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Commissioner of Income-tax, Andhra Pradesh Vs. Gaekwade Vasappa and Sons - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred Nos. 44 of 1977 and 23 of 1979
Judge
Reported in(1983)34CTR(AP)115; [1983]143ITR1(AP)
ActsIncome-tax Act, 1961 - Sections 185, 255(3), 256(2) and 263
AppellantCommissioner of Income-tax, Andhra Pradesh
RespondentGaekwade Vasappa and Sons
Appellant AdvocateM. Suryanarayana Murthy, Adv.
Respondent AdvocateRama Rao, Adv.
Excerpt:
direct taxation - requisite of registration - sections 185, 255 (3), 256 (2) and 263 of income-tax act, 1961 - business run by hindu undivided family (huf) converted into partnership firm and got registered - karta of family was partner of firm in capacity of karta itself - commissioner cancelled registration on ground no partition among coparceners - assessee contended partition is not pre requisite for registration - tribunal accepted assessee's contention - appeal against order - high court opined that partnership firm can be registered even if partners did not bring any property of their own - taking into account different decisions high court observed that contribution of skill and labour are sufficient for registration in absence of any investment of their individual shares. -.....jeevan reddy, j.1. these two r.cs. are inter-connected. we question referred in this r.c. is 'whether, on the facts and in the circumstances of the commissioner of income-tax's order under section 263, dated january 30, 1973, for the assessment year 1971-72 is sound in law ?' 2. the relevant facts are the following : g. vasappa was the karta of an huf, which was carrying on consisted of g. vasappa, the father, and his three sons, viz., sri tikoji rao, sri satyanarayana and sri srinivasa sekhar. with effect from april 1, 1970, the business was converted into a partnership business with three partners, viz., vasappa, tikoji rao and satyanarayana. a deed of partnership was drawn up on april 7, 1970. according to this partnership deed, vasappa was the partner, not in his individual capacity.....
Judgment:

Jeevan Reddy, J.

1. These two R.Cs. are inter-connected. We question referred in this R.C. is

'Whether, on the facts and in the circumstances of the Commissioner of Income-tax's order under section 263, dated January 30, 1973, for the assessment year 1971-72 is sound in law ?'

2. The relevant facts are the following :

G. Vasappa was the karta of an HUF, which was carrying on consisted of G. Vasappa, the father, and his three sons, viz., Sri Tikoji Rao, Sri Satyanarayana and Sri Srinivasa Sekhar. With effect from April 1, 1970, the business was converted into a partnership business with three partners, viz., Vasappa, Tikoji Rao and Satyanarayana. A deed of partnership was drawn up on April 7, 1970. According to this partnership deed, Vasappa was the partner, not in his individual capacity but, as the karta representing the aforementioned HUF, while Tikoji Rao and Satyanarayana were described as working partners. Their shares were fixed in the ratio of 2 : 1 : 1. Registration was applied for under s. 185 of the I.T. Act for the assessment year 1971-72 on the basis of the aforesaid partnership deed dated April 7, 1970. The ITO granted the registration, but when he came to the assessment of the HUF, he clubbed the share income of the three partners on the ground that there was no partition either complete or partial. The ITO further found that Sri Tikoji Rao and Sri Satyanarayana became partners in another firm called M/s. Subrahmanyeswara Financiers by investing monies withdrawn from their account of M/s. G. Vasappa & Sons (which came into existence with effect from April 1, 1970). Since the monies invested by them in M/s. Subrahmanyeswara Financiers belonged to the joint family of Sri G. Vasappa, he held that their investment in M/s. Subrahmanyeswara Financiers belongs to the joint family only and the share incomes of the two partners are also liable to be treated as income of the HUF. Against the orders of the ITO clubbing the share incomes of the partners, Tikoji Rao and Satyanarayana, with the income of the HUF, an appeal was preferred before the AAC, who upheld the orders of the ITO.

