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Commissioner of Income-tax, Madhya Pradesh Vs. Hukumchand Mannalal and Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case No. 112 of 1983
Reported in[1965]57ITR213(MP); 1965MPLJ156
AppellantCommissioner of Income-tax, Madhya Pradesh
RespondentHukumchand Mannalal and Co.
Cases ReferredFirm Bhagat Ram Mohanlal v. Commissioner of Income
Excerpt:
- indian penal code, 1890.section 306 :[dalveer bhandari & harjit singh bedi,jj] abetment of suicide deceased, a married woman, committed suicide - allegation of abetment of suicide against appellant husband and in-laws - ocular evidence was sketchy - dying declaration recorded by tahsildar completely exonerated all accused in-laws of any misconduct dispelling any suspicion as to their involvement - letter of threat allegedly written by appellant to father of victim was concocted piece of evidence held, though presumption against appellant can be raised, it cannot be said that onus shifts exclusively and heavily on him to prove his innocence. conviction of appellant is liable to be set aside. - it has been found by the appellate assistant commissioner, as well as by the tribunal,.....dixit c.j. - in this reference under section 66(i) of the indian income-tax act, 1922, at the instance of the commissioner of income-tax, madhya pradesh, nagpur and bhandara, the question referred for our decision is :'whether in the facts and circumstances of the case the firm hukumchand & mannalal co. could be granted registration under section 26a of the act ?'the material facts, as found by the income-tax appellate tribunal and set out in the statement of the case submitted by the tribunal are that the assessee-firm, sir hukumchand mannalal & co., indore was constituted on 16th july, 1948, by a deed of partnership of that date for carrying on the business as managing and selling agents of the hukumchand mills ltd., indore (hereinafter referred to as the mills). the five partners,.....
Judgment:

DIXIT C.J. - In this reference under section 66(I) of the Indian Income-tax Act, 1922, at the instance of the Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara, the question referred for our decision is :

'Whether in the facts and circumstances of the case the firm Hukumchand & Mannalal Co. could be granted registration under section 26A of the Act ?'

The material facts, as found by the Income-tax Appellate Tribunal and set out in the statement of the case submitted by the Tribunal are that the assessee-firm, Sir Hukumchand Mannalal & Co., Indore was constituted on 16th July, 1948, by a deed of partnership of that date for carrying on the business as managing and selling agents of the Hukumchand Mills Ltd., Indore (hereinafter referred to as the mills). The five partners, according to this deed, were Sir Hukumchand Sarupchand, Chunnilal Onkarmal Ltd., Rajkumarsingh Hukumchand, Ramkumar Morarka & Sons Ltd., and Mannalal Onkarmal. The share of each of the first three partners was four annas, and of the remaining two partners was two annas each. Before the formation of this partnership, the joint Hindu family of Sir Hukumchand was the managing and selling agents of the mills. It has been found 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. On or about 31st March 1950, a partition of the Hindu undivided family took place and thereafter, the share and interest of the family in the firm along with the familys other business were transferred to a private limited company styled as 'Sir Sarupchand Hukumchand Ltd.' The Tribunal has found 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.'

Under certain agreements concluded in 1950 between Mannalal Onkarmal and five other parties, including Chunnilal Onkarmal Ltd., Mannalal agreed to share his two-annas share in the assessee-firm with them, and in this division of Mannalals profits in the assessee-firm Chunilal Onkarmal Ltd., which had already four annas share in the assessee-firm.

The assessee-firms application for renewal or registration under section 26A for the assessment year 1954-55, of which the accounting under ended on 31st March, 1954, was rejected by the Income-tax Officer, Indore, on several grounds. The assessee then preferred an appeal before the Appellate Assistant Commissioner of Income-tax, Indore, who while not accepting any of the grounds given by the Income-tax, Officer, for refusal of registration, upheld the rejection of the renewal application on the ground that Sir Hukumchand Sarupchand and Rajkumar Singh, partners in the firm, were initially members of a Hindu undivided family whose interest they represented; that more than one co-parcener could not represent a Hindu undivided family in the same partnership for the reason that a partnership involved a contract inter se between the partners; and that consequently, there would be a contract of partnership between two coparcener partners in respect of the property benefically held by the Hindu undivided family, and this would be inconsistent with their position as coparceners of the Hindu undivided family.

