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Commissioner of Income-tax Vs. Agarwal Brothers and Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 711 of 1963
Judge
Reported in[1970]75ITR451(All)
ActsCompanies Act, 1913 - Sections 4; Income Tax Act, 1922 - Sections 26A
AppellantCommissioner of Income-tax
RespondentAgarwal Brothers and Co.
Appellant AdvocateB.L. Gupta and ;Ashok Gupta, Advs.
Respondent AdvocateShanti Bhusan, Adv.-General and ;R.R. Misra, Adv.
Excerpt:
.....harakchand and chiranjilal, deceased ;(2) certain persons like babulal reprefented their undivided hindu family ;and (3) certain persons like banarilal shared the profit from this firm with sub-partners in another firm, balla ram banarilal, these circumstances may be examined one by one. ), it was explained by the supreme court that the position in hindu law with regard to a coparcener, even when he is the karta, entering into partnership with others in carrying on a business is well-settled. misra placed strong reliance upon a decision of this court in agarwal & co. 26. these decisions clearly show that' the fact that banari lal and certain persons shared their profits with certain strangers, who were their partners in sub-partnership, has no bearing on the question of total number of..........and chiranjilal, deceased ; (2) certain persons like babulal reprefented their undivided hindu family ; and (3) certain persons like banarilal shared the profit from this firm with sub-partners in another firm, balla ram banarilal, these circumstances may be examined one by one.13. as regards nomination by the heirs of deceased partners, that circumstance did not make the new partners anything but partners, in their individual capacity. the fact that ganpatrai and chhedilal were nominees of the heirs of harakchand and chiranjilal has little bearing on the question of total membership of the partnership.14. in paragraph 28 of his order (exhibit 8) the appellate assistant commissioner observed :'it is obvious that the following partners entered into the partnership, not for their.....
Judgment:

V.G. Oak, C.J.

1. The question for decision in this income-tax reference is whether a certain firm is entitled to registration. The firm is Messrs. Agrawal Brothers & Co. The firm was originally constituted in the year 1939 with 13 partners. There was a provision in the partnership deed for taking new partners into the firm in case of death or retirement of any partner. The firm was granted registration for the assessment year 1940-41. Registration was renewed from year to year up to the assessment year 1952-53. Owing to a change in the constitution of the firm, the partners drew up a fresh deed of partnership on December 20, 1952. The firm succeeded in having registration renewed for the assessment year 1953-54 also. Fresh deeds of partnership were drawn up in the years 1955, 1956 and 1957. The firm applied for registration for the five succeeding assessment years from 1954-55 to 1958-59. Renewal was refused by the Income-tax Officer for all these assessment years on the ground that the number of partners exceeded 20, and the constitution of the firm was illegal in view of the provision contained in Section 4 of the Indian Companies Act, 1913. That decision was upheld in appeal by the Appellate Assistant Commissioner. But the firm succeeded in the appeal before the Appellate Tribunal. The Tribunal directed that the firm be registed for all the five assessment years from 1954-55 to 1958-59. At the request of the Commissioner of Income-tax, U.P., the Tribunal has referred the following question of law to this court:

'Whether, on the facts and in the circumstances of the case, the assessee-partnership was entitled to registration ?'

2. The department relies upon Section 4 of the Indian Companies Act, 1913. Section 4 of the Companies Act contains a prohibition against exceeding a certain number in a partnership. Sub-section (2) of Section 4 of the Companies Act lays down that no partnership consisting of more than 20 persons shall be formed unless it is registered a company under the Companies Act. Admittedly, the firm in the instant case was never registered as a company under the Companies Act. According to the department, the number of partners of the firm exceeded 20 at all material times. There was, therefore, infringement of Section 4 of the Companies Act. Consequently, the constitution of the firm was illegal. This position has been disputed by the firm. According to the firm, the number of partners never exceeded 20.

3. The department also relies upon Sub-section (3) of Section 4 of the Companies Act. Sub-section (3) of Section 4 of the Companies Act states :

'This section shall not apply to joint family carrying on joint family trade or business and where two or more such joint families form a partnership, in computing the number of persons for the purposes of this section, minor members of such families shall be excluded.'

4. According to the department, we are dealing in this case with a partnership of a number of joint families. If the membership of the joint families is taken into consideration, the number of partners exceeds 20. This position is also disputed by the firm. It was denied on behalf of the firm that there was any partnership among joint families as such.

