1. The short question which we have to decide in this reference is whether the purported partnership formed by the deed of partnership dated 12th November, 1953, is one which gives rise to a legal partnership and can be registered under section 26A of the Indian Income-tax Act, 1922.
2. Manilal and Keshavlal were two brothers and they were coparceners in a Hindu undivided family. They entered into a partnership with one Mangalji on 25th October, 1943. That partnership carried on business in grains at village Pimpalgaon under the name and style of Manilal Dharamchand. Then the two families of Manilal and Keshavlal separated by a partial partition between Manilal and Keshavlal. This was on the 24th October, 1946. Each of the two brothers, Manilal and Keshavlal, had sons and their joint undivided families with their male children were being separately assessed in the status of Hindu undivided family with reference to their share of the income from the family firm, Manilal Dharamchand. At the end of the Samvat year 2009 (ending on 6th November, 1953), Mangalji retired from the partnership in the firm of Manilal Dharamchand. On 12th November, 1953, a new partnership deed came to be executed consisting of four partners who were given shares as follows :
(a) Manilal Dharamchand representing hisH.U.F. 5 annas share.(b) Keshavlal Dharamchand representinghis H.U.F. 5 annas share.(c) Rasiklal Manilal 3 annas share.(d) Champalal Keshavlal 3 annas share.
3. There was no separation between the families of Manilal and Keshavlal and their respective sons and that is why Manilal and Keshavlal represented their respective undivided families.
4. As regards the capital, the document is silent, but it has been found as a fact that no capital was introduced by any of the partners and the whole capital had come in by way of a loan from the firm of Manilal Dharamchand at Pimpalgaon. Thus, the entire capital brought into the new partnership were the funds of the Hindu undivided family of Manilal Dharamchand. In paragraph 4 of the statement of the case it has also been stated that Manilal and Keshavlal are shown to have contributed, respectively, Rs. 50,000 and Rs. 44,500 as the capital of the firm, but the two other partners, namely, Rasiklal and Champalal, contributed nothing.
5. Upon the formation of this new partnership on the 12th November, 1953, the firm applied for registration but the Income-tax Officer considered that the firm was not a genuine partnership at all and, therefore, he rejected the application under section 26A. He pointed out that Rasiklal had not introduced any capital into the firm, was staying all along at Nasik and taking into account several other circumstances held that he was not a genuine partner. He held similarly so far as Champalal was concerned.
6. The Appellate Assistant Commissioner did not agree with the findings of the Income-tax Officer. He came to the conclusion that the partnership was a genuine partnership and that since Manilal and Keshavlal, the two partners in the assessee-firm, were not partners in their individual capacity but as representatives of their respective families, it was clear that their shares could only be assessable in the hands of the original Hindu undivided family of Manilal Dharamchand of Pimpalgaon. He, therefore, allowed the appeal and ordered the registration of the firm under section 26A of the Act.
7. In appeal on behalf of the department the Tribunal went into the question whether the firm was capable of being recognised. They accepted the position that a partial partition was made out between Manilal and Keshavlal and that Manilal and Keshavlal represented their respective families, but in their opinion there could be no valid partnership between the two kartas, Manilal and Keshavlal, and the undivided members of their family, namely, Rasiklal and Champalal when its individual members had not brought in any separate property into the firm and were partners only in their individual capacity. They relied upon the decision of the Supreme Court in Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax. An alternative contention was advanced before the Tribunal that at least registration should be granted on the basis that the two kartas alone have become partners, but this contention was negatived by the Tribunal on the short ground that the deed itself showed that there were four partners and the Tribunal could not ignore the two junior members as if their signatures to the deed and the application were mere surplusage. They, therefore, set aside the findings of the Appellate Assistant Commissioner and held that the firm could not be registered.
8. At the instance of the assessee two questions were referred to this court on 23rd March, 1962, as follows :
'(1) Whether, on the facts of this case, a valid partnership firm was constituted by the deed dated November 12, 1953 (annexure 'A'), consisting of the two kartas and the coparceners without any separate property belonging to the coparceners being brought into the firm
(2) Whether, on the facts of this case, the assessee-firm is entitled to registration under section 26A for the assessment year 1955-56 ?'
