C.S.P. Singh, J. - (1.) THE Income-tax Appellate Tribunal has referred the following questions of law for opinion of this court: "1. Whether on a true construction of the memorandum dated January 2, 1963, the Tribunal could on the facts and in the circumstances of the case, legally draw an inference that the business which the assessee carried on as a partner of M/s. Shiv Narain Karmendra Narain was so carried on by him on his own behalf and also on behalf of his wife constituting the sub-partnership between themselves ? 2. Whether the Tribunal was right in law in holding that even in the case of sub-partnership between the husband and the wife from the main partnership, the provisions of Section 64(1) of the I.T. Act, 1961, are applicable ?" THE assessment years involved in this reference are 1966-67, 1967-68, 1968-69 and 1969-70, the relevant previous years ending on December 31, 1965, December 31, 1966, December 31, 1967 and December 31, 1968, respectively. Lala Prag Narain Agarwal constituted an HUF, and died on June 18, 1938, leaving behind him six sons and movable and immovable properties and certain business. After the death of Lala Prag Narain, his sons constituted a firm under a deed of partnership dated January 25, 1941, and on the dissolution of the firm, the business at Aligarh was allotted to Sri Shiv Narain Agarwal, the assessee in this case, and his, brother Karmendra Narain Agarwal. Both the brothers then formed a firm on December 2, 1947, with 50% share both in the capital, as well as in the profits and losses. Sri Shiv Narain Agarwal was a partner in the firm as karta of an HUF. On July 1, 1953, his son Shri Ajay Narain Agarwal was made a partner in his individual capacity, and he separated from the family vis-a-vis the business. Similarly, on January 1, 1957, the assessee's other son Sri Vinay Narain also become a partner having two shares in his own right, and severed his interest in the family in so far as the business was concerned. THE firm was granted registration by the AAC. Sri Shiv Narain Agarwal then effected a partition of the capital in the firm in two equal parts between himself and his wife. He made a declaration to that effect on January 1, 1963, which was reduced into writing in the shape of memorandum. It is necessary to extract paras. 8 to 16 of the said memorandum. "And whereas after the partial partition on two occasions referred to above with regard to the family's business assets in the firm Sri Shiv Narain Karmendra Narain the following properties remained joint:-- (i) Share of M/s. S.K. Agencies of the face value of Rs. 2,48,000 after the sale of two shares worth Rs. 2,000 to Sri Ajay Narain and any sum which may be standing to the credit of Sri S.N. Agarwal on account of and jointly owned by Sri S.N. Agarwal, Smt. Vishwa Mohini Agarwal, Sri Ajay Narain Agarwal and Sri Vinay Narain Agarwal and registered and held in the name of S.N. Agarwal in the books of M/s. S.K. Agencies Private Limited. (ii) An whereas on January 1, 1957, at the time of partial partition of the assets of the family consisting of Sri S.N. Agarwal, Smt. Vishwa Mohini Agarwal and Sri Vinay Narain Agarwal invested in the firm M/s. Shiv Narain Karmehdra Narain, Smt. Viswa Mohini Agarwal got 1/3rd shares in the assets and her l/3rd share of the said assets remained standing joint in the name of Sri S.N. Agarwal by mutual consent who got 1/4th share in the firm of Shiv Narain Karmendra Narain in the names of himself and Smt. Vishwa Mohini Agarwal's capital invested in the firm ; And whereas this 1/4th share in the partnership firm together with Capital of Rs. 3,79.433.75 as on December 31, 1962, standing in the name of Sri S.N. Agarwal in the above-mentioned partnership is jointly owned by Sri Shiv Narain Agarwal and Smt. Vishwa Mohini Agarwal in equal shares; And whereas Sri S.N. Agarwal declared on January 1, 1963, that the above joint assets at No. 8(i) and (ii) above would no longer remain joint and should be divided ; And, whereas, the same has been divided by proper book entries in the account books of the joint family of Sri S.N. Agarwal on January 1, 1963, as recited hereunder : "248 shares held and registered in the name of Sri S.N. Agarwal in the account books of M/s. S.K. Agencies which belonged jointly to Sri S.N. Agarwal, Smt. Viswa Mohini Agarwal, Sri S.N. Agarwal and Sri V.N. Agarwal shall be held separately in equal numbers, viz., 62 shares each, by Mohini Agarwal. THE transference shall be got done as soon as possible in favour of the respective members and steps shall be taken to have these shares registered in the company in the names of the abovenamed members. THE above shares are now no longer jointly owned and would henceforth be the property of the above-named parties individually to the extent of their respective shares. Any sum found to the credit of Sri S.N. Agarwal with M/s. S.K. Agencies P. Ltd., would also be divided in equal shares of 1/4th each between Sri S.N. Agarwal, Smt. Vishwa Mohini Agarwal, Sri S.N. Agarwal Sri V.N. Agarwal; And, whereas, on