On appeal by the assessee-firm, the Tribunal held that the Appellate Assistant Commissioner was wrong in refusing registration to the firm on the ground that there was no valid partnership as both Sir Hukumchand and his son Rajkumar Singh represented the interest of their Hindu undivided family in the assessee-firm. On the authority of the statement of law contained in paragraph 308 of Maynes Hindu Law (11th edition), which was quoted with approval by the Privy Council in Pichappa v. Chokalingam and by the Supreme Court in Charandas Haridas v. Commissioner of Income-tax, and on the unreported decision of the Bombay High Court in Commissioner of Income-tax v. Ganeshnarayan Onkarmal, of the Tribunal held that two or more coparceners of a joint Hindu family representing the joint family could enter into a partnership with a stranger. Before the Tribunal, the Revenue reiterated the contention, which had been rejected by the Appellate Assistant Commissioner, namely, that the assessee-firm shown in the document presented for registration had no legal existence inasmuch as Mannalal, one of the partners, had entered into agreements with five other persons including Chunnilal Onkarmal Ltd., in respect of his share. The Tribunal negatived this contention holding that Mannalal actually participated in the partnership business and exercise the rights and performed the functions of a partner as such; that under the agreements concluded by him with five other persons, those persons were not entitled to participate or interfere in the conduct of the business of the assessee-firm and that, therefore, the fact that Mannalal entered into agreements with others in respect of his share did not detract from the validity of the partnership or from Mannalals position as 'the genuine partner of the assessee-firm'. The Tribunal also rejected the departments objection that as Chunilal Onkarmal Ltd. received twenty-seven per cent. of Mannalals share of profits over and above their own four-annas share in the partnership, the allocation of shares of the partnership deed and, therefore, registration of the firm could not be granted. The Tribunal took the view that the extra share of 0.94 annas, which Chunnilal Onkarmal Ltd. received from Mannalal, was not in their capacity as a partner of the firm but under a separate agreement with Mannalal which was not a part of the partnership agreement; and consequently, registration of the firm could not be refused on the ground that the share of profits was allotted otherwise than in accordance with the terms of the partnership deed.

Another contention advanced on behalf of the department, which had been rejected by the Appellate Assistant Commissioner and which was rejected by the Tribunal also, was that the shares of profits of Sir Hukumchand and Rajkumar Singh were not disclosed in their returns of income but were actually included in the total income of Sarupchand Hukumchand Ltd., and that this showed that Sir Hukumchand and Rajkumar Singh were not the actual partners in the assessee-firm but the company, Sarupchand Hukumchand Ltd., was the partner. While holding that this contention was unsustainable, the Tribunal said :

'The Appellate Assistant Commissioner, however, found that as far as the assessee-firm was concerned, the partners were the two individuals, Hukumchand and Rajkumar Singh. The shares of profits were credited to their individual accounts and the privity of contract of partnership was between the two individuals and the other partners of the assessee-firm. The limited liability had no locus standi so far as the assessee-firm was concerned. Hukumchand and Rajkumar Singh had become partners in the assessee-firm prior to the formation of the company Sarupchand Hukumchand Ltd. As far as the assessee-firm is concerned, it is Hukumchand and Rajkumar Singh who had both the rights and status of partners and, in fact, functioned as such. Qua the firm that the shares of profits earned by them were ultimately received by the limited company would not detract from the genuineness of the claim that Hukumchand and Rajkumar Singh were the partners.'

On the facts found by the Tribunal and the arguments presented before us by the learned Advocate-General, appearing for the Commissioner of Income-tax, and Shri Palkhivala, learned counsel for the assessee-firm, the first question that arises for consideration is whether by reason of Sir Hukumchand and his son, Rajkumar Singh, becoming partners in the assessee-firm not on their own account but as representing their joint Hindu family in the partnership business, the assessee-firm constituted by the deed of partnership of 16th July, 1948, and reconstituted an identical deed of 16th January, 1950, became an invalid partnership so as to desentitle to registration. Learned Advocate-General, while not disputing that the statement contained in Maynes Hindu Law (11th edition - paragraph 308), relied upon by the Tribunal, lent support to the proposition that there could be a valid partnership between a stranger on the one hand and the karta as well as adult coparceners of the family representing it on the other, urged that the passage in Maynes Hindu Law, on which the Tribunal relied, was not to be found in editions earlier than the 9th edition of the book; and that it was quoted with approval by the Privy Council in Pichappa v. Chokalingam and by the Supreme Court in Charandas Haridas v. Commissioner of Income-tax in connection with a matter which was entirely different from the question arising in this reference. Learned Advocate-General said that the present case was governed by the observations of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Income-tax namely :

'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.'

He also referred to S. C. Mullick & Sons In re, where the Allahabad High Court held that persons cannot at one and the same time be members of a joint Hindu family in respect of a joint family property and be also members of a firm of which such property forms assets.

In our judgment, the Tribunal was right in holding that the assessee-firm was in no way invalidated merely because Sir Hukumchand and his son, Rajkumar Singh both as partners represented the interest of their Hindu undivided family. The decision of the Privy Council in Pichappa v. Chokalingam enunciates the principle that when the managing member of a joint Hindu family enters into a partnership with a stranger, the other members of the family enters into a partnership with a stranger, the other members of the family enters into a partnership with a stranger, the other members of the family do not ipso a partnership with a stranger, the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligation of a partner as defined by the Indian Contract Act, 1872, and that in such a case the family as a unit does not become a partner but only such of its members in fact enter into a contractual relation with the stranger; the partnership will be governed by the Contract Act. The Privy Council laid down this proposition by quoting with approval the statement contained in paragraph 308 of Maynes Hindu Law. This proposition clearly envisages that not only the managing member of the joint family but also the other members of the family can enter into a contractual relationship with a stranger and become partners with him in a partnership business. It proceeds on the principle that while membership of a joint family is one of status, the relation of partnership arises from a contract and not from status. The managing member of an undivided family, though he has the power of representing the interest of another members is not their agent in the strict sense of the term so as to clothe the other members of the family with all the rights of principles in respect of contracts entered into by their agent. His position is, as pointed out by the Privy Council in Annamalai Chetty v. Murugasa Chetty more analogous to that of a trustee. When the managing member of a joint Hindu family and or other adult members of it representing the family enter into a partnership with a stranger, the other members of the family play no part. The only right they have is against their karta and the coparcener partner if any to call upon them to give account with reference to any business that they might do with joint family; the other coparceners would no doubt have a right to share such profits as members of the joint family and also a right to call upon the managing member or members who entered into partnership to account for all profits earned through such a partnership. But they cannot have any right directly in relation to the partnership in which the managing member of members of a joint family are individual partners, albeit not on their own account but as joint family representatives. On principle or authority, there is no justification for the contention that whereas it is open to the karta of a joint Hindu family to enter into a partnership with outsiders, it is not open to two or more adult coparceners of the family in their individual capacity to enter into a partnership with outsiders.