9. When the matter had come before us on a previous occasion it was pointed out on behalf of the department that the question whether the firm was a genuine firm or not was a question which had been raised and decided by the Appellate Assistant Commissioner and the Tribunal and that the question therefore arose upon the order of the Tribunal but there was no reference to that question in the statement of the case, dated 23rd March, 1962. We passed an order on the 1st November 1967, calling for a further statement of the case with reference to the question whether the firm was a genuine firm or not and the Tribunal has on 22nd June, 1968, submitted a supplementary statement of the case. In that statement the Tribunal, after stating the facts, has found that 'considering all facts and circumstances of the case, in our opinion, Champalal and Rasiklal were really partners in the assessee-firm and the firm can, therefore, be said to be a genuine firm'. Knowing that this finding was against the department, no further action has been taken upon that finding and since it is a finding in favour of the assessee, the matter rests at that. Nothing therefore arises out of the supplementary statement of the case are, therefore, left with the two questions originally framed and referred to this court.
10. In order to decide the question whether upon the terms of the document of partnership, dated 12th November, 1953, and the other circumstances, a legal partnership came into existence or not it is necessary first of all to turn to the partnership deed itself. In the preamble to the partnership deed, Manilal is described as 'the Manager of and representing the Hindu undivided family of himself, his wife and children, Jain, inhabitant of Pimpalgaon' and similarly Keshavlal as 'the manager of and representing the Hindu undivided family of himself, his wife and children, Jain, inhabitant of Pimpalgaon'. Rasiklal and Champalal, their respective sons, however, are described as 'Rasiklal Manilal Shah, Jain, inhabitant of Pimpalgaon, in his individual capacity' and, similarly, 'Champalal Keshavlal Shah, Jain, inhabitant of Pimpalgaon, in his individual capacity'. The name of the partnership was Messrs. Manilal Dharamchand and Company and its business, that of onions, grains, jaggery, etc. The shares of the partners in the profits of the partnership as well as the losses of the partnership business, however, are described as under :
'(a) Manilal Dharamchand representing his H.U.F. 0-5-0(b) Keshavlal Dharamchand representing his H.U.F. 0-5-0(c) Rasiklal Manilal 0-3-0(d) Champalal Keshavlal 0-3-0'
11. At the foot of the document the signatures are all in their individual names. The recital in the preamble of the document is in Consonance with the provisions of clause (4) thereof, showing the shares of the partners in the profits as well as losses of the firm and in the preamble it is also made clear that the two fathers, Manilal and Keshavlal, became partners in the firm not in their individual capacity, but as the representative managers of their Hindu undivided families. This is further made clear from clauses (a) and (b) of paragraph 4 of the terms and conditions of the document. In clause (4) itself, moreover, the contrast in stating the shares is remarkable. In the case of Manilal and Keshavlal it is clearly added 'representing his Hindu undivided family', but so far as the sons, Rasiklal and Champalal, are concerned, the document merely mentions their names and nothing else. It is clear, to our minds, therefore, that the document indicates that the two fathers, Manilal and Keshavlal, joined the partnership as the respective kartas of their Hindu undivided families, while Rasiklal and Champalal joined the firm in their individual capacity. There is also no doubt that the entire capital of this firm came from the Hindu undivided family, Manilal Dharamchand, and in the accounts Rs. 50,000 were credited to the share of Manilal and Rs. 44,500 to the share of Keshavlal. No capital has been introduced into the firm by any partner but the whole of the capital has come by way of a loan from the Hindu undivided family of Manilal Dharamchand, Pimpalgaon.
12. It was strenuously urged that, properly construed, this document should not be read to imply that Rasiklal and Champalal joined the firm only in their individual capacity. It was urged that the document is silent on that question in clause (4) because only the names of Rasiklal and Champalal are mentioned and there is nothing to show that they joined in their individual capacity. Therefore, assuming that the decision of the Tribunal is correct, it was urged that the document must be construed with a view to make it legal rather than illegal and whatever doubt may arise as to the capacity in which Rasiklal and Champalal joined the firm should be resolved in favour of the assessee and it should be held that they joined the firm as kartas representing their Hindu undivided families, namely, the families consisting of Rasiklal and Champalal and their respective sons. There is no doubt that each of them has a son.