3. The Addl. Commissioner, on a perusal of the records and having formed an opinion that the orders passed by the ITO are prejudicial to the interests of the Revenue, invoked his suo motu revisional powers under s. 263 of the Act and issued a show-cause notice to the assessee (firm). The Addl. Commissioner stated in the show-cause notice that the registration granted to the firm, Sri G. Vasappa & Sons, was bad in law and was liable to be revised. The assessee submitted his explanation, after considering which the Addl. Commissioner held that a legal partnership could subsist as between the undivided coparceners of a family only if they first divide the joint property in respect of which the partnership is entered into. He also found that the two members, Tikoji Rao and Satyanarayana, did not bring any property of their own into the partnership and, therefore, the firm was not entitled to registration under the Act. Accordingly, he cancelled the orders of the ITO granting registration to the firm, M/s. G. Vasappa & Sons. Against the orders of the Addl. Commissioner, the assessee filed an appeal before the Tribunal contending that a prior partition is not a pre-condition to the formation of a partnership between the karta and the members of the HUF. Reliance was mainly placed on the decision of the Mysore High Court in I.P. Munavalli v. CIT : [1969]74ITR529(KAR) . Following the said decision the Tribunal upheld the assessee's contention and allowed the appeal, whereupon the department asked for and obtained this reference under s. 256(1) of the I.T. Act.

4. The Tribunal has referred the following three questions for our opinion :

'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's order cancelling the Additional Commissioner of Income-tax's order under section 263, dated January 30, 1973, for the assessment year 1971-72 is sound in law

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's order holding that the partnership of M/s. G. Vasappa & Sons, Silk Dyes, was legally entitled to the benefits of registration under the Income-tax Act, 1961, is sound in law and

3. Whether the order passed by single member of the Appellate Tribunal in this case which involves no computation of total income within the meaning of section 255(3) of the Income-tax Act, 1961, is competent and valid ?'

5. Now, coming to R.C. No. 23 of 1979, the question referred is :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the share incomes of Sri Tikoji Rao and Sri Satyanarayana are not includible for the assessment year 1972-73 ?'

6. It is obvious that the answer to this question depends on our answer to be recorded to questions Nos. 1 and 2 in R.C. No. 44 of 1977. If it is held that the registration granted to the firm, M/s. G. Vasappa & Sons, is good, then it would follow that the question referred to in R.C. No. 23 of 1979 has to be answered in favour of the assessee and in case we answer the first two questions in R.C. No. 44 of 1977 in favour of the Department, the question referred in R.C. No. 23 of 1979 also has to be answered in favour of the Department.

7. The principal question that falls for our consideration is whether a partnership is permissible in law between the karta of an HUF representing the HUF as such and the members of such HUF who do not contribute or bring in any separate property of their own but merely contribute their skill and labour and who in turn are described as working partners. There appears to be some divergence of opinion between several High Courts in this country on this question and it would, therefore, be appropriate for us to examine the matter for ourselves.

8. In Sundar Singh Majithia v. CIT [1942] 10 ITR 457 the Privy Council held that s. 25A of the Indian I.T. Act does not prohibit members of an HUF from entering into a partnership in respect of a portion of the joint property, which they have partitioned among themselves. In that case, an HUF consisting of a father, his wife and three sons and owning among others a sugar factory was assessed as an HUF in respect of its income from all its properties and business including the sugar factory. At the time of the assessment for the accounting year 1931-32, it was alleged that the father, wife and sons had divided the sugar factory business among themselves in certain fixed shares while retaining their status as a joint Hindu family in respect of the other properties and business, and an application was made for the registration of a firm, which was alleged to have come into existence in respect of the sugar factory business under a partnership deed dated February 12, 1933, between the father, wife and the three sons. The I.T. authorities refused to recognise the alleged partition and rejected the application for registration of the firm. On a reference, the High Court upheld the orders of the Commissioner. When the matter came before the Privy Council, it held that the Hindu law permitted a partial partition and that it was not necessary for a partition between the members of an HUF to be total and complete. It held that with respect to the property or business which had been divided among the members of the HUF, it was permissible for them to enter into a partnership and the said partnership firm cannot be refused registration under s. 26A of the Act.