In Pichappa v. Chokalingam , the question that the Privy Council considered was whether one Virppa Pillai, who was the karta of a joint family, having become a partner in a firm, the partnership was on his own account or as managing member of the joint Hindu family, or whether the result of his joining the partnership was that other members of his family also became the partners. Their Lordships observed that the law on the point was correctly stated in Maynes Hindu Law, (9th edition - at page 398) as follows :

'Where a managing member of a joint family enters into a partnership with a stranger, the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Contract Act. In such a case the family as a unit does not become a partner, but only such of its members as in fact enter into a contractual relation with the stranger : the partnership will be governed by the Act.'

The reference in the above passage to the provisions of the Contract Act is to the provisions which have been repealed and are now to be found in the Indian Partnership Act, 1932. The Privy Council held that Virappa Pillais entering into partnership with the Chetties would not ipso facto make the other members of the family partners of the firm and that it would be a question of evidence and proof whether other members or the family entered into a contractual relationship with the Chettiews making them partners. On the evidence in that case, the Privy Council held that of the two members of the joint family, who were sought to be made liable as partners, one was minor and there could be no possible ground for holding him to be a partner. As regards the other, it was held that there was no evidence to show that he ever agreed with the Chetities to become a partner of that the Chetities on their side ever agreed to take him as a partner. The Privy Councils decision in Pichappas case is clearly an authority for the proposition that when the managing member of a joint family enters into a partnership with a stranger, the other members do not ipso facto become in law partners of the firm, but that they can enter into a contractual relationship with the stranger and become partners of the partnership.

The law, as stated by Mayne and approved by the Privy Council in Pichappas case was accepted by the Supreme Court in Charandas Haridas v. Commissioner of Income-tax. In that case, Charandas as karta of a joint family owned shares in several managing agency] firms. In the course of assessment proceedings, he claimed that a partial partition had taken place in respect of this asset of the family and that the share income from the managing agency firms ceased to be the income of the Hindu undivided family. The Bombay High Court held that the coparceners only divided the commission and not the source which produced the commission and that the asset, which belonged to the joint Hindu family, being the share in a partnership which remained undivided, the nature of the partnership not being changed, the assessment of the income in the hands of the Hindu undivided family was justified. The Supreme Court reversed the decision of the Bombay High Court, and held that when the members of the joint family divided the commission, there was an effective division of the source itself for the purposes of income-tax law, and assessment could not be made upon the Hindu undivided family. While dealing with this question the Supreme Court referred to the passage in Maynes Hindu Law and pointed out the effect of the law of partnership, Hindu law income-tax law on the matter before it, and observed :

'The fact of a partition in the Hindu law may have no effect upon the position of the partner in so far as the law of partnership is concerned, but it has full effect upon the family in so far as the Hindu law is concerned. Just as the fact of a karta becoming a partner does not introduce the members of the undivided family into the partnership, the division of the family does not change the position of the partner vis-a-vis other partner or partners. The income-tax law before the partition takes note, factually, of the position of the karta, and assesses not him qua partner but as representing the Hindu undivided family. In doing so the Income-tax law looks not to the provisions of the family has disrupted the position under the partnership continues as before, but the position under the Hindu law changes. There is then no Hindu undivided family as a unit of assessment in point of fact, and the income which accrues cannot be said to be of a Hindu undivided family.'

Those observations, when read in the context of the reference made by the Supreme Court to the passage in Maynes Hindu Law, only recognise the position that membership of a joint family is one of status and that in a partnership it is one created by a contract, and when the karta or any other coparcener representing the joint family enters into a partnership with a stranger, then so long as the asset of the joint family, namely, the share in the partnership, is not partitioned, the assessment on the karta and or coparcener partner is not qua partner but as representing the Hindu undivided family.

