Income from share transactions of the partners cannot be assessed as those of the firm acting as broker of Partners
Pannalal Kejriwal Vs. CIT (Calcutta HC)- Whether in the facts of the present case the transactions relating to the shares of ITC Ltd. and Tata Tea Ltd. on behalf of the two partners where the assessee-firm apparently acted as broker could be said to be the transaction on behalf of the assessee-firm itself and the profit of the two partners can be added to the income of the assessee-firm. There is no just reason of treating the income from such share transactions of the partners of the assessee as those of the firm. The firm in those transactions only got the brokerage and those brokerages would be the income of the firm.
IN THE HIGH COURT AT CALCUTTA
Special Jurisdiction (Income-Tax)
I.T.A. No.780 of 2004
M/s. Pannalal Kejriwal
Commissioner of Income-Tax (Central-1)
For the Appellant: Mr. J.P. Khaitan, Mr. Saurabh Bagaria.
For the Respondent: Mr. M.P. Agarwal, Mr. Ranjan Sinha.
Coram: Mr. Justice Bhaskar Bhattacharya and Mr. Justice Sambuddha Chakrabarti
Heard on: 07.04.2011.
Judgment on: 19th April, 2011.
J U D G M E N T
Bhaskar Bhattacharya, J.:
1.This appeal under Section 260A of the Income-tax Act, 1961 is at the instance of an assessee and is directed against an order dated 12th July, 2004, passed by the Income-tax Appellate Tribunal, “B” Bench, Kolkata, in Income-tax Appeal being ITA No.1738/Kol/2003 for the Assessment Year 1998-99 and thereby allowing the appeal of the Revenue and setting aside the order passed by the Commissioner of Income-tax (Appeals).
2.Being dissatisfied, the assessee has come up with the present appeal.
3.The facts giving rise to filing of this appeal may be summed up thus:
a) The assessee is a partnership firm within the meaning of the Indian Partnership Act, 1932 and carries on the business of dealing in shares, securities, debentures and is duly registered as a stockbroker.
b) The assessee-firm has the two partners, namely, Dwarka Prasad Kejriwal and Govardhan Dass Kejriwal, having 50 percent share each in the said partnership.
c) The aforesaid two partners of the assessee desired to purchase shares by way of investment or to sell their existing investment and in such cases, instead of involving an outside stockbrokers, they decided to transact such sale and purchase through their own firm, assessee itself, as a registered stockbrokers. In respect of such transactions, the assessee-firm charged its usual brokerage including service charge from its partners. In this type of purchase of shares by the partners, the payment for the same was made by debit of the amount to their capital accounts and in case of sale by the partners of their investments, the sale proceeds received were credited to the partners’ capital accounts.
d) During the previous year ended March 31, 1998, in December 1997, the assessee-firm purchased for each of its two partners 18,000 shares each in ITC Ltd. and 10,000 shares each in Tata Tea Ltd. The shares in ITC Ltd. were sold on behalf of the partners in December 1997 itself and those in Tata Tea Ltd. were sold in January, 1998.
e) The payment for the purchase of shares in ITC Ltd. was made on behalf of the partners on December 17, 1997 on which date the credit balance in the capital accounts of each of the partners was in excess of the purchase consideration payable. The payment for the shares in Tata Tea Ltd. was made on behalf of the partners on December 31, 1997 by debit to their respective capital accounts and on that date also the balance standing to the credit of each of the partners was in excess of the purchase-consideration. In other words, on the dates of payment of the purchase-consideration, each of the partners had sufficient credit balance in their respective capital accounts to cover the payment.
f) Each of the said transactions made on behalf of the partners was evidenced by entries in the assessee’s sauda book, purchase and sale contract notes, contemporaneously issued by the assessee showing therein, inter alia, the purchase or sale rate, as the case may be, and the brokerage inclusive of service tax bills raised by the assesseefirm or its partners, as the case may be, and debit in respect of the purchase consideration and credit in respect of the sale consideration in the capital accounts of the two partners.
g) Similarly, during the previous year ended March 31, 1998, the assessee-firm purchased on behalf of each of the partners 15,000 shares each in Castrol India Ltd. and after receiving delivery of the said shares, the partners sent the same to the company for registering the transfer in their respective names and received the duly transferred shares from the company.
h) In the transactions relating to purchase and sale of shares in ITC Ltd. and Tata Tea Ltd., the two partners of the assessee earned short-term capital gains which were duly shown by them in their respective income-tax return. The shares in Castrol India Ltd. purchased by the assessee’s partners and held by them as at the end of the previous year were duly shown in their respective balancesheet as at March 31, 1998 filed with their income-tax return.