9. In Lachhman Das v. CIT [1948] 16 ITR 35 the Privy Council held that there can be a valid partnership between the karta of an HUF representing the family on the one hand and a member of that family in his individual capacity on the other, if such member brings his separate or individual property into the partnership, which separate or individual property has been acquired by him without the aid of, and without any detriment to, the joint family property. It was observed that a member of a Hindu family can in law hold separate property of his own and his right to proper and full enjoyment of such property includes the freedom to enter into contractual relations with others including his family so long as it is represented in such transactions by a definite personality like its karta. It was observed further that in such a case, such member retains the share and interest in the property of the family, while he simultaneously enjoys the benefit of his separate property and the fruits of its investment, and that for enabling him to do so, it is not necessary that he should separate himself from his family. It is really not necessary to notice the facts of this case, since the principle of the said decision as stated above represents the ratio of the decision relevant for our purposes. The principle enunciated by the Privy Council is clearly understandable on the basis that if the karta of an HUF is entitled to enter into a partnership with strangers, who bring their own properties into the partnership, there is no reason why the karta cannot enter into such a partnership with the members of his own family so long as those members also bring their individual or separate properties into the partnership, which property they acquired without detriment to and without the aid of the joint family property.

10. In the case in I. P. Munavalli v. CIT : [1969]74ITR529(KAR) which came up before the Mysore High Court, the facts of the case were almost identical with the facts of the present case (indeed, we have a feeling that the partnership in the present case was inspired by and is drawn up keeping in mind the aforesaid decision). There, an HUF consisting of the father, I. P. Munavalli, and the son, C. I. Munavalli, were carrying on a business in food grains and pulses. On November 9, 1961, the father and the son entered into an agreement of partnership whereunder the son became a working partner while the other partner was the joint family represented by the father as its karta. The profits and losses had to be shared equally by the two partners. Application for registration of the firm was made under s. 185 of the Act, which was refused on the ground that since there was no partition between the members of the family, there can be no genuine partnership. When the matter came before the High Court, it referred to the decision of the Privy Council reported in Lachhman Das v. CIT [1948] 16 ITR 35 among other decisions, and held (p. 533) :

'If a partner by putting into the partnership by way of his capital his separate property or the property which he obtained at a partition on division and thus can become a partner with the family represented by its karta, it is difficult to understand how such a partnership cannot come into being and why a coparcener who continues to remain a member of the coparcenary cannot become a working partner of a firm of which he and the family represented by its karta are the partners. In Lachhman Das's case [1948] 16 ITR the coparcener placed at the disposal of the firm as his capital his separate property, and in the case of a working partner he contributes his skill or labour or both, as the case may be. If the partnership is permissible in one case, it would be difficult to assign any reason for reaching the conclusion that it is not permissible in the other'

11. Thus, this decision extended the principle of Lachhman Das v. CIT [1948] 16 ITR 35 even to a case where the member of the HUF brings in his skill and labour instead of his separate and individual property. It is obvious that if this decision represents the correct position in law, the assessee has to succeed in this reference. But before we record our answer, it is necessary to refer to the decisions, which have either disagreed with the Mysore High Court's view or have adopted an apparently different approach. We shall also refer to those decisions which have agreed with and taken the same view as the Mysore High Court. For this purpose, it is necessary to refer to the decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. CEPT : [1956]29ITR521(SC) , since it is the different understanding of that decision which seems to have led to differing opinions by different High Courts.