In Commissioner of Income-tax v. Ganeshnarayan Onkarmal, the Bombay High Court, while considering a question very similar to the one before us, laid down that it is open not only to a karta of a joint family but also to two or more members of the joint family in their individual capacity to enter into a partnership with outsiders. That was a case where one Soniram Devidutta had four sons, Surajmal, Ramanand, Mitanand and Rampratap. Their joint family disrupted in 1926-27 and the four sons became divided but the branch of each son continued joint. Some of the members of each branch started doing partnership business and in August, 1933, a firm was constituted so as to consist of ten persons all of whom were members of the four branches. The instrument of partnership showed the partners to be ten persons representing the four branches with different shares but so as to give each branch quarter share in the profits and loss of the business. The assessee applied for registration under section 26A of the Act, which was refused by the Income-tax Officer. The Appellate Tribunal, however, held that the partnership should be registered under section 26A. The Bombay High Court upheld the view of the Tribunal. On behalf of the Commissioner of Income-tax it was contended that while the karta of a Hindu undivided family could enter into a partnership with a stranger, two or more members of the joint family could not in their individual capacity enter into a partnership with outsiders. Rejecting this contention, Chagla C.J. said :

'Now it is to be noted that the Tribunal has found it as a fact that the profits accruing to the shares of the ten persons constituting the partnership under the partnership deed dated the 23rd June, 1941, was credited to their accounts in the firms books. It has also been found as a fact that the partnership was carried on with the funds of joint families constituted by the four branches and the Tribunal has rightly found that although the members of each branch entered into a contractual partnership with the others they were liable to account to their own representative joint families. I do not see what is there opposed to principle or opposed to authority which would or should prevent two or three members of a joint family individually contracting with outsiders and entering into partnership. As far as their individual shares are concerned they would be accountable to their joint family. The profits which they would earn in respect of their individual shares would ultimately belong to the joint family but so far as the partnership with their individual shares.'

Tendolkar J. in a concurring judgment observed :

'Sir Jamshedji on behalf of the Income-tax Commissioner has contended before us that the partnership should not be registered because then ten persons who have taken shares under the said deed of partnership did not take any individual shares for themselves. He contends that the shares taken by the co-partners belonged not to the individuals but are the shares held by them for the benefit of their branch of the family which is still joint and that they therefore together form only one share in partnership. In other words there are really and truly four partners in the partnership, viz., the four branches of the joint family which has separated. To my mind this argument is based upon a misconception of the position of the coparceners qua the partners. It is now well established that a member of a joint Hindu family can enter into a partnership with an outsider, may be that in such a partnership he represents the joint family of which he is a member and if so, he is accountable to the joint family for the profits of such business and cannot retain those profits for himself, but qua the partnership he is certainly a partner. The position is not any different when instead of one coparcener of the joint family tow or more coparceners of that joint family enter into a partnership with the outsider. So far as the partnership is concerned, they have their individual shares in the partnership. It may be that in this partnership they represent the joint family or use joint family for the profits made in the partnership. But the fact that the profits earned by a coparcener who is partner in a firm ensure for the benefit of the joint family does not make it any the less partnership for the purposes of section 26A.'

Thus both the learned Chief Justice of the Bombay High Court and Tendolkar J. regarded the proposition that not only the manager of the joint family but other coparceners also could, representing the joint family, enter into a partnership with a stranger, as a self-evident one. There is no material distribution between the case before the Bombay High Court and the present one, and the decision of the Bombay High Court and the present one, and the decision of the Bombay High Court in Commissioner of Income-tax v. Ganeshnarayan Onkarmal fully supports the view taken by the Tribunal that the partnership could not be held to be invalid merely because both Sir Hukumchand and his son, Rajkumar Singh, representing their joint family became partners in the assessee-firm. In Bagyalakshmi & Co. v. Commissioner of Income-tax also the view has been expressed that a partnership between two members of a Hindu undivided family and strangers would be valid, although the two members may represent, and receive their shares of profits on behalf of one and the same family.

Learned Advocate-General has made the observations made by the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Income-tax and reproduced earlier the mainstay of his contention that the assessee partnership firm could not be regarded as validity constituted under law inasmuch as both Sir Hukumchand and his son, Rajkumar Singh, representing their joint family became partners therein. In order to see whether the observations of the Supreme Court, on which reliance has been placed, really conclude the matter, it is necessary to refer to the facts of the case before the Supreme Court. In Firm Bhagat Ram Mohanlals case, the karta of a Hindu undivided family entered into a partnership with two strangers. The karta had eight-annas share, and other two partners had four-annas share each. The Excess Profits Tax Officer set off the profits of the firm for the years 1943 and 1944 against a deficiency of profits for the year 1945 under section 7 of the Excess Profits Tax Act, 1940, and directed a refund of excess profits tax. Later when it came to the knowledge of the Commissioner of Excess Profits Tax that the joint family of which A was the karta had disrupted and the firm had been reconstituted on 17th October, 1944, so as to include in the partnership the karta, two members of the joint family and the two strangers with whom the karta had originally entered into a contractual relation of partnership, and that the karta and the two members were each entitled to two annas share in the partnership and the two strangers had five annas share in the partnership, he set aside the order of refund on the view that there was no change in the partnership firm when it was reconstituted on 17th October, 1944, as when originally the karta of the Hindu undivided family entered into a partnership with the two strangers, the two members of the joint family also became partners therein. On the well-settled principle 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 the firm, the Supreme Court rejected the contention than when the karta entered into a contract of partnership with two strangers, the two members of the family also became partners of the firm. It was further submitted before the Supreme Court that when the firm Bhagat Ram Mohanlal was originally constituted in 1940, the persons who entered into the contract of partnership was not merely the karta of the joint family, but also the two members of the family in their individual capacity, and that, therefore, they became partners under the ordinary partnership law. The Supreme Court found this contention opposed to the findings given by the Nagpur High Court and to the registration certificate of the firm which showed 'Bhagat Ram Mohanlal, Hindu undivided family' as a partner and made no mention whatsoever of the two members of the joint family as partners. The Supreme Court then made the following observations :

'But even apart from this, it is difficult to visualise the situation, which the appellate 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 quad his separate property. It was also held by the Privy Council in Sunder 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 what 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 interest 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.'