5. As already mentioned, there were as many as five deeds of partnership executed between the years 1952 and 1957. They are exhibits A to E annexed to the statement of the case. The general plan of the five deeds of partnership was the same. It will, therefore, be sufficient to consider in detail the provisions of one of these deeds of partnership.

6. Exhibit A is a copy of the instrument of partnership, dated December 20, 1952. In the first paragraph of annexure 'A', names of 20 partners were given. The second paragraph of annexure 'A' ran thus :

'Whereas the aforesaid parties and Lala Harakchand Kedia and Lala Chiranjilal Kedia were partners... aND WHEREAS Lala Harakchand Kedia, one of the partners of the firm.. . died on the 16th day of January, 1950, leaving two sons, Shri Ganpatrai Kedia and Shri Rukmanand Kedia, as his legal heirs ; and WHEREAS the aforesaid heirs have nominated Shri Ganpatrai Kedia on their behalf to be a partner of the firm .. .and as such automatically he become a partner in the said firm..and WHEREAS Lala Chiranjilal Kedia another partner, died on the 22nd of April, 1952, leaving four sons, Shri Chhedilal Kedia.. and WHEREAS the aforesaid heirs have nominated Shri Chhediial Kedia as their nominee for and on behalf to be a partnner of the firm of the managing agents by virtue of paragraph 6 of the deed of partnership dated 26th November, 1948 ; and as such he automatically became a partner in the said firm.

Paragraph 6 of annexure 'A' runs thus :

On the death or retirement of any partner his nominee or in the absence of such nominee his heirs, executors, administrators or legal representatives shall automatically become partner in the place of the so dying or retiring partner and shall be entitled to all the powers and be liable to all the liabilities of the partners so dying or retiring provided that in cases there be more than one heirs, the heir, executors, administrators or legal representatives shall nominate one of them to be the partner in place of partner so dying or retiring.'

7. Annexure 'A' concluded thus :

'...all the partners 1 to 18 who were already partners...and partners Nos. 19 and 20 who have become automatically partners . . . hereto set and subscribed their respective hands ...'

8. On the face of the document, there were only 20 partners. But according to Dr. Misra appearing for the department, a careful examination of the transaction indicates that there were many more partners.

9. In Firm Bhagat Ram Mohanlal v. A. Commissioner of Excess Profits Tax, [195G] 29 I.T.R. 521 (S.C.) 1, it was observed by the Supreme Court on page 528 that income-tax authorities are not estopped by the fact of registration from going behind the certificate and deciding who the real partners of the firm are.

10. In Commissioner of Income-tax v. A. Abdul Rahim & Co., [1965] 55 I.T.R. 651 (S.C.), V.A and M constituted a partnership. V's nephew, K, was inducted into the partnership as a fourth partner. It was held that registration of the partnership could not be refused on the ground that K was V's benamidar.

11. In the deed (annexure 'A') it was explained how the new partners, Ganpat Rai and Chhedilal, took the place of the deceased partners, Harak-chand and Chiranji Lal. It was explained in the document that this substitution was done under the provision of paragraph G of the deed of partnership, dated November 26, 1948. That documents is not on the record. But it appears that the provision of paragraph 6 of the partnership deed, dated November 26, 1948, was similar to the provision of Clause 6 of annexure 'A' dated December 10, 1952. According to this provision, whenever a partner died, his heirs were to nominate the successor of the deceased partner. It was according to this plan that Ganpatriai and Chhedilal took the place of the deceased partners, Harakchand and Chiranjilal. The plan was to maintain continuity of the partnership. It is true that Ganpatrai and Chhedilal were nominated new partners by the heirs of Harakchand and Chiranjilal, deceased. But this circumstance did not make the persons so nominating the new partners as partners in the new firm. The new partners were only Ganpatrai and Chhedilal.

12. According to Dr. Misra, there are three circumstances indicating that the number of partners exceeded 20. The three circumstance are ; (1) Ganpatrai and Chhedilal were nominees of the heirs of Harakchand and Chiranjilal, deceased ; (2) certain persons like Babulal reprefented their undivided Hindu family ; and (3) certain persons like Banarilal shared the profit from this firm with sub-partners in another firm, Balla Ram Banarilal, These circumstances may be examined one by one.