12. The case in Firm Bhagat Ram Mohanlal v. CEPT : [1956]29ITR521(SC) , arose under the Excess Profits Tax Act, 1940. It is necessary to notice the facts of this case. The firm Bhagat Ram Mohanlal was constituted on August 23, 1940, and was registered under s. 26A of the Indian I.T. Act, 1922. The partners of the firm were : (1) Bhagat Ram Mohanlal : HUF, (2) Richpal, and (3) Gajadhar, their shares being respectively 8 annas, 4 annas and 4 annas. Mohanlal was the karta of the joint family which consisted of himself and his two brothers, Chhotelal and Bansilal, and as stated above, Mohanlal entered into the aforesaid partnership as the karta of the HUF. The firm carried on business for the accounting years ending 1943 and 1944 and made profits during those years and was assessed to excess profit tax. For the year 1944-45, however, it sustained a loss and adding the said loss to the standard profits, the Excess Profits Tax Officer determined the deficiency of the profits for the years at Rs. 53,571. Section 7 of the Excess Profits Tax Act provided that when there is a deficiency of profits in any of the chargeable accounting periods in any business, the profits of that business during the previous year shall be deemed to be reduced eo extanti and that the relief necessary to give effect to the reduction shall be given by repayment of the tax paid or otherwise. Under this provision, the Excess Profits Tax Officer passed orders on December 23, 1946, whereby after setting off the profits of the firm for the years ending 1943 and 1944 against the deficiency of profits during the year ending 1945, he directed a refund of certain amount which was paid by the appellant as excess profits tax for the earlier years. At the commencement of the assessment year 1944-45, there was a partition in the joint family of which Mohanlal was the karta. Consequent on this division, the firm Bhagat Ram Mohanlal was reconstituted under a deed dated October 17, 1944. Under this deed, the number of partners became five. Richpal and Gajadhar were given five annas share each while Mohanlal and two erstwhile members of the HUF, Chhotelal and Bansilal, were given shares of two annas each. Thus, there was a reconstitution of the firm both with reference to the persons and also with reference to the inter se shares. According to s. 8(1) of the Excess Profits Tax Act, any change in the persons carrying on a business had to be construed as a discontinuance of the business and the commencement of a new business. Thus, on the facts of that case, if the reconstitution of the firm on October 17, 1944, was to be taken as a change in the persons carrying on the business, the orders of the Excess Profits Tax Officer under s. 7 of the Act would become incompetent and unsustainable. When the above facts came to the knowledge of the Commissioner of Excess Profits Tax, he invoked his suo motu revisional powers and set aside the orders of the Excess Profits Tax Officer under s. 7, on the ground that there was a change in the persons carrying on the business on account of the reconstitution of the firm which took place on October 17, 1944, consequent on the disruption of the joint Hindu family of one of the partners. He directed that the amount which was directed to be refunded to the assessee should be recollected from him. Against the orders of the Commissioner, a writ petition was filed in the High Court of Nagpur. Two questions were urged before the High Court and also before the Supreme Court when the matter was taken up to them. We are concerned herein only with the first of those two questions, which is :

'Whether, by reason of the partition of the joint family and the reconstitution of the firm under the deed dated October 17, 1944, there was a change in the persons carrying on business within section 8(1) of the Act ?'

13. On this question the contention of the appellant, i.e., Firm Bhagat Ram Mohanlal, before the Supreme Court was that when Mohanlal entered into partnership with Richpal and Gajadhar on August 23, 1940, as karta of the joint family, the other members of the family, viz., Chhotelal and Bansilal, also became in substance partners of the firm and hence the deed dated October 17, 1944, did not bring about any real change in the persons carrying on the business and the change, if any, was merely formal than substantial. This argument was rejected by the Supreme Court holding that where the karta of an HUF becomes a partner in a partnership firm, it cannot be said that all the members of that HUF also become members of the firm, though it may be that in case of a decree passed against the karta, the shares of such members may also be liable to be proceeded against. It was pointed out that such liability of the members arises not because they are partners in the partnership firm but because of their status as members of the HUF. This decision was by itself found sufficient to dispose of the matter. But the Supreme Court proceeded to make certain further observations which have given rise to differing interpretations among the several High Courts. Those observations may now be set out. They are (p. 526) :

'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 [1948] 16 ITR 35 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 [1942] 10 ITR 457 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.'

14. It is necessary to point out that the above observations ought to be understood in the light of the facts of that case. The main and the only contention urged before the Supreme Court was that when the karta became a partner in Firm Bhagat Ram Mohanlal, the other members of the HUF also, in effect, became partners and hence there was no change in the person by virtue of the deed dated October 17, 1944. It was this argument which was rejected as unsustainable in law and while doing that the Supreme Court also observed that with reference to the coparcenary properties, the members of an HUF cannot simultaneously be both coparceners and partners.

15. We shall now refer to the decisions of the various High Courts. We shall first refer to the decisions which apprently take a view contrary to the view taken by the Mysore High Court in I. P. Munavalli v. CIT : [1969]74ITR529(KAR) . The first of such decisions is of the Gujarat High Court in Pitamberdas Bhikhabhai & Co. v. CIT : [1964]53ITR341(Guj) . In that case, an HUF consisting of A and his three sons, B, C and D, was carrying on a business. In 1939, B and C separated from the family and the whole business was carried on by B and C in partnership as a registered firm. On November 2, 1956, C retired from the partnership after receiving his share and B continued to carry on the business. On February 9, 1956, B, treating the business as his own, made a gift of Rs. 10,000 each to his two sons, E and F, by making credit entries in the accounts of the business, and entered into a partnership with E and F under a deed of partnership dated November 18, 1956, giving E and F 1/4th share each in the business and retaining a half share for himself. An application was made for registration under s. 26A of the Indian I.T. Act, 1922. Admittedly, there was no partition between B and E and F and even the sum of Rs. 10,000, which was gifted to the two sons, came out of the HUF funds. The registration was refused and when the matter came before the High Court it referred to the decision of the Privy Council in Lachhman Das v. CIT [1948] 16 ITR 35 and observed (p. 349) :