January 1, 1964, it was also declared by Sri S.N. Agarwal, that the share of his wife Smt. Vishwa Mohini Agarwal in asset No. (ii) above which remained invested in the firm of M/s. Shiv Narain Karmendra Narain through Sri S.N. Agarwal will no longer remain joint. And, whereas, pursuant to the above declaration proper book entries of the joint capital as on December 31, 1962, have been made in the account books maintained by Sri S.N. Agarwal showing the division in two equal shares; And, whereas, it was further declared by him, that the division of profits for the calendar year 1962, from the said firm shall further be credited to her account as and when the account books of the said firm have been completed and proper statements made : And, whereas, it was also declared that Sri S.N. Agarwal shall pay from the future profits 2 annas share to his wife Smt. Viswa Mohini Agarwal on account of her separated share in the capital still invested in the said business so long as her capital remains invested in the said business of M/s. Shiv Narain Karmendra Narain through Sri S.N. Agarwal; Now, therefore, it is recorded that the shares of M/s. S.K. Agencies Private Limited which stood in the name of Sri S.N. Agarwal along with any sum standing to his credit in the books of M/s. S.K. Agencies Private Ltd. on December 31, 1962, which remained joint between Sri S.N. Agarwal, Smt. Vishwa Mohini Agarwal, Sri A.N. Agarwal and Sri V.N. Agarwal have already been divided in equal 1/4th share between the abovementioned four persons. It is further recorded that the severance of the share of Smt. Vishwa Mohini Agarwal in the capital which remained standing in the name of Sri S.N. Agarwal after the separation of Sri V.N. Agarwal in the said share of 4 annas in the firm M/s. Shiv Narain Karmendra Narain, as stated above in para. 8(ii), has already been made and that future profits arising from that firm shall be paid to her to the extent of 2 annas in a rupee, so long as her capital remains invested in the firm M/s. Shiv Narain Karmendra Narain through Sri S.N. Agarwal. THE profits shall include loss also which the lady shall be under an obligation to pay to the extent of her 2 annas share. In the assessment years in question although Sri S.N. Agarwal had 4 annas share in the firm M/s. Shiv Narain Prag Narain, Aligarh, in the return of income filed, he had shown only 2 annas share income from the said firm. In the books, it was stated that the remaining 2 annas share belonged to Smt. Vishwa Mohini Agarwal, his wife, and, hence, it had not been shown in the return. It was stated that there was overriding charge of 2 annas share in favour of Smt. Vishwa Mohini Agarwal on account of her share in the capital investment in the said firm. THE ITO rejected these contentions. THE assessee filed an appeal. THE Appellate Commissioner found that the partition of the 4 annas share of the assessee in the firm M/s. Shiv Narain Karmendra Narain was effected on December 31, 1962, which was reduced in writing in the form of a memorandum dated January 2, 1963, the relevant part of which we have already extracted. Relying on the decision given in the assessee's wealth-tax appeal, wherein it had been held by the Tribunal that 1/2 share of the capital invested in the said firm did not belong to the assessee, he held that the assessee's income from the share should be taxed at only 2 annas of the profits. On appeal, the Tribunal found that his two sons Sri Ajay Narain and Sri Vijay Narain Agarwal had separated on July 1, 1953 and January 1, 1957. THEreafter, the capital investment of Rs. 3,79,433'75 as on December 31, 1962, outstanding in the name of Sri Shiv Narain in the books of the firm was jointly owned by him and his wife, Smt. Yishwa Mohini Agarwal. On December 31, 1962, Sri Shiv Narain Agarwal declared that the assets no longer were joint and would be divided. Pursuant to that declaration, entries were made in the account books maintained by Sri Shiv Narain Agarwal showing the division of the capital in two equal shares as on December 31, 1962, and Sri Shiv Narain Agarwal agreed to pay 2 annas share in future profits to his wife, Smt. Vishwa Mohini Agarwal, on account of her separated share in the capital, which are invested in the business of the firm M/s. Shiv Narain Karmendra Narain, Aligarh. On these findings, the Tribunal held that there was a partition of the capital investment and an overriding charge was created by the memorandum dated January 2, 1963, to the extent of 2 annas in favour of the assessee's wife, Smt. Vishwa Mohini Agarwal. THE Tribunal, then, considered the question whether the memorandum of January 2, 1963, created a sub-partnership in respect of the assessee's 1/4th share from M/s. Shiv Narain Karmendra Narain, and held that as in the memorandum dated January 2, 1963, the assessee and his wife had agreed to share the profits to the extent of 1/4th, a sub-partnership had been created between the assessee and his wife in respect of the 1/4th share in the business of the firm.
