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Benares Cloth Dealers Syndicate Vs. Income-tax Officer, Benares. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Miscellaneous Case No. 316 of 1953
Reported in[1964]51ITR507(All)
AppellantBenares Cloth Dealers Syndicate
Respondentincome-tax Officer, Benares.
Excerpt:
.....amendment act of 1936. it follows that the rulings relating to the validity of partnerships between several joint families given prior to 1936 can no longer be applicable after 1936. the question which arises for decision in this case is whether upon the proper construction of the instruments of partnership the real partners in the assessee syndicate were the individuals mentioned in the instrument or the partners included the members of the hindu undivided families whom some of them represented as well as the partners of the firms whom some of the others represented. if on the other hand the partners of the syndicate included the others also, then clearly as the number of such persons exceeded 20, the partnership was invalid. under the income-tax law it is well settled that..........partnership, which is sought to be registered, is a partnership consisting of 3 individuals, 3 hindu undivided families consisting of 4 adult coparceners and 6 firms consisting of 14 partners. the partnership deed was signed by the 3 individual, 3 kartas of hindu undivided families and 6 persons acting as representatives or agents of the firms, that is, by 12 persons. from the recitals in the partnership deed itself it is clear that the kartas entered into the partnership not as individuals but as representatives of the hindu undivided families and that the 6 partners entered into the partnership as representing the 6 firms, i.e., the partners of the partnership in dispute were 3 individuals, 3 hindu undivided families and 6 firms.a hindu undivided family cannot be a partner; this.....
Judgment:

DESAI C.J. - I agree with the answer proposed by my brother, Brijlal Gupta. There is no doubt whatsoever that the latter partnership, which is sought to be registered, is a partnership consisting of 3 individuals, 3 Hindu undivided families consisting of 4 adult coparceners and 6 firms consisting of 14 partners. The partnership deed was signed by the 3 individual, 3 kartas of Hindu undivided families and 6 persons acting as representatives or agents of the firms, that is, by 12 persons. From the recitals in the partnership deed itself it is clear that the kartas entered into the partnership not as individuals but as representatives of the Hindu undivided families and that the 6 partners entered into the partnership as representing the 6 firms, i.e., the partners of the partnership in dispute were 3 individuals, 3 Hindu undivided families and 6 firms.

A Hindu undivided family cannot be a partner; this proposition admits of no doubt. The Income-tax Act does not recognise a partnership of which a Hindu undivided family is a partner. A karta of a Hindu undivided family may be a partner, but, so far as the Partnership Act is concerned and the Income-tax Act is concerned, only he will deemed to be the partner and not the Hindu undivided family, nor its coparceners. Really he is a partner as an individual and, it is only by virtue of the Hindu law, that his partnership becomes a joint family property or his interest in the partnership is held to be that of the Hindu undivided family. A Hindu undivided family is not a juristic person and cannot be a partner. What has happened in this case is that 3 of the partners are not kartas as individuals but Hindu undivided families consisting of 4 adult coparceners. Instead of the 3 kartas being the partners, 4 adult coparceners are the partners.

A firm also cannot be a partner of another partnership. A partnership is not a juristic entity, it being only a compendious name for all the partners. Where one speaks of a partnership, one really speaks of all the partners. Therefore, when in the partnership in dispute 6 persons representing 6 firms are said to be the partners, it is really the 14 persons among the firms who are the partners. The result is that the partnership in dispute consists of 21 partners and is thus an illegal partnership which cannot be registered.

Another defect is that the application for registration is signed by only 12 out of the 21 partners. An application for registration must be signed by all the partners; it cannot be signed by agents of partners.

Another defect in the deed of partnership and the registration application is that the individual shares of the partners are not specified. The share of each of the 21 partners ought to have been specified in both the documents. Specifying the share of a Hindu undivided family, or of a partnership, is not enough, because neither a Hindu undivided family nor a partnership can be, or is, a partner. The shares of the real partners ought to have been specified.

