LexCOMMISSIONER OF INCOME TAX, CALCUTTA versus PRAHALADRAI AGARWALA
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r • • COMMISSIONER OF INCOME TAX, CALCUTTA v. PRAHALADRAIAGARWALA APRIL 26, 1989 [R.S. PATflAK, CJ AND M.H. KANIA, JJ.] ).. Income Tax Act, 1961: Section 64(J)(iii)-Wife partner in firm " alongwith husband-Capital contributed by wife out of amount gifted by the husband-Share of profit of assessee's wife-Whether includible in total income of the husband-There must be proximate connection between the accrual of income and as~ets transferred. The respondent-assessee was one of the partners in a lirm in which the live other partners were his wife, mother, grand-father, brother, and a stranger. His wife had contributed Rs.Sl,000 as capital A B c in the lirm, which amount came out of two gifts made to her by the assessee. In the course of assessment proceedings for the assessment D year 1962-63 in respect of the assessee, the Income Tax Officer included the prolits of the assessee's wife from the firm, under s. 64(1)(ili) of the Income Tax Act, 1961. The_, assessee's appeal was dismissed by the Appellate Assistant Commissfoner who observed that the wife would not have become a partner of the lirm unless he had contributed capital which was provided by the husband. The Appellate Tribunal, while E dismissing the second appeal of the assessee, found that the admission of the assessee's wife as a partner in the lirm was solely on acrount of her contribution of capital to the lirm. It was conceded by the assessee before the Tribunal that the interest received by the assessee's wife on her capital contribution to the lirm was includible in the total income of the assessee. F The High Court, while answering the question referred to it in favour of the assessee, took the view that the income arose from the share of prolits only because the other partners agreed to take the · assessee's wife as partner and she was allowed to contribute to the partnership lirm, and that the admission of the assessee's wife to the G partnership was not in consequence of the gift. Dismissing the Revenue's ·appeal, it was HELD: (l) The income may arise directly or Indirectly, but for application of the provisions of section 64(l)(iii)_of the Income Tax Act, H 737 738 SUPREME COURT REPORTS [1989] 2 S.C.R. 1961 there must be a proximate connection between the accrual of the •~ 4l'i_ A .income and the assets transferred by the assessee. [74ID] ~ Commissioner of Income-tax, West Bengal III v. Prem Bhai Parekh, [1970] 77 ITR 27 followed. B (2) The mere contribntion of the capital by the wife into the firm would not automatically have entitled her to partnership in the firm. \ The partnership was based on agreement, and it is the event of agree- -( ment between the partners that brought the assessee's wife into the firm · c as partner: l742EJ Commissioner of Income-tax, Bangalore v. J.H. Got/a, [1985] 156 ITR 323; Commissioner of Income-tax, Assam, Tripura and Manipur v. Jwalaprasad Agarwala, [1967] 66 ITR 154; V.D. Dhanwatey v. Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara, [1968] 68 ITR 365; Smt. Mohini Thapar v. Commis- sioner of Income-tax (Central), Calcutta, [1972] 83 ITR 208; Patti Vee- D rayya Sresty v. Commissioner of Income-tax, A.P., [1972) 85 ITR 194 distinguished. CIVIL APPELLATE JURISpICTION: Civil Appeal No. 575 (NT) of 1975. E From the Judgment and Order dated the 24.4.1973 of the F Calcutta High Court in Income Tax Reference No. 202 of 1969. B. Ahuja and Ms. A. Subhashini for the Appellant. K._P. Bhatnagar, S.P. Mittal and B.P. Maheshwari for the R.es- pondent. The Judgment of the Court was delivered by · PATHAK, CJ. This appeal by special leave is directed against the judgment of the High Court at Calcutta answering the following G question in favour of the assessee and against the Revenue: H "Whether, on the facts and in the circumstances of the case, the share of profit of the assessee's wife was includ- able in the total income of the assessee under section 64(1)(iii) of the Income Tax Act, 1961?" ) C.l.T. v. PRAHALADRAI [PATHAK, CJ [ 739 The assessee was assessed in the status of an individual for the assessement year 1962-63 corresponding to the previous year 26 March, 1961 to 13 April, 1962. At the material time the assessee was a partner in a firm, Messrs Ramesh and Co., with a share of eight annas therein. The balance was shared. by three other partners, the assessee's father, Kunjilal Agarwala, the assessee'S broth~r
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