13. This argument cannot be accepted, because of the intrinsic indications in the document itself. First of all, we have already referred to the recitals in the preamble. That the preamble can be used in the construction of a document, when its construction is not free from doubt, is clear. The preamble, after the names of both Rasiklal and Champalal, categorically states 'in his individual capacity' leaving no room for doubt as to the capacity in which these two persons joined the firm. Further, a consideration of clause (4) of the document puts the controversy beyond any doubt, because in sub-clauses (a) and (b) of clause (4) when the respective kartas are mentioned, the words used are 'representing his Hindu undivided family' against both Manilal and Keshavlal, but while mentioning the names of Rasiklal and Champalal the document is silent, clearly indicating therefore that they were not representing any Hindu undivided family. So far as the signatures are concerned, no doubt each of the four individuals have signed the document without specifying anything, but that cannot affect the issue when the recitals in the document are so clear. In our opinion, we must hold that upon the document of partnership itself Dharamchand and Keshavlal Dharamchand joined the partnership in their respective capacity as the kartas of their respective Hindu undivided family, but Rasiklal and Champalal joined the firm only in their individual capacity and not as representing their respective Hindu undivided family. If so, the question arises whether such a partnership would be valid in law.
14. In Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax the Supreme Court found it difficult to visualise a situation where a joint Hindu family enters into a joint venture with strangers through its kartas and the junior members of the family also become at the same time partners in their personal or individual capacity. In that case the circumstances were almost similar to the circumstances here. On 23rd August, 1940, a firm known as Bhagat Ram Mohanlal was constituted and registered under section 26A of the Indian Income-tax Act. Its partners were (1) Bhagat Ram Mohanlal, Hindu undivided family, (2) Richpal and (3) Gajadhar, who were strangers to the Hindu undivided family. The respective shares given to the so-called partners were 8 annas to Bhagat Ram Mohanlal and 4 annas each to Richpal and Gajadhar. Mohanlal was the karta of the Hindu undivided family, Bhagat Ram Mohanlal, which consisted of himself and his two brothers, Chhotelal and Bansilal and he had entered into partnership as the karta of the said joint family. On 17th October, 1944, this firm was reconstituted under an agreement, and thereafter, the partners of the firm were five in number, namely, the two stranger partners, Richpal and Gajadhar, and Mohanlal (the karta of the Hindu undivided family) and Chhotelal and Bansilal, his brothers. The question was whether a new business had been commenced within the meaning of section 3(1) of the Excess Profits Tax Act, 1940, upon the formation of the new partnership. The question depended upon whether in the old firm constituted on 23rd August, 1940, Chhotelal and Bansilal could be said to be partners. The Supreme Court ruled that :
'It is well-settled that when the karta of a joint Hindu family enters into a partnership with strangers, the members of the family do not ipso facto become partners in that firm. They have no right to take part in its management or to sue for its dissolution. The creditors of the firm would no doubt be entitled to proceed against the joint family assets including the shares of the non-partner coparceners for realisation of their debts. But that is because under the Ram law, the karta was the right when properly carrying on business to pledge the credit of the joint family to the extent of its assets, and not because the junior members become partners in the business.'
15. 'In short', observed the Supreme Court, 'the liability of the latter arises by reason of their status as coparceners and not by reason of any contract of partnership by them. It would therefore follow that when Mohanlal became a partner of the firm on 23rd August, 1940, Chhotelal and Bansilal could not be held by reason of that fact alone, to have become partners therein.'