i) By the order of the assessment dated March 30, 2004, the Assessing Officer taxed the capital gains earned by the partners of the firm in the transactions relating to the shares in ITC Ltd. and Tata Tea Ltd. as the assessee’s profit. Over and above, the shares in Castrol India Ltd. purchased by those two partners were treated as belonging to the partnership firm-assessee and the difference between the market value of the said shares as on March 31, 1998 and the purchase price was added in the assessee’s assessment as alleged undervaluation of the closing stock.
j) Being aggrieved, the assessee-firm preferred an appeal before the Commissioner of Income-tax (Appeals) and the said Appellate Authority, by an order dated March 06, 2003 deleted the addition made by the Assessing Officer in respect of the transactions relating to shares in ITC Ltd. and Tata Tea Ltd. but upheld the addition on account of the shares in Castrol India Ltd.
k) Being dissatisfied, the Assessing Officer preferred an appeal against the said order of the Commissioner of Income-tax (Appeals) deleting the addition made in respect of transactions relating to the ITC Ltd. and Tata Tea Ltd. before the Income-tax Appellate Tribunal and the assessee-firm also preferred an appeal before the Tribunal against the order of the Commissioner of Income-tax (Appeals) so far as the addition in respect of the transactions relating to shares in Castrol India Ltd. was sustained.
l) The Tribunal by the order impugned allowed both the appeals preferred by the assessee and the Revenue. While granting relief to the assessee’s appeal, the Tribunal was influenced by the fact that the partners of the assessee got the share in Castrol India Ltd. registered in their respective names. While allowing the appeal of the Revenue in respect of transactions relating to shares in ITC Ltd. And Tata Tea Ltd., the Tribunal held that the funds were not available to the partners of the assessee for entering into the transactions.
m) Being dissatisfied, the assessee has come up with the present appeal while Revenue has accepted the order of the Tribunal relating to deletion in respect of the transaction of the Castrol India Ltd. At the time of admission of this appeal a Division Bench of this Court formulated the following questions of law:
“Whether the Tribunal was justified in law in holding that the short term capital gains of Rs.44,56,360/- earned by the appellant’s partners in transactions relating to purchase and sale of shares in ITC Ltd. and Tata Tea Ltd. were to be assessed as the appellant’s profits and its purported findings that sufficient funds were not available to the partners for entering into the transactions or that the purchases and sales were made by mere book entries and upholding the said addition are arbitrary, unreasonable and perverse?”
4.Mr. Khaitan, the learned senior Advocate appearing on behalf of the appellant, has strenuously contended before us that the learned Tribunal below committed substantial error in law in setting aside the relief granted to the assessee by the CIT (Appeals) on erroneous ground that sufficient funds were not available to the partners for purchasing the shares or that the purchases and sales could not be lawfully transacted by the partners by mere book entries.
5.By referring to the balance in partners’ capital accounts on the dates of debit for their personal share investment, Mr. Khaitan points out that on the dates of purchase of those shares in the two companies, each of the partners had sufficient amount in the capital share of the business. Mr. Khaitan submits that the partners of his client have the right to purchase share through the assessee firm although they are the partners of the firm and it would appear that the necessary brokerage fees and service charges have been credited in the account of the assessee-firm for those transactions. Mr. Khaitan, therefore, prays for setting aside the order passed by the Tribunal as regards the re-addition of the amount relating to the transaction of share in ITC and Tata Tea Ltd.
6.Mr. Agarwal, the learned counsel appearing on behalf of the Revenue, has, however, opposed the aforesaid contention advanced by Mr. Khaitan and has contended that the learned Tribunal below rightly held that there were merely book entries in the transaction of shares relating to ITC and Tata Tea Ltd. and that it was really the income of the firm itself and as such, we should dismiss the appeal. According to Mr. Agarwal, the firm is the compendious name for the partners who constitute it and therefore, when the firm pays something to its partners, it really pays to itself and likewise, when the firm extends to the partners a benefit, the benefit is availed by the firm itself. In support of his contention, Mr. Khaitan placed strong reliance upon a Division Bench decision of this Court in the case of Lovelock & Lewes vs. Commissioner of Income-tax, reported in (1994) 208 ITR Page-95. Mr. Agarwal further contends that according to Partnership Act, the partners of the firm cannot run the similar type of business with that of the partnership firm and, therefore, the Assessing Officer rightly held that those transactions relating to the shares of ITC Ltd. and Tata Tea Ltd. were really the transaction of the assessee-firm. He, therefore, prays for dismissal of the appeal.
7.Therefore, the primary question that arises for determination in this appeal is whether in the facts of the present case the transactions relating to the shares of ITC Ltd. and Tata Tea Ltd. on behalf of the two partners where the assessee-firm apparently acted as broker could be said to be the transaction on behalf of the assessee-firm itself and the profit of the two partners can be added to the income of the assessee-firm.