'The decision cannot, in our opinion, help the assessees, for the business in which Ramanlal and Jayantilal were sought to be admitted as partners was joint family business and Ramanlal and Jayantilal were sought to be given shares in the business in their individual capacity to the detriment of the joint family, without their bringing into the business any separate property held by them in their individual capacity and unconnected with the family funds.' (Ramanlal and Jayantilal are referred to as E and F respectively in this paragraph).

16. It was further observed that the decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. CEPT : [1956]29ITR521(SC) , conclude the issue against the assessees. The High Court then extracted the aforesaid observations of the Supreme Court and held that the observations are decisive of the controversy between them and leave no scope for any argument to the assessee. It was observed that by the partnership deed which was entered into on November 18, 1956, the father, B, sought to give to his two undivided sons, interest as partners in the business which was coparcenary property, with the result that to the extent of the eight annas share in the business held by the father as the karta, the said two sons, E and F, would have an interest as members of the HUF and that they would also be entitled to four annas share each in their own right as partners. It was pointed out that the sons would be both coparceners as well as partners simultaneously, in what was essentially a joint family business. It was held that such a situation was held not permissible, by the Supreme Court, in the above decision. It was also pointed out that such an arrangement would also prejudice the other members of the HUF who were not taken in as partners since their shares in the joint family business would be correspondingly reduced. It is necessary to point out that this was not a case like the one before the Mysore High Court or one before us. In other words, it was not a case where the partnership was entered into between an HUF represented by its karta and the members of the HUF who were contributing their labour and skill alone and who were taken as working partners only. It was a case where in respect of the HUF property or the HUF business, as the case may be, a partnership was sought to be entered into between the father as the karta and some of the members of the HUF as partners, without such members contributing either their separate or individual property to the partnership firm or their labour and skill. In such a case, it can rightly be said that the members of an HUF were sought to be clothed with a dual character vis-a-vis the joint family property, which was impermissible. The principle of this case, therefore, is clearly distinguishable as having no application to the facts before us.

17. The next decision is of the Bombay High Court in Shah Prabhudas Gulabchand v. CIT : [1970]77ITR870(Bom) . This was again a case where, without effecting a partition between the members of a Hindu joint family, the members were sought to be inducted as partners as and when they became majors. The members did not bring their separate or individual property into the partnership nor the partnership deed showed that they were expected to contribute their labour and skill, as in the case before us. The business in respect of which the partnership was formed was the same business which was hitherto carried on by the joint family. In such a case, therefore, it was held that the principle of the decision of the Privy Council in Lachhman Das v. CIT [1948] 16 ITR 35 had no application and that the aforesaid observations of the Supreme Court in Firm Bhagat Ram Mohanlal v. CEPT : [1956]29ITR521(SC) , also concluded the issue against the assessee. When the decision of the Mysore High Court in I. P. Munavalli v. CIT : [1969]74ITR529(KAR) was cited before the Bombay High Court, they dissented from it, observing (p. 881) :

'......... the High Court of Mysore appears to have read the decisions of the Judicial Committee and the Supreme Court referred to above to mean that a partnership could come into existence between a karta of an undivided Hindu family and one of the coparceners if such coparcener merely agrees to become a working partner of the firm. With great respect, we are unable to take that view of the above decisions.'

18. But as was pointed out by us hereinbefore while dealing with the Gujarat High Court's decision, the facts of the Mysore High Court's case and the Bombay Court's case are entirely different. The Bombay High Court's case was not a case where the partnership was sought to be entered into between the karta of an HUF and the other members who were contributing their labour and skill. But it was a case where, with respect to the very same joint family property, the karta and the members were sought to be treated as partners, without effecting a division. Such simultaneous dual character was held impermissible in law. A similar view was taken by the Bombay High Court again in Manilal Dharamchand v. CIT : [1970]78ITR96(Bom) . We may also mention that the Gujarat High Court in Shah Purshottamdas Ghelabhai v. CIT [1974] 96 ITR 442 has reaffirmed the principle of the decision in Pitamberdas Bhikhabhai & Co. v. CIT : [1964]53ITR341(Guj) .