16. Thus, upon that finding the old firm constituted on 23rd August, 1940, could never be the same as the firm constituted on 17th October, 1944, and so far as that case is concerned the above finding by the Supreme Court was sufficient to dispose of the matter before them, but the Supreme Court did not confine itself to that finding but went on to give a further finding which is of the utmost importance in the present case. They held at page 526 :
'This is sufficient, without more, to dispose of this contention. But even apart from this, it is difficult to visualise the situation which the appellant contends for, of a Hindu joint family entering into a partnership with strangers through its karta and the junior members of the family also becoming at the same time its partners in their personal capacity. In Lachhman Das v. Commissioner of Income-tax it was held by the Judicial Committee that the karta of a joint Hindu family could enter into partnership with an individual member of the coparcenary quoad his separate property. It was also held by the Privy Council in Sundar Singh Majithia v. Commissioner of Income-tax that there was nothing in the Income-tax Act to prohibit the members of a joint Hindu family from dividing some properties, while electing to retain their joint status, and carrying on business as partners in respect of those properties treating them as its capital. But, in the present case, the basis of the partnership agreement of 1940 is that the family was joint and that Mohanlal was its karta and that he entered into the partnership as karta on behalf of the joint family. It is difficult to reconcile this position with that of Chhotelal and Bansilal being also partners in the firm in their individual capacity, which can only be in respect of their separate or divided property. If members of a coparcenary are to be regarded as having become partners in a firm with strangers, they would also become under the partnership law partners inter se, and it would cut at the very root of the notion of a joint undivided family to hold that with reference to coparcenary properties the members can at the same time be both coparceners and partners.'
17. In the present case there is no doubt that we are dealing with coparcenary property, for the entire capital of the firm was contributed by the Hindu undivided family of Manilal Dharamchand. We have also found that, upon the document of partnership, Rasiklal and Champalal entered the firm only in their individual capacity and not as members of the Hindu undivided family, whereas Manilal and Keshavlal joined the firm only as kartas of their respective Hindu undivided families which would naturally include both Rasiklal and Champalal. Therefore, Manilal and Keshavlal represented their sons, Rasiklal and Champalal, as kartas of their Hindu undivided families. In such circumstances, Rasiklal and Champalal could not also enter into partnership in their individual capacity because as pointed out by the Supreme Court that would cut at the very root of the notion of an undivided joint family. The rights of Rasiklal and Champalal in the partnership firm would be contractual rights against the kartas of their respective families which rights would come into conflict with their rights as coparceners in the Hindu undivided family vis-a-vis the two kartas such as, for instance, in the matter of taking accounts and so on. As coparceners of the Hindu undivided family they would have no right to ask for accounts from the kartas, whereas, as partners in the partnership firm, they would have that right, at least so far as the profits of the firm are concerned which undoubtedly arose out of the property of the Hindu undivided family.
18. It seems to us, therefore, that the principle of the decision in Firm Bhagat Ram Mohanlal's case would squarely cover the facts of the present case. But the present case was sought to be distinguished from Firm Bhagat Ram Mohanlal's case upon the ground that in that case they were all members of one and the same Hindu undivided family, whereas, in the present case, the two brothers, Manilal and Keshavlal, had separated before the formation of the firm and, therefore, Rasiklal and Champalal must be treated as strangers.
19. In principle, we are quite unable to see how the ratio of the decision of the Supreme Court would be affected or altered by the fact that strangers were also partners in a firm so long as the karta representing his Hindu undivided family was a partner and an individual coparcener in his individual capacity was also a partner. The principle is that there cannot be a partnership in law where the karta of a Hindu undivided family has become a partner in a partnership firm in which another coparcener has also become a partner in his individual capacity in respect of the family property brought into the partnership. If that is the principle then the question whether there are one or more stranger partners in addition will, in our opinion, not make the slightest difference to the application of the principle.