In our view the above observations of the Supreme Court must be read as confined to the nature of the case which was before the Supreme Court. As was remarked by Lord Halsbury in Quinn v. Leathem every judgment must be read as applicable to 'the particular facts proved or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law but governed and qualified by the particular facts of the case in which such expressions are to be found.' Now the Supreme Court made the above observations while dealing with the contention that when the firm Bhagat Ram Mohanlal was originally constituted in 1940, the karta of the joint family and two other members thereof became partners in their individual capacity. The question whether besides the karta the two other members of the family could as representing the joint family become partners in the firm, was not raised in the case before the Supreme Court and did not arise therein. As was rightly pointed out by Shri Palkhivala, the reference in the above observations to the cases of Lachman Das v. Commissioner of Income-tax and Sunder Singh Majithia v. Commissioner of Income-tax and the emphasis therein at various places on 'personal capacity' or 'individual capacity' in which the two members of the joint family claimed to have become partners in the firm, Bhagat Ram Mohanlal, clearly show that by the above observations what their personal capacity and not that if the karta on behalf of his joint family entered into a partnership as representing the joint family. Having regard to the fact that the question which the Supreme Court considered was about the coparceners becoming partners in their individual capacity as distinguished from their capacity as representatives of the joint family in relation to coparcenary property, and considering the references made earlier in the observations reproduced above to 'personal capacity' or 'individual capacity' of coparceners, the particular observation on which the learned Advocate-General has relied must be read as referring to members of a coparcenary becoming partners in their individual capacity, as distinguished from representative capacity, in a firm with strangers, and so read, the remark of the Supreme Court that 'it would cut at the very root of the notion of a joint undivided family to hold that with reference to coparceners and partners only means that with reference to coparceners and partners in their individual capacity, as distinguished from their capacity as representatives of the joint family. In the context of the facts of the case before the Supreme Court it would not be legitimate to think that by making the above observations the Supreme Court disagreed with the statement of law given in paragraph 308 of Maynes Hindu Law (11th edition), which was approved by the Privy Council in Pichappa v. Chokalingam and accepted by the Supreme Court in the case of Charandas Haridas v. Commissioner of Income-tax, and also overruled the decisions of the several High Courts in which, on the basis of Pichappas case, it has been held that besides the karta, other coparceners, as representing the joint family, can enter into a partnership with a stranger. In our opinion, the decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Income-tax does not in any way advance the case of the department.

Reference was also made by the learned Advocate-General to the decision of the Gujarat High Court in Pitamberdas Bhikhabhai & Co. v. Commissioner of Income-tax. That case is clearly distinguishable. In that case a Hindu undivided family consisting of a father and his three sons carried on a business. In 1939 two of his sons separated from the family and the whole business was carried on by them in partnership as a registered firm. In 1956 one of the brothers retired from the partnership and the other one continued to carry on the business. Later in the same year, the son who carried on the business made a gift of Rs. 10,000 each to his two sons and entered into a partnership with them under a deed of partnership giving to his two sons one-fourth share each in the business and retaining for himself half share. An application made by the firm for registration was rejected on the ground that the business belonged to the joint family. It was held by the Gujarat High Court, following the decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Income-tax, that the two sons, who had received the gift of Rs. 10,000 each, could not in their personal capacity enter into a valid partnership in respect of the joint family business with their father in his representative capacity, as the karta of the Hindu undivided family consisting of their father, themselves and their brothers. The question that arose in the Gujarat case for determination was similar to the one decided by the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Income-tax and all that was decided in that case was that in respect of business belonging to a Hindu undivided family, the karta of the family cannot enter into a valid partnership with some of the coparceners of the family in their individual capacity. No question similar to the one raised before us in this reference was in issue in the Gujarat case.

The decision of the Allahabad High Court in S. C. Mullick & Sons, In re, which was also cited by the learned Advocate-General is also not in point here. In that cased, a Hindu undivided family carried on a business up to the year 1934. In that year, a deed of partnership was executed by the members of the family reciting that they had all along been carrying on the business in partnership and that they firm was reconstituted in 1933. An application under section 26A for the registration of the firm was rejected by the income-tax authorities, on the view that there was no disruption of the Hindu undivided family and the members continued to constitute one. The Allahabad High Court, while holding that there was no partnership and the family remained undivided, said that persons cannot at one and the same time be members of a joint Hindu family in respect of a joint family property and be also members of a firm of which such property forms the assets, and that the mere fact that a partnership deed was executed in respect of the business of the family was not by itself sufficient to show that there had been a division of the family. In the Allahabad case, no question of the validity of a partnership entered into by the karta and coparceners as representing a joint family with an outsider arose. In our opinion, the Tribunal was right in holding that the assessee-firm could not be denied registration under section 26A on the ground that Sir Hukumchand and his son, Rajkumar Singh, represented the interest of the Hindu undivided family in the firm.