13. As regards nomination by the heirs of deceased partners, that circumstance did not make the new partners anything but partners, in their individual capacity. The fact that Ganpatrai and Chhedilal were nominees of the heirs of Harakchand and Chiranjilal has little bearing on the question of total membership of the partnership.

14. In paragraph 28 of his order (exhibit 8) the Appellate Assistant Commissioner observed :

'It is obvious that the following partners entered into the partnership, not for their individual benefit, but for the benefit of his Hindu undivided family or firm which he was really representing.'

15. Dr. Misra contended that this is a finding of fact, and this finding is binding on the High Court. We, are unable to accept the suggestion that the finding that certain partners represented their Hindu undivided families is a pure question of fact. Whether a partner acted in his individual capacity or represented his undivided Hindu family is a mixed question of fact and law. It is, therefore, open to this court to examine this finding recorded by the Appellate Assistant Commissioner.

16. In Commissioner of Income-tax v. Nandlal Gandalal, [1960] 40 I.T.R. 1 (S.C.), it was explained by the Supreme Court that the position in Hindu law with regard to a coparcener, even when he is the karta, entering into partnership with others in carrying on a business is well-settled. The partnership is not between the family and the other partners. It is a partnership between the coparcener individually and his other partners. So far as the partnership is concerned, the control and mangement is in the hands of the individual coparcener who is the partner, and not in the family.

17. In the case of Ram Kumar Ramniwas of Nanpara, In re, [1952] 22 I.T.R. 474, this court explained that a Hindu undivided family cannot as such be a partner in a partnership. Adult members of the family can be partners, but in that case it is necessary to specffy their individual shares. It is only those who enter into contract who can be deemed to be partners, although they may be there in their representative capacity on behalf of the family.

18. In Kshetra Mohan-Sannyasi Charan Sadhukhan v. Commissioner of Excess Profits Tax, [1953] 24 I.T.R. 488 (S.C) the Supreme Court explained that when two kartas of two Hindu undivided families enter into a partnership agreement, the partnership is populary described as one between two Hindu undivided families. But in the eye of the law it is a partnership between the two kartas, and the other members of the families do not ipso facto become partners.

19. In Benaras Cloth Dealers Syndicate v. Income-tax Officer, Benaras, [1964] 51 I.T.R. 507 three individuals, three Hindu undivided families consisting of four adult coparceners, and six firms consisting of 14 partners, entered into a partnership. It was held that there were 21 partners in all, and the partnership was illegal. In that case three Hindu undivided families consisting of four adult coparceners entered into partnership with others. In the present case there is no clear indication in any of the documents, exhibits A to E, that certain partners entered into an agreement of partnership on behalf of their undivided Hindu families.

20. In Ramakrishna Transports v. Commissioner of Income-tax, [1968] 68 I.T.R. 107, it was held by the Andhra Pradesh High Court that the karta of a joint family may enter into partnership with strangers on behalf of his family. In such a case the family as a unit does not become ipso facto a partner. The karta in such cases bears a dual capacity--one as partner as between parties to the contract, and the other as trustee vis-a-vis the other members of the family.

21. Dr. Misra placed strong reliance upon a decision of this court in Agarwal & Co. v. Commissioner of Income-tax, [1968] 68 I.T.R. 673. It was held in that case that, although it is settled law that where kartas of Hindu undivided families enter into a partnership in their capacity as kartas representing their respective families, the adult members do not become partners of the firm, yet for the purpose of determining whether the total number of persons constituting the partnership exceeds 20 and the partnership contravenes Section 4(2) of the Indian Companies Act, 1913, and is therefore illegal, the adult members of the families must also be taken into account, and ii the total number of persons including the adult members of the families exceeds 20, the partnership cannot be registered under Section 26A of the Indian Income-tax Act, 1922. In that case it was common ground that must of the partners were kartas and represented their respective families in the partnership. There is no such common ground in the instant case. The partners all along have been insisting that they entered into partnership in their individual capacity. In pursuance of a remand order passed by the Appellate Assistant Commissioner, the Income-tax Officer submitted a remand report on March 12, 1958. It was mentioned in that remand report that all the partners gave their status as individual. Thus, the facts of the present case are different from those in Agarwal & Co. v. Commissioner of Income-tax.