20. Reliance was placed in this respect upon a decision of a Division Bench of the Madhya Pradesh High Court in Commissioner of Income-tax v. Hukumchand Mannalal & Co. In that case, no doubt, the Division Bench held that a partnership between more than one coparcener of a Hindu undivided family and strangers would be valid though the members mas represent and receive their shares of profits on behalf of one and the same family, but the facts and circumstances under which the Madhya Pradesh High Court laid down that proposition were in important respects different from the facts of the present case. In that case the firm, Sir Hukumchand Mannalal & Co., constituted on 6th July, 1948, by a deed of partnership of that date, had five partners. They were, Sir Hukumchand Sarupchand, Chunnilal Onkarmal Ltd., Rajkumarsingh Hukumchand, Ramkumar Morarka & Sons Ltd. and Mannalal Onkarmal. Rajkumarsingh was the son of Sir Hukumchand and the share of each of the first three named partners was four annas and of the remaining partners two annas each. Prior to the formation of the firm, the joint family of Sir Hukumchand were the managing and selling agents of the said mills and it was found as a fact by the Appellate Assistant Commissioner as well as by the Tribunal that in the partnership, which came into existence on 16th July, 1948, Sir Hukumchand Sarupchand and his son, Rajkumar Singh, 'represented as partners in the firm the share and interest of their Hindu undivided family'. No doubt in that case on 31st March, 1950, a partition of the Hindu undivided family took place, and, thereafter, the share and interest of the family in the firm with the family's other business were transferred to a private limited company styled as 'Sir Sarupchand Hukumchand Ltd.', but once again even after the partition the Tribunal found as a fact that :
'The shares in this company were held by the members of the erstwhile Hindu undivided family. The share and interest in the names of Sir Hukumchand and that of his son, Rajkumar Singhji, were transferred to this new company. In other words, the share and interest of both the father and the son were held by them on behalf of the Hindu undivided family, and, hence, were made the subject of a partition on March 31, 1950. Sir Hukumchand and Rajkumar Singh became partners in the assessee-firm on behalf of the Hindu undivided family and the share and interest in the firm held by them beneficially belonged to the Hindu undivided family.'
21. Therefore, upon this finding in that case though a karta and a coparcener had both become partners in a partnership firm, the coparcener had not joined the partnership in his individual capacity, but only in his capacity as a representative of his Hindu undivided family. In that case, both Sir Hukumchand Sarupchand and his son, Rajkumar Singh, represented the interest of their respective Hindu undivided families and Rajkumar Singh was not a partner in his individual capacity at all. That crucial fact serves to distinguish that case from the present one.
22. The principle of Firm Bhagat Ram Mohanlal's case was held to be inapplicable in that case for this very reason as can be seen from the remarks of the Division Bench at page 234 :
'Shri Chitale supplemented the arguments of Shri Palkhivala by adding that there was a distinction between the case of Firm Bhagat Ram Mohanlal v. Commissioner of Income-tax and the present case, as here, there was no partnership in any coparcenary property. It seems to us unnecessary to consider this contention when the case of the assessee-firm has all along been that Sir Hukumchand and his son, Rajkumar Singh, became partners of the assessee-firm on behalf of a Hindu undivided family and the share and interest in the firm held by them beneficially belonged to the Hindu undivided family.'
23. The principle, therefore, laid down in Firm Bhagat Ram Mohanlal's case was not applied in Hukumchand Mannalal's case. In fact the distinction drawn in Hukumchand Mannalal's case serves to emphasise the difference in the principle laid down in Firms Bhagat Ram Mohanlal's case. Mr. Mehta also drew the distinction between Firm Bhagat Ram Mohanlal's case and that case on the ground that stranger partners were partners in Hukumchand Mannalal's case, whereas in Firms Bhagat Ram Mohanlal's case they were all members of one and the same Hindu undivided family. We have already said that in our opinion the question whether or not stranger partners entered into the partnership is not a relevant consideration in the application of the principle laid down in the case of Firm Bhagat Ram Mohanlal's case.
24. Then it was urged, that in the present case, the partnership has upon the findings of the Tribunal been held to be genuine, and once the partnership is found to be genuine registration cannot be refused. Reliance was placed in this respect upon a recent decision of the Supreme Court in Commissioner of Income-tax v. A. Abdul Rahim and Co., and on the remarks at page 659 :
'The legal position may be stated thus : When a firm makes an application under section 26A of the Act for registration, the Income-tax Officer can reject the same if he comes to the conclusion that the partnership is not genuine or the instrument of partnership does not specify correctly the individual shares of the partners. But once he comes to the conclusion that the partnership is genuine and a valid one, he cannot refuse registration on the ground that one of the partners is a benamidar of another. If the partnership is genuine and legal, the share given to the benamidar will be the correct specification of his individual share in the partnership.'
25. No doubt the principle is clear that if the partnership is held to be genuine and valid the department cannot refuse registration, but in the present case the validity of the present partnership is itself in question and though it has been held to be genuine in the sense that it is not a fraudulent lent or bogus partnership, it has not been held to be a valid or legal partnership. The finding that it was a genuine partnership only implies that it was a partnership bona fide entered into but not that in all respects it was a legal partnership. In A. Abdul Rahim's case there was no question involved as is involved before us in the present case, as to whether a coparcener can join a firm in his individual capacity when the karta of his Hindu undivided family is also a partner in respect of the joint family property. The principle in the case of A. Abdul Rahim & Co. therefore, does not apply in the present case.