Turning to the second question, whether the registration of the firm could be refused for the reason that Mannalal had entered into agreements with five other persons, including Chunnilal Onlarmal Ltd., for sharing the profits derived by him from the assessee-firm, learned Advocate-General argued that when Mannalal entered into these agreements he ceased to have any share in the firm and Chunnilal Onkarmals share was enhanced to 4.94 annas and, therefore, the instrument of partnership, on the basis of which registration was sought, did not specify correctly the shares of Mannalal and Chunnilal Onkarmal Ltd., when it stated that Chunnilal Onkarmal Ltd., had four a annas share and Mannalal had two annas share, and the registration of the firm should have been refused on this ground alone. It was also submitted that by virtue of clause 13(c) of the instrument of partnership, Mannalal ceased to be a partner of the firm when he assigned his share to five persons contrary to that clause. We are unable to accede to these contentions. It has been found as a fact both by the Appellate Assistant Commissioner and the Tribunal that Mannalal actually participated and exercised the rights of a partner in the firm and also received the share of his profits. The five persons, with whom he entered into agreements for the division of his profits, were not, under those agreements, entitled to participate in the conduct of the partnership business or exercise any rights therein as a partner. Under the agreements there was no diversion of Mannalal share of profits directly to the five sharers even before they became the income of Mannalal. The appropriation of his profits between the shares was subsequent to the accrual or the receipt of profits by Mannalal. That being so, as a matter of law logic it cannot be held that the assessee-firm was not a valid or genuine one because of these agreements.

There is no prohibition under the Partnership Act against a partner with regard to the manner of disposal of the profits derived by him from the partnership after they are received by him. A partner can enter into a valid sub-partnership or into an arrangement for the sharing of his profits with orders. By doing so, the genuinenss or the validity of the firm in which he is a partner is in no way affected. The partner continues to be a member entitled to his stipulated share, and the firm cannot urge that by reason of the agreement concluded by the partner with regard to the disposal of his share of profits after they are received by him, he has become entitled to a lesser share. Likewise, under such an agreement for division of the share of profits, the person in whose favour an agreement has been concluded would not be entitled to claim that the partnership firm should deal directly with him to the extent of the interest created in him by the agreement. So far as the partnership is concerned the partner who has entered into an agreement with an outsider for the sharing of his profits after they are received by him, continues to posses the same interest as before. Thus in the assessee-firm, even after concluding the agreement that he did Mannalal continued to be the partner entitled to get the stipulated two annas share of profits; and when Chunnilal Onkarmal Ltd. got from Mannalal a share of his profits under one such agreement, they got it as a private individual entity and not in their capacity as partner of the firm.

There is abundant authority to support the above view. In Lindley on Partnership (12th edition), it has been stated at page 100 that :

'An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, 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. The result of such an agreement is to constitute what is called a sub-partner-ship, that is to say, it makes the parties to it partners inter se; but it in no way affects the other members of the principle firm.'

On the basis of this statement of law, it was held in Commissioner of Income-tax v. Laxmi Trading Co. that if several persons are partners and one of them agrees to share the profits derived by him with a stranger, then this agreement does not make the stranger a partner in the original firm and the agreement in no way affects the other members of the principal firm. In that case also, the learned judges of the Punjab High Court held that such an arrangement entered into by a partner does not affect the registrability of the firm. A similar view was taken in Commissioner of Income-tax v. Agardih Colliery Co. and Bagyalakshmi and Co. v. Commissioner of Income-tax The matter is really concluded by the observations of the Supreme Court in Commissioner of Income-tax v. Sivakasi Match Exporting Co. In that case, while considering the combined effect of section 26A and the rules made thereunder, Subba Rao J., who delivered the majority judgment, said that the fact that a partner of a firm has entered into a sub-partnership with others in respect of his share does not detract from the validity of the partnership; nor has the manner in which he deals with his share of profits any relevance to the question of the validity of the partnership. Shah J. also, in his dissenting judgment, observed :

'It is open to a partner who receives his share in the profits of the firm to dispose of that share in any manner he pleases, and no inference from the distribution of the share of such profits alone can lead to the inference that the persons who ultimately received the benefit of the profits are partners of the firm which had distributed the profits'.

We may also refer to another decision of the Supreme Court in Commissioner of Income-tax v. Abdul Rahim & Co., a short report of which has been given at page 23 of short notes section of [1964] 54 Income Tax Reports. The Supreme Court ruled in that case that if a partnership is a genuine and a valid one, then registration under section 26A cannot be refused on the ground that one of the partners is a benamidar of another, and the share given to the benamidar will be the correct specification of his individual share in the partnership; that the beneficial interest in the income pertaining to the share of the benamidar may have relevance to the matter of assessment, but none in regard to the question of registration; and that the benami character does not affect the benamidars capacity as partner or his relationship with the other members of the partnership. If the validity or genuiness of a firm is in no way affected by the membership of a benamidar-partner therein, then a fortiori an agreement entered into by a partner with a person for the sharing of his profits in the firm after he has received them cannot make a partnership, which is otherwise genuine and valid, an invalid or bogus one.