Sri V. P. Tewari relied upon certain observations made by Malik C.J. and Bhargava J. in In re Ram Kumar Ramniwas, but they were obiter. There a Hindu undivided family was a partner and the learned judges held that it could not be a partner and went on to deal with a case in which a karta of it might have been a partner. All the reference to the law in respect of a karta being a partner was nothing but obiter. In the case of Firm Bhagat Ram Mohanlal the Supreme Court did not discuss whether the karta was partner, or the Hindu undivided family, of the earlier partnership and assumed that the karta was the partner. It is, therefore, no authority in support of the contention advanced before us that the three kartas, and not the Hindu undivided families, were partners of the partnership in dispute. The observation on pages 525-526 that where a karta is a partner he alone is the partner and his coparceners are not partners has no application when a Hindu undivided family and not the karta is a partner. There is a real distinction between a karta being a partner and a Hindu undivided family being a partner; the distinction is not imaginary. When the law prohibits a Hindu undivided familys being a partner but permits its kartas being a partner it confirms the distinction between the two. There would have been no sense in prohibiting a Hindu undivided familys being a partner if there was no such thing, as distinct from its kartas being a partner, i.e., if its being a partner were the same as its kartas being a partner. In Lachhman Das v. Commissioner of Income-tax the Supreme Court held that there can be a partnership between a karta and a coparcener and did not consider the validity of a partnership between a Hindu undivided family and a coparcener. A partnership between a karta and a coparcener was recognised because it is not a partnership between the Hindu undivided family and its coparcener. It is pointed out that when a karta is a partner the Hindu undivided family does not become a partner. Here, though nominally the three kartas were said to be the partners, really the three Hindu undivided families were the partners. Even if it be said that the three kartas were partners as individuals, there was still the fatal defect that the partners of the 6 firms did not sign the application for registration and their shares were not specified. The earlier deed of partnership suffers from the same defect but in an aggravated form. Therefore, both the partnerships were rightly refused registration.

BRIJLAL GUPTA J. - This is a reference under section 66(1) of the Income-tax Act. The question which has been referred for the opinion of the court is :

'Whether in view of the provisions of section 4 of the Indian Companies Act, 1913, the Tribunal was justified in refusing registration of the fir ?'

The reference relates to the assessment year 1947-48, relevant to the accounting period April 11, 1946, to March 30, 1947. The facts giving rise to the reference are that in pursuance of a scheme sponsored by the Government for the distribution of cloth to the public, a firm of the name and style of M/s. Benares Cloth Dealers Syndicate, Benares, was formed on April 10, 1946. An instrument of partnership was drawn up on May 19, 1946, incorporating the terms and conditions of the partnership. It was mentioned that the firm consisted of 17 partners. Out of these 3 were individuals, 5 represented their Hindu undivided, 5 represented their Hindu undivided families and the remaining 9 represented other firms in which they were partners. The instrument of partnership is a part of our paper-book. There is a chart also included in the paper-book from which it appears that the 5 Hindu undivided families consisted of 7 adult members and the 9 firms consisted of 20 partners. Thus if the adult members of the Hindu undivided families and the partners of the firm are also considered to be partners in the syndicate the total number of partners will be 30 (3 individuals + 7 adult members of the Hindu undivided families + 20 partners of the 9 firms).

Between June 29, 1946, and December 22, 1946, partners, viz., Nos. 13 to 17, retired, Nos. 15 and 16 were representatives of Hindu undivided families consisting of 3 adult members, Nos. 13, 14 and 17 were representatives of firms, the number of whose partners was 6. Thus the effect of the retirement of these partners was to reduce the number of partners by 9 (3 adult members of the 2 Hindu undivided families + 6 partners of three firms.) Thus the number of partners in the syndicate was now reduced to 21 but still exceeded 20. A fresh instrument of partnership was drawn up on October 15, 1947, showing 12 persons as partners. But the terms of this instrument were also the same as the terms of the earlier instrument.

This instrument of partnership is also a part of our paper-book. The syndicate was admittedly not registered under section 4 of the Indian Companies Act, 1913.

On these facts the syndicate which is the assessee in the case made an application for registration under section 26A. But the registration was refused by the income-tax authorities on the ground that even though the partnership purported to be between 17 persons under the earlier instrument and 12 persons under the later instrument, in reality it was a partnership between 30 persons under the earlier instrument and 21 persons under the later instrument and as such was not a valid partnership and was not entitled to registration.

