Decided on April 27,1982



George Cheriyan, Accountant Member - (1.) THIS appeal by the assessee relates to the assessment year 1978-79. The assessee is a registered firm. The accounting period ended on 31-3-1978. The assessee-firm came into existence by an instrument of partnership executed on 21-2-1973. The partners were R.N. Kandaswamy, R.M. Subramanian and R.M. Srinivasan, all sons of one R. Manickavsa Chetty. It has been stated in the partnership deed that they had formed a sub-partnership in respect of interest in capital, profit, etc., of a firm known as Bharat Sandal Oil Distilleries. Formerly, the partners of the assessee-firm were members of a HUF and were represented by Sri R.M. Kandaswamy in the firm of Bharat Sandal Oil Distilleries (hereinafter referred to as the "larger firm"). Subsequently, there was a partition and Kandaswamy continued to be partner in the larger firm which was constituted by a deed dated 11-6-1965.
(2.) In the case of the assessee, the share income from the larger firm was taken at Rs. 1,65,906 on a provisional basis. The assessee had claimed before the ITO that the assessee was not liable to pay firm's tax in respect of such income included in its total income because the larger firm had paid tax and what would result would be double taxation. A copy of an order of a Single Member of the Tribunal, Jaipur Bench, in IT Appeal No. 177 (Jp.) of 1976-77 decided on 27-8-1977 was also placed before the ITO. According to the ITO, the facts of that case were different. He further observed that registered firms were subject to tax at concessional rates and it could not be acceded to that the assessee-firm was not liable to tax at all. The assessee-firm, he emphasized, was paying taxes only at a concessional rate and, therefore, he rejected the plea of the assessee. The assessee appealed to the A AC. The A AC referred to the decision in the case of CIT v. Shyam Narain Mehrolra [1980] 122 ITR 313 (Cal.) and held that if it logically followed as a result of provisions of particular enactments that double taxation should take place, there was nothing in the Constitution which prevented such double taxation and, therefore, the assessee was not entitled to any relief. He also mentioned that in the present case there was no double taxation in respect of the same income.
(3.) BEFORE us, the learned counsel referred to the decision of the Supreme Court in Murlidhar Himatsingka v. CIT [1966] 62 ITR. 323 and submitted that the concept of sub-partnership had been elucidated by the Supreme Court as under : A sub-partnership is, as it were, a partnership within a partnership ; it pre-supposes the existence of a partnership to which it is itself subordinate. An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, several persons are partners and one of them agrees to share the profits derived by him with a stranger, this agreement does not make the stranger a partner in the original firm. The result of such an agreement is to constitute what is called a sub-partnership, that is to say, it makes the parties to its partners inter se ; but it in no way affects the other members of the principal firm. (p. 329) His contention was that since a sub-partnership is only a partnership within a partnership, it is part of the same entity, viz., the larger partnership, and when the larger partnership paid firm's tax, the sub-partnership was not liable to pay firm's tax in respect of the same income. The learned counsel also relied on the order of the Tribunal which was placed before the ITO.;

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