The contention of the learned Advocate-General that Mannalal ceased to be a partner because the agreements, which he executed with regard to the division of his share of profits, were contrary to clause 13 of the instrument of partnership is altogether unsubstantial. That clause, so far as it is material here, is as follows :

'13. No partner shall without the written consent of the other partner or partners :-.....

(c) assign (except to the extent and in the manner mentioned in clause 20 hereof) mortgage or charge his share of interest in the partnership or any part of such share or make any other person a partner with him therein and if any partner does so assign, mortgage or charge his share or interest without such consent, his share and interest in the partnership shall forth-with determine and belong to the other partners in proportion to their shares in the firm.....'

It will be seen that under the above clause the share and interest of a person in the partnership is liable to be determined forthwith only if he, without the written consent of other partners, assigns, mortgages or charges his share or interest in the partnership or any part of such share or makes any other person a partner with him therein. In the present case, the agreements which Mannalal concluded with five persons for the division of his profits were examined in detail by the Appellate Assistant Commissioner, and he rightly came to the conclusion that by those agreements there was no assignment, mortgage or charge by Mannalal of his share of interest in the partnership. There was no contravention of clause 13(c) of the deed of partnership. The point was not canvassed before the Tribunal. There is also no material to show that the agreements, which Mannalal concluded, were without the consent of other partners.

The further objection that as Sir Hukumchand and his son, Rajkumar Singh, had not disclosed in their returns of income the shares of profits received by them from the assessee-firm and that as those profits were actually included in the total income of a private limited company, namely, Sir Sarupchand Hukumchand, therefore, Sir Hukumchand and his son were not the real partners of the assessee-firm during the relevant period but that the actual partner was the company, Sir Hukumchand and his son were not the real partners of the assessee-firm during the relevant period but that the actual partner was the company, Sir Sarupchand Hukumchand Ltd., and so the registration of the firm should have been refused, is also untenable. Sir Hukumchand and Rajkumar Singh, representing the joint family was not divided, they were accountable to the joint family for all the profits earned from their partnership in the assessee-firm. The partition of the family, and the formation of the private limited company thereafter, did not in any way change their position as partners in the assessee-firm vis-a-vis other partners; nor did it make Sir Sarupchand Hukumchand Private Ltd. a partner in the assessee-firm after the partition of the family and the formation of the said company. Even after the partition, Sir Hukumchand and Rajkumar Singh continued to be partners in the assessee-firm with this difference that after the partition of the family and the formation of the private limited company, behind them was the private limited company and not any Hindu undivided family. The question whether the profits received by Sir Hukumchand and Rajkumar Singh from the partnership belonged to the joint family or to the private limited company, Sir Sarupchand Hukumchand Private Limited, has relevance only to the matter of assessment, and none whatsoever in regard to the question of registration. This is clear from the decision of the Supreme Court in Charandas Haridas v. Commissioner of Income-tax.

Learned Advocate-General also put forward the argument of the department that the process of assessment and recovery would become extremely difficult if the assessee-firm were held to be entitle to registration despite the fact that under the agreements concluded by Mannalal with regard to division of his profits other persons became entitled to his share and the beneficial interest in the shares of Sir Hukumchand and Rajkumar Singh passed on to the private limited company, Sir Sarupchand Hukumchand Ltd. In this connection, he referred us to the observations of the Madras High Court in Raju Chettiar & Brothers v. Commissioner of Income-tax emphasising the necessity of strict and rigid compliance with the requirements of section 26A and the Rules made under the Act with regard to registration of firms, and pointing out that the purpose of the entire scheme of assessment of registered firms in the manner provided under sub-section 5(a) of section 23 would be defeated if there was no strict and rigid compliance with section 26A of the Act and the rules made thereunder and if it was found that either the firm was not genuine or the shares mentioned therein were not true.

This contention cannot be accepted. It is true that the object of enacting section 26A and the rules relating to the procedure for registration is to prevent escapement of liability to tax, and a firm desiring to have the privilege of registration in order to get the benefit of lower rates of assessment must conform strictly and rigidly to the requirements of section 26A and the relevant rules. But from that it does not follows that when under law it is open to a partner to enter into an agreement with any person for the sharing of his profits and the partition of the joint family of the partners representing it in the firm does not in any way affect the status or position in the partnership firm of such partners, the effectiveness and validity of the partnership is destroyed to the extent of rendering it ineligible for registration if a partner enters into an agreement for the sharing of his profits or if there is a partition of the joint family and formation of a private limited company of the erstwhile coparceners. The decision of the Madras High Court, relied on by the learned Advocate-General, does not lay down any such proposition. In that case, a Hindu undivided family consisting of two brothers there was a partition in the family followed by a partnership consisting of the window and two minor sons of the deceased, and the surviving brother. When it was found that there could be no valid partnership between an adult and two minors, a fresh partnership was entered into between the surviving brother and the window of the deceased. This partnership firms application for registration was refused by the Income-tax Officer on the ground that there was no genuine partnership between the surviving brother and the window and the share shown as belonging to the window did not really belong to her but to the minor sons and the partnership did not specify the real partners and their shares and so there was no real firm in existence which could be registered under the Act. The Principle that the Madras case lays down is this : that when any document purporting to be an instrument of partnership is tendered under section 26A on behalf of a firm when an application is made for registration, the Income-tax Officer is entitled to examine whether the partnership is a genuine or a sham one brought into existence by way of pretence for escaping liability for tax or for avoiding the incidence of higher taxation. In the reference before us, we are not called upon to decide any question of fact whether the instrument of partnership constituting the assessee-firm is genuine or sham.