The assessee went up in appeal before the Income-tax Appellate Tribunal and it was urged by it before the Tribunal that although some of the persons who constituted the partnership represented their Hindu undivided family or families, and although the aggregate of the individual members, the adult members of the Hindu undivided families and the partners of the other firms exceeded 20, the assessee was entitled to registration as the instruments of partnership were signed by less than 20 persons and the income-tax authorities should have confined themselves to the number of persons who had signed the instruments and should not have taken into consideration the aggregate number of the adult members of the Hindu undivided families and the partners of the other firms whom the assessee-partners represented, and registration under section 26A should have been granted.

The Tribunal by its order dated May 12, 1945, repelled the contention and held that as the assessee firm really consisted of more than 20 persons and as it had not been registered under section 4 of the Indian Companies Act, 1913, it was an illegal firm and as such not entitled to registration. In due course upon application being made by the assessee for the statement of a case to this court, the case has been stated.

The material portion of section 4 of the Indian Companies Act, 1913, is as follows :

'(2) No company, association or partnership consisting of more than 20 persons shall be formed for the purpose of carrying on any other (if other than banking) business that has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of an Act of Parliament of the United Kingdom or some other Indian Law or of Royal Charter or Letters Patent.

(3) 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.'

Contravention of the provisions of this section made every member carrying on business personally liable for the liabilities of the business and the contravention was also made punishable with fine. It may be mentioned that the provision quoted above relating to joint families and the provisions relating to contravention of this section were added by the Companies Amendment Act of 1936. It follows that the rulings relating to the validity of partnerships between several joint families given prior to 1936 can no longer be applicable after 1936.

The question which arises for decision in this case is whether upon the proper construction of the instruments of partnership the real partners in the assessee syndicate were the individuals mentioned in the instrument or the partners included the members of the Hindu undivided families whom some of them represented as well as the partners of the firms whom some of the others represented. If only the individuals mentioned in the instruments were the partners the assessee syndicate was a valid partnership. If on the other hand the partners of the syndicate included the others also, then clearly as the number of such persons exceeded 20, the partnership was invalid.

It may be pointed out in this connection that section 6 of the Indian Partnership Act provides that :

'In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant fact taken together.'

Thus for the determination of the question mentioned above it will be permissible to take into consideration 'all relevant facts', not each fact in isolation by itself but 'taken together'.

In his first instrument of partnership there are 17 individuals mentioned as contracting parties, but each individual is described as contracting 'on behalf of' (minjanib) some firm, three of which as mentioned above were proprietary concerns, five Hindu undivided family firms and nine partnership firms. The deed was signed by these 17 individuals. In the subsequent deed only individuals are mentioned as contracting parties. Their number 12 as 5 out of the original 17 had dropped out of the subsequent deed are concerned they are the same as in the original deed. If follows that the mere fact that in the subsequent deed the 12 individuals were described without it being mentioned that they were partners on behalf of their firms, did not make any real difference to their position as partners or to their rights and liabilities under the deed. As pointed out the question has to be decided by taking 'all relevant facts together'. It was not denied that the individuals mentioned in the deeds were not partners in their individuals mentioned in the deeds were not partners in their individuals capacity. In other words it was admitted that they were partners on behalf of their firms. The question which was however raised was that even though they were partners on behalf of their firms they alone should be considered to be the partners of their Hindu undivided families or their respective firms. Even if their Hindu undivided families or their firms were considered to be partners they should all be treated as constituting single units and not as multiple units having the effect of all their members or partners being themselves considered to be the partners of the assessee firm. So far as the last argument is concerned that stands negatived by the decision of the Madras High Court in firm Pannaji Devichand v. Kapurchand in which it was held that 'the word person in section 4 of the Indian Companies Act denoted individuals and did not include unregistered bodies of individuals'. It was observed, 'to say that persons forming unregistered companies should be taken as units for the purpose of section 4 would be to defeat the intention of the Act'. This decision was affirmed by the Privy Council in Senaji Kapurchand v. Pannaji Devichand. This is so far as treating firms who may have entered into partnership with other firms or individuals as units is concerned. So far as Hindu undivided families are concerned, statutory provision has already been made in 1936 in section 4 of the Indian Companies Act that where a Hindu undivided family is a partner in a firm it will not be treated as a unit but all the adult members of the Hindu undivided family shall be considered to be the partners in the firm. Thus the question which has to be answered is whether the individuals alone were the partners or all the adult members of the Hindu undivided families and all the partners of the various firms were partners of the assessee firm.

