the deeds, it was pointed out, specifically stated that the firms will have no fixed capital. It was claimed that her interest in the partnerships was for her participation and not because of capital. The real source, it was contended, was business itself. It was pointed out that she was also bound to share the losses. It was, therefore, contended that there was no case for inclusion under Section 64(1)(vi).
4. We have carefully considered the facts and arguments presented before us. Section 64(1)(vi) authorises inclusion of income that arises directly or indirectly to the son's wife of such individual from assets transferred directly or indirectly on or after 1-6-1973 to son's wife by such individual otherwise than for adequate consideration. It is not in dispute that the capital amounts contributed to the two firms by the son's wife, Smt. Vijayalakshmi were out of gifts received from the assessee (individual). The amounts so given by the assessee was credited at Rs. 6,000 each in the two firms in her capital account in both cases. She had contributed no other capital. It is not the assessee's case that she was a working partner or had otherwise actively participated in the affairs of either firm. She was a housewife and her age was 23 at the time she entered the partnership.
Both the partnership agreements are identically worded. In Vijayalakshmi her co-partner was one Singaram, son of Alalasundaram Chettiar, with equal share. In Singarappan she had 35 per cent interest while other partners were the assessee 15 per cent, Alalasundaram Chettiar 35 per cent and his (latter's) son, A. Rajasekaran. The crucial point for determination is whether the partnership interest that Smt. Vijayalakshmi had in these two firms is attributable to her capital. From the facts placed before us, we are not in a position to say that it is attributable to anything else. No doubt, Clause 2 of both the deeds (identically worded) say that there is no fixed capital for the firm, but they proceed to add that the moneys to the credit of partners will be treated as their capital. Hence, it does not appear to be correct to say that the share income had no nexus to the capital.
Vijayalakshmi has business in dyeing and sale of yarn, while Singarappan deals in handloom textiles. Both businesses need capital.
If Smt. Vijayalakshmi is recognised as a partner in her own right, it is because of her capital contribution. In absence of any other nexus between her and her share income, we are not in a position to say that the ITO was wrong in concluding that there is a nexus between the capital in her name and her share income. Since her capital came directly out of the gifts made to her (assessee's son's wife) after 1-6-1973, application of Section 64(1)(vi) is inescapable.
5. The account of daughter-in-law in Vijayalakshmi reads for the assessment years 1976-77 to 1978-79 as under :Debit Rs. Credit Rs.13-4-1975 14-4-1974 Cash 6,000.00Drawings 700.00 13-4-1975 Profits 9,064.54 _________C.F. 14,364.54 15,064.54 _________14-4-1975 14-4-1975 O.B. 14,364.54Transfer of 12-4-1976 Profit 22,973.31gift to PalaniappanDrawings 9,764.00 O.B. 30,637.85C.F. 32,970.56 Profit 12,096.71 __________ _________ It was alternatively claimed from the above that in view of the transfer of Rs. 6,000 from the capital account on 14-4-1975, the inclusion for the assessment year 1978-79 at least, cannot be justified. We are unable to accept the alternative argument as the nexus which gave rise to the partnership income continues. If her share in partnership was because of her capital gifted by her father-in-law, the nexus does not get snapped by the subsequent withdrawal, since the income continues to arise from the assets initially transferred.
Besides when there are adequate profits to cover the withdrawal, it is not possible to identify the withdrawal as only relating to capital, merely because the assessee claims it to be so for a self-serving purpose.
6. The account of daughter-in-law in the book of Singarappan for the three years reads as under :Debit Rs. Credit Rs.C.F. 14,420.44 14-4.1974 Gift 6,000.00 _________ 13-4-1975 Profit 8,420.44Transfer to 14-4-1975 C.F.14,420.44Palaniappa Palayakat 12-4-1977 Profit 10,091.67Co. C.F. 6,000.00C.F. 21,576.39 13-4-1976 C.F. 18,512.11 Profit 3,064.28 Here also there is an alternative claim based on the withdrawal of Rs. 6,000 for the assessment year 1978-79. For the same reasons stated in the immediately preceding year, this alternative claim cannot also be admitted.
7. We are yet to deal with the citations on behalf of the assessee. In CIT v. Prem Bhai Parekh [1970] 77 ITR 27, the Supreme Court found that the incomes of minors admitted to the benefits of partnership were not aggregable in the hands of the father, as the capital in these cases was not the proximate cause of the income. A minor is not a party to the contract and it is not necessary, therefore, that consideration should emanate from him. In fact, the decision of the Supreme Court in CIT v. Jwalaprasad Agarwala [1967] 66 ITR 154 would support the proposition that even in the case of a minor admitted to benefits of partnership, the income may well be includible if the contribution of the capital is made a condition precedent for admission. In assessee's case, though there is no such explicit condition in the deed, it is the finding of this Tribunal in the facts and circumstances of the case that the lady had been given a share because of her capital contribution. The factual positions in the case of Prahladrai Agarwala v. CIT [1973] 92 ITR 130 before the Calcutta High Court was that the wife in that case was in receipt of interest on the capital and the share of profit. It was conceded by the assessee that interest on capital was includible in husband's hands and the Calcutta High Court found that the Tribunal was in error in equating profit with interest.
In the present case, though the deeds provide for interest on capital, if they so choose at a later date, there was no interest paid during the years. In Prahladrai's case (supra) that, there was no direct nexus between the capital and profit as in the case before us. As for assessee's reliance on the decision of the Madras High Court in CIT v.S. Chandappa Iyer [1976] 103 ITR 810, it was found in that case that the wife whose income was sought to be included under Section 64 was a member of a firm not merely because of her capital contribution, but because she was an active partner and that she was entitled to the income referable to her share, in her own right and not merely because of the capital contribution. It was in this context that Section 64 was held inapplicable. It is, therefore, seen that the cases relied upon by the assessee are not only distinguishable on facts but we also find that the rationale of these very decisions supports the case of the ITO in that there is no other nexus in this case than the capital contribution, which came from the assessee.
8. Hence, the departmental appeals are allowed and the orders & of the ITO restored.