In considering the validity of the partnership the argument that if in circumstances, such as the one present in this reference, registration of the firm were to be granted, the process of assessment and recovery of tax would be made difficult is totally out of place. It is a well settled cannon of taxation law that any citizen of the State is entitled to avoid taxation or minimise the burden of it if he can devise a lawful method of doing so. It was remarked by Lord Atkin in Duke of Westminster v. Commissioners of Inland Revenue that :

'...for it has to be recognised that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax.'

So also in Commissioner of Income-tax v. Sivakasi Match Exporting Co. Shah J. has said :

'It is always open to a person, consistently with the law, to so arrange his affairs that he may reduce his tax liability to the minimum permissible under the law. The fact that the liability to tax may be reduced by the adoption of an expedient which the law permits, is wholly irrelevant in considering the validity of that expedient.'

Avoidance of tax may not be very commendable in the context of present times. But it is permissible if it can be done legally. That being so, considerations of difficulty in assessment and recovery of tax cannot be taken into account for determining the legal result of an arrangement such as the one made by the partners in the assessee-firm before us.

During the course of his arguments, learned Advocate-General asked us to call a supplementary statement of facts from the Tribunal in order to ascertain whether the application for registration made by the assessee-firm was in conformity with the rules and whether the particulars mentioned therein as regards the names of the partners and the specification of their shares were correct and corresponded to the real state of things existing during the period for which registration was sought. It was said that though the department did not contend before the Tribunal that registration should have been refused on the ground that the application did not strictly comply with section 26A and the rules relating to the procedure for registration it was entitled to so urge before us as when the question whether in the facts and circumstances of the case the assessee-firm could be granted registration itself was under issue, the reference could not be limited to only those aspects of the question which had been argued before the Tribunal. Reliance was placed on the decision of the Supreme Court in Commissioner of Income-tax v. Scindia steam Navigation Co. Ltd. We see no ground whatsoever for allowing this plea. If the objection be that the application for registration, though it correctly stated the names of the partners and specified their shares as given in the instrument of partnership itself, did not really represent the state of affairs during the material period inasmuch as Mannalal had entered into agreements with five persons for the sharing of his profits and the joint Hindu family represented by Sir Hukumchand and Rajkumar Singh had been partitioned and replaced by a private limited company, then clearly no supplementary statement is at all required in the view we have expressed earlier on this objection. If, on the other hand, the revenue now wishes to contend that the application for registration did not comply with the rules in certain other respects also, such a contention cannot now be allowed to be raised for the reason that the facts relevant to the question have not been found or dealt with in the order of the Tribunal, or even in the orders of the Appellate Assistant Commissioner and the Income-tax Officer. The statement in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. at page 612, namely :

'Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(I) of the Act'

must be read with the observations which the Supreme Court further made in the case. Those observations are :

'It is argued for the appellant that this view would have the effect of doing away with limitations which the legislature has advisedly imposed on the right of a litigant to require references under section 66(I), as the question might be framed in such general manner as to admit of new questions not argued being raised. It is no doubt true that sometimes the questions are framed in such general terms that, construed literally, they might take in questions which were never in issue. In such cases, the true scope of the reference will have to be ascertained and limited by what appears on the statement of the case.'

These observations make it very clear that if a question was never in issue and the facts relevant to it have not been found or dealt with in the judgment of the Tribunal or stated in the statement of the case, then a new contention as to 'another aspect of the question referred to' cannot be allowed to be raised in the High Court. This is very clear from the decision of the Supreme Court in New Jehangir Vakil Mills Ltd. v. Commissioner of Income-tax where it has been held that it is the facts admitted or found by the Appellate Tribunal that form the basis of a statement of case on reference; that facts which are not found in the order of the Tribunal or the record before it cannot be the foundation for raising any question of law in abstract or otherwise; and that the High Court cannot refer the case which would enable either the assessee or the Tribunal to make out a case which had never been made during the course of proceedings before the income-tax authorities or the Tribunal.

Shri Chitale supplemented the arguments of Shri Palkhiwala by adding that there was a distinction between the case off 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.

For the foregoing reasons, our answer to the question propounded is that the assessee-firm was entitled to registration under section 26A of the Act for the assessment year 1954-55 and that the Tribunal was right in directing the Income-tax Officer to register the firm. The assessee-firm shall have costs of this reference. Counsels fee is fixed at Rs. 200.


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