8.After hearing the learned counsel for the parties and after going through the materials on record, we find that in the case before us it appears from the Partnership Deed executed between the two partners that according to Clause 5 of the Partnership Deed, the business of the assessee-firm should continue to be dealing in shares, securities, debentures, bonds etc. and acting as stockbroker and any other job allied to those and the partnership is at liberty to carry on any other business as may be mutually agreed by and between the two partners. According to Clause 6 of the Deed, the two partners should provide such capital for the smooth running of the partnership business as might be necessary from time to time which should be credited to their respective accounts and the amount standing to the credit of the parties as on 1st April, 1994 in the books of the partnership should be treated as their capital contribution in the partnership and no interest should be payable on the capital contribution by the partners.
9.Clause 7 of the Deed provides that both the partners would be working partners and they would be engaged in attending to and looking after the business of the partnership-firm for which they would be entitled to a remuneration of Rs.10,000/- a month with effect from 1st April, 1994 subject to the limitation that in case of total remuneration payable during a financial year to the two partners exceeded 75% of the book profits of the partnership, the remuneration payable to the partners should be limited to 75% of the book profit of that financial year.
10.The remuneration payable to both the partners should be equal.
11.According to the Clause 8, the shares of the partners in assets, liabilities and profit and loss of the partnership should be equal.
12.It further appears from those terms, that there is no restriction of carrying on similar nature of business at the instance of any of the partners and similarly, there is no restriction of withdrawing the capital contribution of the partners at any point of time with mutual consent.
13.At this stage it will be profitable to refer to the provision contained in Sections 11 and 16 of the Partnership Act which are quoted below:
“11. Determination of rights and duties of partners by contract between the partners.-(1) Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and such contract may be expressed or may be implied by a course of dealing.
Such contract may be varied by consent of all the partners, and such consent may be expressed or may be implied by a course of dealing. Agreements in restraints of trade.-(2) Notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner.”
“16. Personal profits earned by partners.-Subject to contract between the partners,-
(a) if a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm:
(b) if a partner carries on any business of the same nature as and competing with that of the fir, he shall account for and pay to the firm all profits made by him in that business.”
14.On consideration of the terms of the contract entered into between the two partners of the assessee-firm and the aforesaid provisions contained in the Partnership Act, we find that there is no legal bar in the present case in withdrawing any amount of the capital contribution of the partners from the partnership-firm on mutual consent of the two partners.
15.It appears that for the purpose of purchasing the shares of ITC Ltd. And Tata Tea Ltd. both the partners purchased equal number of shares and the purchase amount were debited to the capital contribution of the partners. It further appears that for transactions in shares in respect of those shares, the necessary brokerage fees and other service charges for those transactions were paid by the partners to the partnership-firm and those were reflected in the account of the partnership-firm.
16.In such circumstances, we find no substance in the contention of Mr. Agarwal, the learned Advocate appearing on behalf of the Revenue, that under the law of the land in the facts of the present case the two partners were not entitled to purchase or sale those shares after withdrawing money from their capitals of the said business when it appears that both the partners agreed to such a course and they had withdrawn equal amount of money for purchase of those shares.
17.Similarly, in this case, there is no clause in the Partnership Deed restraining any of the partners from dealing with the same type of business as that of the firm.
18.On consideration of the aforesaid materials on record, we agree with the Commissioner of Income-tax (Appeals) that there was no just reason for treating the transactions in respect of those shares as transaction made by the firm. In the case of Lovelock & Lewes vs. Commissioner of Income-tax (Supra), relied upon by Mr. Agarwal, the assessee-firm in that case had branches at places B and D and took flats on monthly rent as those two places. The partners of the firms were residing in those flats and part of rent paid by firm for the flats was claimed as deduction on the ground of partners’ discharging their official duties from their residence. In such a case, the Division Bench held that when the partners conducted firm’s business at outstation places, they rendered services to the firm and not to a different entity and no relationship of employer and employee existed between the firm and the partners and as such, the part of the rent paid for the flat was not an allowable deduction. In that context, the Division Bench held that when the firm pays to its partners, it pays to itself and likewise when the firm extends to the partners a benefit, the benefit is availed of by the firm itself.
19.We fail to appreciate how the principle laid down in the said decision can have any application to a case where the two partners of the firm after withdrawing from capital of the partnership-firm by mutual consent of the two partners decided to purchase and subsequently to sell shares of different companies by giving brokerage to the assessee-firm of which they are the partners. In such circumstances, there is no just reason of treating the income from such share transactions of the partners of the assessee as those of the firm.
20.The firm in those transactions only got the brokerage and those brokerages would be the income of the firm.
21.We, therefore, find that the Tribunal erroneously set aside the order of the Commissioner of the Income-tax (Appeals) as regards the income arisen out of the sale of the shares in respect of ITC Ltd. and Tata Tea Ltd. at the instance of the partners by adding the same to the income of the assessee. We, therefore, allow this appeal by answering the question in the negative in favour of the assessee.
22.In the facts and circumstance, there will be, however, no order as to costs.