On the admitted fact that individuals were not partners in their individual capacity or in their own right but were partners on behalf of the Hindu undivided families or the partnership firms, it is clear that they were the agents of their Hindu undivided families or their firms. The Hindu undivided families and the firms were their principals. It follows that the contract of partnership or the instruments of partnership were entered into or executed by agents of disclosed principals. The incidents of such contracts are provided for in section 226 of the Indian Contract Act. That section is as follows :

'Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences, as if the contracts had been entered into and acts done by the principal in person.'

It is therefore clear that the 'legal consequences' of the contracts of partnership or the instruments of partnership in this case were the same 'as if the contracts had been entered into and the acts done' by the Hindu undivided families or the firms 'in person'. The rights and liabilities under these contracts were also enforceable at the instances of the Hindu undivided families and the firms themselves. In other words having regard to the provisions of this section the Hindu undivided families and the firms must themselves be treated to be the contracting parties who entered into contracts of partnership. In this connection the provisions of section 230 of the Contract Act may also be noticed. That section is to the following effect :

'In the absence of any contract to that effect an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.'

There is nothing in the instruments of partnership to show that the agents, namely, the individuals entering into partnership and not the principals, namely, the families or partnership firms, could sue or be sued in respect of the rights and liabilities arising under the instrument. On the other hand there is a provision in both these instruments to the following effect :

18. That all the parties on behalf of their firm (partnership or family) are partners in this partnership deed; therefore, the partnership firm or the family firm of each party is and shall be entitled to take and liable to pay the dues and outstanding of the syndicate.'

There is thus a specific provision investing the principals, namely, the families and the partnership firms themselves with rights and imposing liabilities on them. This could only be done if the principals themselves were treated to be parties to the deed; in other words, if they were treated to have privity between themselves. Thus it is clear that it was not merely the individuals mentioned in the instruments who were the partners of the assessee syndicate but their Hindu undivided families and their firms. That only the individuals actually mentioned in the instruments could act and not all the other members of their families or their firms cannot prevent those other members or partners from being treated as partners of the assessee firm. The reason is that in a partnership all that is required under section 4 of the Partnership Act is :

(1) that the partners should have agreed to share the profits of the business even though

(2) the business might be carried on by any of them acting for all.

Thus the other persons constituting the families and the firms could sit back and share the profits without actually conducting the business of the assessee firm, and yet they would be liable to be treated as the partners of the firm.

Under the income-tax law it is well settled that neither Hindu undivided families nor firms can be partners in a partnership firm as such. Where the Hindu undivided families or the firms are partners it may be possible to treat all the members of the Hindu undivided family and all the partners of the firm to be themselves partners in their individual capacity provided that the instrument of partnership is signed by all the members and the partners and the application for registration is also signed by all the members and partners and not merely by their agent or representative. That is not so here. The instrument of partnership and the application for registration is signed only by the individuals mentioned in the instruments. In view of what has been said above that the Hindu undivided families and the firms were the partners, the assessee firm would not be entitled to registration as the registration application was not signed by all the persons who must be treated to be partners. The individuals shares of the members of the families and of the partners of the firms were also not separately specified. The share of each family and of each firm was a consolidated lump sum share. This is another reason why the assessee firm could not be granted registration.