(2.) WE propose to answer the questions seriatim. Coming to the first question, we will address ourselves to the question as to whether there was a sub-partnership between the assessee and his wife. From the facts recited earlier, it is apparent that Sri Shiv Narain Agarwal, the assessee was a partner of the firm M/s. Shiv Narain Karmendra Narain as karta of the HUF, consisting of himself and his wife. The firm recognised Sri Shiv Narain Agarwal alone as its partner, but as he had become a partner of the firm as the karta of the HUF, he was liable to account for the profits received from the firm, which was liable to be assessed in the hands of the HUF consisting of the assessee and his wife. On January 1, 1963, there was a partition between the assessee and his wife, inter alia, in respect of the business carried on by Sri Shiv Narain Agarwal in the firm, as karta of the HUF. This is apparent from the declaration made on January 1, 1963. The result of the partition was that the business asset, viz., the share in the firm no longer belonged to the HUF, but came to be owned in equal shares by the assessee and his wife. See Appovier v. Ramasubba Aiyan [1866] 11 MIA 75 (PC). The fact that no partition by metes and bounds took place of the capital invested by the HUF in the firm through its karta, was immaterial, for, the nature of the investment was such a partition by metes and bounds of this investment could not be made immediately. The wife could not make a claim against the firm, as she was not a partner, and likewise the assessee could not withdraw the investments in the firm unless he either retired from the partnership, or claimed a dissolution of the partnership, and took his share after accounts, and divided the profits between himself and his wife. Thus, the business assets came to be owned by the assessee and his wife as tenantsin-common and the HUF no longer owned the assets. See Charandas Haridas v. CIT [1960] 39 ITR 202 (SC). We have also extracted the declaration made by the assessee on January 1, 1963, in respect of the capital invested in the firm. Paragraph 12 of the declaration states that the share of the wife in the firm no longer remained joint with her husband, and paras. 14 and 15 recited that as for the future the assessee will pay 2 annas share of profits to his wife on account of her separate share in the capital investment in the said business. This payment was to continue so long as her capital remained invested in the business through Sri Shiv Narain Agarwal. Paragraph 16 recites that the profits referred included losses, and makes the wife liable to pay losses, if incurred by the firm to the extent of her 2 annas share. It is contended, on behalf of the Revenue, that these stipulations in the deed create a sub-partnership between the assessee and his wife. Now it is open to a partner of a firm to create a sub-partnership in respect of his share in a firm. Lindley on Partnership, 13th Edition, says on page 111. "A sub-partnership is, as it were, a partnership within a partnership ; it presupposes 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 as sub-partnership, that is to say, it makes the parties to it partners inter se ; but it in no way affects the other members of the principal firm. In the language of the civilians, socius met socii, socius meus non est. " But before a particular relationship leads to the creation of a partnership, one has to see whether the requirements of Sections 4 and 6 of the Partnership Act are satisfied. It is better to extract the relevant part of these two sections: "Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. "Explanation 1.--The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners, Explanation 2.--The receipt by a person of a share of the profits of a business or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business." It will be seen that a mere agreement to share the profits of a business carried on by all or any of them acting for all is not sufficient, for Section 6 lays down that in determining whether a group of persons constitutes a partnership, one has to take into account the real relationship between the parties as shown by all the relevant facts taken together. Explanation 1 to it states that mere sharing of profits of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. Explanation 2 lays down that the receipt by a person of a share of the profits of a business or of a payment contingent upon the earning of profits or varying with the profits earned by business does not of itself make him a partner with the persons carrying on the business. Thus the entire circumstances have to be seen in order to determine as to whether a partnership has come into existence.
(3.) NOW, in the present case, the existence of partnership is sought to be proved on account of the following facts : (i) that the share of the capital of the wife was kept invested in the firm through the assessee ; (ii) that the wife was entitled to two annas share in the profit of the firm and also liable for losses. The question is as to whether this is sufficient to constitute a partnership. An agreement to share the profits and losses of a business may be said to be characteristic, but not the essence of a partnership contract (Lindley on Partnership, 13th Edition p. 80). Section 60 of the Partnership Act also points in this direction. Thus, in a case where there is an agreement to share the profits and losses, it is prima facie evidence of the existence of a partnership but the inquiry must not stop there. The entire circumstances and relations between the parties have to be examined in order to determine as to whether the persons constitute a partnership as contemplated by Section 4. Counsel for the assessee urged that the fact that the share of the wife remained invested in the partnership is a neutral circumstance in this case, for, in the circumstances, that was the only mode of partition. It was also contended that the circumstances of both the parties sharing profits and losses did not create the relationship of a partnership, inasmuch as the wife was free to withdraw her share of the invested capital, and the liability of Shiv Narain Agarwal, to pay the profits and losses to her, ended with the withdrawal of her share in the business. This, according to counsel, went against the fundamental conception of a partnership which is to the effect that so long as the partnership exists, no partner can claim a definite share in the partnership property. It is only on dissolution of the firm, he can get whatever is due to him on accounting.;