26. Lastly, it was urged that even assuming that we find, as we have done in the present case, that Rasiklal Manilal and Champalal Keshavlal became partners and thereby the firm is liable to be rendered illegal upon the principle of the decision in Firm Bhagat Ram Mohanlal's case, we should ignore the illegal part and give effect to the deed in so far as it is otherwise valid. Reliance was placed in this respect upon a decision of the Supreme Court in Ram Laxman Sugar Mills v. Commissioner of Income-tax. urged that a construction should be put upon the partnership deed in the present case which would give it validity rather than invalidity and, therefore, although the names of Rasiklal and Champalal are mentioned without anything more we must understand by the mention of those names alone that these two persons joined the firm as kartas representing their respective Hindu undivided families. There is no doubt that each of them had a son or sons and that, therefore, there are Hindu undivided families of Rasiklal and Champalal. The question, however, is whether we can construe this document contrary to its very tenor and terms. We have already pointed out that reading the document as a whole it is not only silent as to the capacity of Rasiklal and Champalal but, on the other hand, upon a proper construction of clause (4), it is clear that Rasiklal and Champalal entered into the partnership in their individual capacity. What is more, that is in express terms stated in the preamble in the case of both Rasiklal and Champalal. With that positive statement there we do not think that the rule of construction that a document must be read with a view to giving it legality rather than illegality would apply in the present case. In Ram Laxman Sugar Mills' case no doubt the Supreme Court undertook a construction of the documents before them, but under peculiar circumstances. There was a deed of partnership dated 21st August, 1939, to which one party was one 'L' representing his joint Hindu family. He had 8 annas share and he had signed the document 'for and on behalf of (the family) manager and karta'. Then on 21st August, 1947, a partition took place in that family and the 8 annas share which was till then allotted to L was divided between four members of the family, four annas going to L and the remaining, 4 annas to three others of the Hindu undivided family. The question was whether the firm in which L was a partner till that date could thereafter be granted renewal of registration under section 26A. The Supreme Court held that though L was described in that partnership deed as manager and he had signed the document in that capacity it was never intended thereby to bring into existence any relationship between the partners of the firm and the members of his family. The signature of L merely indicated that he was acting as the manager of the family in entering into the agreement. As a matter of law a family, because of the fluctuating composition of its members, is incapable of entering into an agreement contemplating the creation of mutual rights of agency among its members.
27. It will be noticed, therefore, that in Ram Laxman Sugar Mills' case no one was a partner in the firm or admitted as a partner in his individual capacity, but only L had entered into the partnership representing his Hindu undivided family. The only question involved in that case was what was the effect of the disruption of the family of L upon execution of the document which remained the same as before. The Commissioner had taken the view that having regard to the document the entire joint Hindu family had become a partner and as soon as the joint family status was severed the partnership deed became inoperative. The Tribunal had confirmed the order of the Commissioner but upon different grounds. They held that though all the members of the joint family had become partners they had not signed the instrument of partnership nor the application for renewal of registration, and since all the members of the partnership had not signed the application for renewal of registration, registration could not be granted. The High Court virtually affirmed the decision of the Tribunal.
28. The Supreme Court reversed the decision holding that the partnership agreement between L on the one hand and the other partners named on the other, would not be affected by the fact that the joint family of which L was originally the karta had been disrupted. They held that the fact that,
'... that joint family had later ceased to exist by reason of partition will not affect the validity of the partnership or its continuance.' (See page 619).
29. It was under these circumstances that the Supreme Court read the document of partnership in that case and proceeded to construe it. There was no conflict between the terms of the document of partnership and a possible construction was the one which the assessee in that case placed upon it. In the present case the construction for which the assessee contends is directly contrary to its very tenor and the terms.
30. These were all the contentions urged in this reference. We are in agreement with the view taken by the Tribunal. We answer both the questions in the negative. The assessee will pay the costs of the Commissioner.
31. Questions answered in the negative.