19. On the other hand, the Madhya Pradesh High Court in Ramchand Nawalrai v. CIT : [1981]130ITR826(MP) and the Allahabad High Court in CIT v. Gupta Brothers : [1981]131ITR492(All) , have agreed with and applied the same view as taken by the Mysore High Court in I. P. Munavalli v. CIT : [1969]74ITR529(KAR) . We do not think it necessary to burden this decision with the facts of those cases, since we are of the opinion that the principle of law books no controversy. As pointed out by us hereinbefore, it is wholly permissible for the karta of an HUF representing the HUF to enter into a partnership with one or two strangers who are taken in merely as working partners and who do not contribute any separate or individual properties of their own. If so, there is no reason why such a partnership cannot be entered into with the members of the HUF. The fact that they happen to be members of the HUF ought not to be a disqualification against them. Just as a stranger-partner contributes his labour and skill thus working as a working partner, similarly a member of the HUF contributes his labour and skill by participating in the partnership business as a working partner. Further, we see no distinction in principle between a case where a member of an HUF is admitted as a partner if he brings in his separate and individual property into the partnership and a case where he brings in his labour and skill instead of separate property. The phenomenon of working partner who does not contribute any capital or who does not bring in any property of his own, is a well-known and a well recognised feature in partnership law. There may be cases where the karta of an HUF is unable to attend to the business or has no time or inclination to attend to this business because of his other pre-occupations and he wants to take in a person as a working partner so that such working partner can carry on the business. Instead of taking a stranger, he takes a member of his own family. The member of the family performs the same duties and obligations which a stranger would do in a similar situation. If so, we see no reason to disqualify a member of an HUF, merely because he happens to be a member of the HUF. Just as a member of an HUF is entitled to enjoy his separate property in such manner as he pleases, he is equally entitled to employ his labour and skill to his best advantage in such manner as he chooses. Further, a member of an HUF need not necessarily participate in the business of a firm of which the karta, representing the family, is a partner.

20. We must now deal with one of the reasons given by the Commissioner for holding that the said partnership is not entitled to registration, viz., that on dissolution of such partnership, the two sons, viz., Tikoji Rao and Satyanarayana, would be entitled to a 1/4th share each in all the assets of the partnership firm. This is obviously a misapprehension in law. Section 48 of the Indian Partnership Act says that :

'In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed :-...

(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order :-...

(iii) in paying to each partner rateably what is due to him on account of capital; and...'

21. In the partnership before us, it is not stated that on dissolution all the assets shall be divided between the three partners in the ratio of 2 : 1 : 1. In the absence of any such specific agreement, the assets will be divided, on the dissolution of the firm, in proportion to the capital contributed by each partner, which means that on the dissolution of the present firm, the two sons will not be entitled to any part of the capital of the firm. That will go only to the HUF.

22. Another argument advanced by the Commissioner is that inasmuch as, according to the Partnership Act, each partner is bound to contribute his best including his skill and labour for the beneficial conduct of the partnership business, there is no such thing as contribution of labour and skill by a partner. Again this seems to be not a correct understanding of law. It is true that s. 12(b) of the Indian Partnership Act says that every partner is bound to attend diligently to his duties in the conduct of the business and s. 13(a) of the Act says that a partner is not entitled to receive remuneration for taking part in the conduct of the business, but, both these sections are subject to a contract between the partners to the contrary. Both these sections open with a parenthetical clause, which says :

'Subject to contract between the partners'.

23. In the case before us the partnership deed expressly says that the working partners, viz., Tikoji Rao and Satyanarayana, are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other and to render true accounts and full information of all things affecting the firm to any partner or his legal representative. In other words, the business of the partnership firm is expected to be and bound to be carried on by the two working partners. The other partner, viz., G. Vasappa, the karta of the HUF, is not burdened with any such obligation, probably because all the assets of the partnership were contributed by him, i.e., by the HUF represented by him. As we have pointed out hereinbefore, the concept of a working partner is a well-recognised one and there can be a contract or a partnership between the parties whereunder while some partners actually and actively participate in the business of the partnership, others do not.