It is true that a Hindu undivided family can enter into a partnership through its karta but in such a case the partnership knows nothing about the other members of the family and looks to no one beyond the karta for enforcement of rights and liabilities. There may be a private understanding or a private agreement between the karta and the other members for the sharing of the profits and for undertaking liability arising out of the partnership business but the partnership has nothing to do with the same. In the case of trading Hindu families the karta may be able to bind the family in respect of the risks and the liabilities of a partnership business if the partnership business is treated to be a family business. Where the partnership business cannot be treated to be a family business a separate contract between the karta and the other members may be necessary before they can become responsible for the risks and the liabilities of the partnership business. In either case the partnership knows nothing about the rights and liabilities of the other members inter se. In this case, however, not only are the individuals the agents of disclosed principals but the instrument of partnership itself makes the principals of the families and the partners of the firm liable in respect of partnership business and also invests them with a right to share in the profits of the partnership business. In the former case the other principals are treated merely as sub-partners but in this case they must be treated to be full-fledged partners. In this connection reference may be made to two decisions of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax and Commissioner of Income-tax v. Nandlal Gandalal. The position of firms as partners in another firm may now be considered. It has already been stated that a firm as such cannot be a partner in another firm though the partners of that firm may be individuals treated as partners of the other firm. This is for the reason that a firm is merely a convenient name for the partners constituting it and does not itself constitute a distinct juristic entity : vide decision of the Supreme Court in Dulichand Laxminarayan v. Commissioner of Income-tax. Thus if the firm as such is not a juristic entity and is merely the name for the partners collectively, the individual who purports to be the agent or the representative of the firm is in reality the agent or the representative of all the partners. If follows from what has been stated above that the necessary result of a contract on behalf of all the partners by a person purporting to be their agent is that all the partners themselves become partners under the contract. In this connection attention may be invited to a Division Bench ruling of this court in Brij Kishore Ram Sarup v. Sheo Charan Lal, where it has been observed as follows :

'..... a firm as such cannot enter into partnership with other individuals. At the same time it must be held that a firm is only an association of persons who have no corporate capacity and that if a partnership is in fact entered into and if all the partners of the firm are consenting parties to the agreement of partnership or are represented by a duly authorised person when the contract of partnership is concluded between the firm and others or subsequently ratify it, a partnership will come into existence, though it will not be regarded as a partnership of which a firm as such is a partner. Such a partnership will have for its members all the partners of the partner firm and the others.'

It follows that in this case the instrument having been professedly executed by individuals, on behalf of their firms, were consenting parties to the instruments of partnership. Not merely so, but further all the members undertook the liability of the business of the firm and were entitled to a share in its profits : vide paragraph 18 of the partnership deed quoted above. As such all the partners of these firms must themselves be treated to be the partners of the assessee firm and not merely the individuals who represented those partners.

The matter does not rest there. The assessee firm was brought into existence to take advantage of a scheme of distribution of cloth formulated by the Government. Only those persons could benefit by this scheme who held cloth licenses. The licenses were held by the firms represented by the individuals. It follows that the individuals in their individual capacity could not benefit by the scheme. The entire object of constituting the syndicate would have been defeated if the members of the syndicate were individuals and the families and the firms which held the licences. Whenever the licence of a firm was suspended or cancelled it was to cease to be a member of the assessee syndicate. This would also show that the whole scheme of distribution of cloth could work only if the licence-holders, namely, the firms themselves, were the partners and not merely the individuals through whom the partnership was entered into and who, generally speaking, did not hold the licences in their own individual names.

One other paragraph in the partnership deed may be referred to. This is paragraph 11. The relevant portion is as follows :

'11. That this partnership will not dissolve even on the death of a party but the heirs and successors of the deceased or his firm shall be deemed to be a partner and the share of the syndicate and all the terms of this partnership shall be binding on such heirs and successors.....'

If only the individuals mentioned in the deed were the partners and not the members of their families or partners of their firms mention would not have been made in this paragraph of 'successors of his firm' but merely of 'the heirs of the deceased'. From this also it is clear that it were the families and the firms who were the partners and not merely the individuals mentioned in the instruments.

For all these reasons the question referred to this court for opinion should be answered in the affirmative and against the assessee.

The reference should be returned to the Tribunal with this answer under the seal of the court and the signature of the Registrar. The department should be entitled to its costs fixed at Rs. 200.

Question answered in the affirmative.


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