22. In support of his contention that certain partners entered into partnership on behalf of their undivided Hindu families, Dr. Misra relied upon two circumstances. Firstly, when these partners furnished returns of their income, the returns were filed in the status of Hindu undivided family. Secondly, the profits earned by these partners were shared with other members of their families. We do not think that these two factors are sufficient to alter materially the nature of the transaction of pastnership. If a partner chose to throw his share of profit into the joint family funds, that circumstance will not alter the fact that that person was a partner of the firm in his individual capacity.

23. Exhibit B is a copy of the partnership deed, dated March 31, 1955. By this time one partner, Ganpat Rai, had died in October, 1954. Exhibit B mentions how Madan Lal took the place of Ganpat Rai, deceased. On this point exhibit B ran thus :

' WHEREAS the said Shri Ganpat Rai Kedia died on the 12th day of October, one thousand nine hundred fifty-four ; AND WHEREAS consequent on the death of the said Shri Ganpat Rai Kedia, as aforesaid, the said Shri Madan Lal Kedia, party of the nineteenth part hereto was, with the mutual consent of the parties concerned and pursuant to Clause 6 of the said deed, admitted to and became partner in the said partnership in place and with the same rights and obligations as those of the said Shri Ganpat Rai Kedia, with effect from the twelfth day of October. .....'

24. In this passage the partners took care to emphasise that Madan Lal had the same rights and liabilities as his predecessor, Ganpat Rai. So, assuming that formerly Ganpat Rai was a partner in his individual capacity, in exhibit B Madan Lal became a partner in his individual capacity in spite of nomination in pursuance of Clause 6 of the previous deed of partnership,

25. In Sugar Syndicate v. Commissioner of Income-tax, A.I.R. 1957 A. P. 332, it was held by the Andhra Pradesh High Court that strangers do not become partners by having a common partner. The position is not different even where the profits of such partners in the partnership are divided between him and strangers as partners. In Commissioner of Income-tax v. Roopnarain Ram Chandra, [1966] 60 I.T.R. 314, it was held by this court that the relation of partners exists only between those persons who have entered into the agreement and only they are the partners. If 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 and in no way affects the other member of the principal firm and is no ground for not registering the firm.

26. These decisions clearly show that' the fact that Banari Lal and certain persons shared their profits with certain strangers, who were their partners in sub-partnership, has no bearing on the question of total number of persons in the assessee-firm.

27. It may be that some of these persons shared their profits with members of their families. But this circumstances has little bearing on the number of persons in theassessee firm. There is no indication in the various deeds of partnership thai any partner was entering into partnership as karta of his undivided Hindu family. Throughout these documents there is no reference to any undivided Hindu family. There is no indication that the contribution made by any partner was from funds received from his undivided. Hindu family. Although the number of partners varied from time to time the number never exceeded 20. It seems that the partners, took care so that the number should never exceed 20. The Appellate Assistant Commissioner observed in paragraph 26 of his order (exhibit S) that it is obvious that the preamble of a former deed was deleted in a subsequent deed with a view to circumvent the provisions of Section 4 of the Indian Companies Act, 1913. Now, it is open to partners to so arrange their affairs as not to offend against Section 4 of the Indian Companies Act. Such a device is not illegal.

28. In each of the five deeds of partnership the number of partners was 20 or less. On the face of these documents these partners entered into partnership in their individual capacity. The Appellate Assistant Commissioner was wrong in holding that these partners entered into partnership on behalf of their undivided Hindu families. Since the number of partners never exceeded 20, there was no infringement of Section 4 of the Indian Companies Act, 1913. The Tribunal was right in directing registration of the firm.

29. Dr. Misra pointed out that the Tribunal allowed the appeal of the firm without reversing the findings recorded by the Appellate Assistant Commissioner. Dr. Misra, therefore, suggested that we should call a supplementary statement of the case. This course appears to be unnecessary in the present case. The facts are clear from the various orders of the Tribunal, the Appellate Assistant Commissioner and the Income-tax Officer. There should, therefore, be no difficulty in drawing the correct inference in law from these facts.

30. Our answer to the question referred to this court is in the affirmative and in favour of the assessee firm. We direct that the Commissioner of. Income-tax, U.P., shall pay the firm Rs. 200 as costs of the reference.


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