24. For the aforesaid reasons, we are in agreement with the decision of the Mysore High Court in I. P. Munavalli v. CIT : [1969]74ITR529(KAR) and accordingly hold that the Tribunal was right in holding that the assessee partnership firm is entitled to registration under s. 185 of the I.T. Act and that the orders of the Commissioner to the contrary are unsustainable in law.

25. We must, however, point out that in this case, the Commissioner has not found that the partnership entered into between the father and the two sons, represented by the partnership deed dated April 7, 1970, is a mere pretence or a mere make-believe. In other words, he has not held that the partnership deed is not a genuine one nor has he held that the partnership firm, which is said to have come into existence with effect from April 1, 1970, under the said deed, is a bogus one. Had any such finding been recorded, that would have been a finding of fact obviating all this discussion. In this case the Commissioner has set aside the registration only on the finding that such a partnership as was entered into under the deed dated April 7, 1970, is not permissible in law and since we have held that such a partnership is permissible in law, we have to uphold the Tribunal's view.

26. Now remains the third question referred to us, which we may deal with briefly. The appeal before the Tribunal was disposed of by a single member. The Department asked him to make a reference to the court, which was declined, whereupon the Department approached this court under s. 256(2) of the I.T. Act, 1961, and this court directed the Tribunal to refer the three aforesaid questions for the opinion of this court, which the Tribunal accordingly did. The question pertains to the competency of a single member to dispose of the appeal. Sub-sections (1), (2) and (3) of s. 255 of the I.T. Act are relevant for this purpose and may be set out :

'255. Procedure of Appellate Tribunal. - (1) The powers and functions of the Appellate Tribunal may be exercised and discharged by Benches constituted by the President of the Appellate Tribunal from among the members thereof.

(2) Subject to the provisions contained in sub-section (3), a Bench shall consist of one judicial member and one accountant member.

(3) The President or any other member of the Appellate Tribunal authorised in this behalf by the Central Government may, sitting singly, dispose of any case which has been allotted to the Bench of which he is a member and which pertains to an assessee whose total income as computed by the Income-tax Officer in the case does not exceed forty thousand rupees, and the President may, for the disposal of any particular case, constitute a special Bench consisting of three or more members, one of whom shall necessarily be a judicial member and one an accountant member.

27. It is not the contention of the Department that there is no such authorisation in favour of the member who actually disposed of the appeal as is contemplated by sub-s. (3); the contention is that the authorisation, if any, is invalid and ineffective inasmuch as this is not an appeal involving computation of total income of an assessee. In other words, the argument is that the authorisation within the meaning of sub-s. (3) can be given only in respect of those appeals which involve computation of the total income of the assessee but not to any other case. The contention is that inasmuch as the appeal in this case involved only the question of registration of the firm under s. 185 of the I.T. Act, it is not an appeal involving computation of total income. We are unable to agree with this reasoning. We do not find any restrictive words in sub-s. (3) curtailing the power of the President to issue the authorisation only with respect to appeals involving total computation. The authorisation can extend to disposal of 'any case', which may be brought before the Tribunal. In fact, the word 'compute' occurs only when fixing the monetary limit, to wit, such authorisation can extend only to such appeals where the total income as computed by the ITO does not exceed forty thousand rupees. Admittedly, in this case, the total income of the assessee as computed by the ITO does not exceed forty thousand rupees. We must also record that the authorisation issued by the President under sub-s. (3) has not been placed before us by the Department. Inasmuch as sub-s. (3) does not restrict such authorisation only to appeals involving computation of the income alone, we are unable to say that the authorisation in this case is ineffective or that the member who disposed of the appeal and who has been admittedly authorised under sub-s. (3) was not competent to dispose of the appeal.

28. For the above reasons, we answer questions Nos. 1 and 2 in the affirmative and in favour of the assessee. Similarly, we answer question No. 3 also in the affirmative.

29. Since R.C. No. 23 of 1979 is merely consequential and our answer to the question referred to in this R.C. is also in favour of the assessee upholding the view taken by the Tribunal. In the circumstances of the case, we direct the parties to bear their own costs in both the R.Cs.


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