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Commissioner of Income-tax, Madras Vs. Bagyalakshmi and Co., Udamalpet - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtSupreme Court of India
Decided On
Judge
Reported inAIR1965SC1708; [1965]55ITR660(SC); [1965]2SCR22
ActsIndian Income-tax Act, 1922 - Sections 26A and 33B; Partnership Act; Hindu law; Statutory Law; Personal law; Indian Income-tax Law
AppellantCommissioner of Income-tax, Madras
RespondentBagyalakshmi and Co., Udamalpet
Cases ReferredCharandas Haridas v. Commissioner of Income
Excerpt:
.....registered - on assessment of partnership members of joint family assessed on basis of partnership deed - income-tax appellate tribunal held two members were liable to pay only according to their shares in partition deed - commissioner of income-tax cancelled registration of partnership under section 33 as shares of partners not specified - appellate tribunal confirmed order of commissioner - division bench of high court nullified cancellation order of the commissioner and held firm registrable under section 26-a - appeal to supreme court - held, division of joint family does not change position of 'karta' as a partner and that shares of partnership depends on the partnership deed and not on partition deed. - motor vehicles act (59 of 1988)section 168: [dr.arijit pasayat & dr.mukundakam..........it only regulates the rights andliabilities of the partners. a partner may be the karta of a joint hindufamily; he may be a trustee; he may enter into a sub-partnership with others;he may, under an agreement, express or implied, be the representative of agroup of persons; he may be a benamidar for another. in all such cases heoccupies a dual position. qua the partnership he functions in his personalcapacity; qua the third parties, in his representative capacity. the thirdparties, whom one of the partners represents, cannot enforce their rightsagainst other partners nor the other partners can do so against the said thirdparties. their right is only to a share in the profits of theirpartner-representative in accordance with law or in accordance with the termsof the agreement, as the case.....
Judgment:

Subba Rao, J.

1. These appeals raise, though not the same but a similar question on whichwe have given a decision in The Commissioner of Income-tax, Ahmedabad v. M/S.A. Abdul Rahim & Co. [1965] 2 S.C.R. 12. The assessee-firm was themanaging agent of Palani Andavar Mills Ltd., Udamalpet. It was originallyconstituted by a deed of partnership, dated June 1, 1934. The following 6persons were the partners :

(1) G. Venkataswami Naidu . . As. 2

(2) G. T. Narayanaswamy Naidu . . As. 2

(3) G. T. Krishnaswamy Naidu . . As. 2

(4) M. A. Palaniappa Chettiar . . As. 5

(5) R. Guruswamy Naidu . . As. 2 1/2

(6) K. Venkatasubba Naidu . . As. 2 1/2

2. By subsequent transactions the share of G. Venkataswami Naidu wastransferred to his son Vidyasagar and the share of M. A. Palaniappa Chettiarwas purchased by R. Guruswamy Naidu. With the result that the 5th partner, G.Guruswamy, had 7 1/2 annas share in the partnership instead of 2 1/2 annasshare which he held earlier. Guruswamy Naidu and Venkatasubba Naidu, the 5thand 6th partners, belonged to a Hindu undivided family and the beneficialinterest of their shares belonged to that family; indeed, during the previousyears the joint family was assessed in respect of the income pertaining to thesaid shares. On August 24, 1950, the said Hindu undivided family was dividedand a partition deed was executed between the members thereof. Under the deedthe ten annas share held by the family was divided as follows :

(1) R. Guruswamy Naidu . . As. 2

(2) Rudrappa (Minor son of No. 1) . . Anna 1

(3) Venkataramana (Minor son of No. 1) . . Anna 1

(4) Subba Naidu . . As. 2

(5) Venkatasubba Naidu . . As. 1-4

(6) Rudrappa Naidu . . As. 1-4

(7) Jagannatha Naidu . . As. 1-4

3. After the said partition, on November 30, 1950, a new partnership deedwas executed between the partners of the assessee-firm. Under the saidpartnership deed the following shares were allotted to each of the partner :

(1) R. Guruswamy Naidu . . As. 7 1/2

(2) R. Venkatasubba Naidu . . As. 2 1/2

(3) G. T. Narayanaswamy Naidu . . As. 2

(4) G. T. Krishnaswamy Naidu . . As. 2

(5) Vidyasagar . . As. 2

4. The point to be noticed is that the beneficial interest in 10 annas shareoriginally belonged to the Hindu undivided family of which Guruswamy Naidu andVenkatasubba Naidu were members. But before and after the partition of thejoint family the said two persons, namely, Guruswamy Naidu and VenkatasubbaNaidu, were partners of the firm; before the partition the beneficial interestin the 10 annas was in the undivided family, but after partition the beneficialinterest in the partnership was in the divided members of the family includingthe said two partners. The assessee-firm presented the deed of partnership,dated November 30, 1950, before the Income-tax Officer for registration for theassessment years 1952-53, 1953-54 and 1954-55 and was duly registered undersection 26A of the Indian Income-tax Act, 1922, hereinafter called the Act. Indue course Guruswamy Naidu and Venkatasubba Naidu were assessed as partners ofthe assessee-firm on their respective shares as shown in the partnership deed.But the Income-tax Appellate Tribunal, in respect of two of the assessmentsmade on them, accepted their contention and held that they were liable only topay tax in respect of the shares shown in the partition deed. After thedecision of the Tribunal, the Commissioner of Income-tax acting under section33B of the Act cancelled the registration of the partnership on the ground thatthe partnership deed did not show the correct shares of the partners in thepartnership. On appeal, the Appellate Tribunal confirmed the zorder of theCommissioner in respect of the 3 assessment years. At the instance of theassessee-firm the following questions of law were referred to the High Court.

(1) Whether the aforesaid orderof the Commissioner under s. 33B cancelling the registration of the firm forthe three years 1952-53, 1953-54 and 1954-55 is lawful.

(2) If the answer to the abovequestion is in the affirmative, whether the firm is registrable under section26-A for the aforesaid assessment years.

5. A Division Bench of the Madras High Court, which heard the reference,came to the conclusion that the partnership was a genuine one, that thepartition in the joint Hindu family allotting specific shares to the members ofthe family might have affected the accountability of the two partners of thefirm to the other members of the family, but qua the partnership theirrelationship with the other partners had not in any way been affected and,therefore, the Tribunal went wrong in holding that the registration of the saidpartnership was rightly refused. In the result, it answered the first questionin the negative and the second question in the affirmative. Hence the appeals.

6. Learned Attorney-General, appearing for the revenue, contended that asthe partnership did not specify the correct shares of Guruswamy Naidu andVenkatasubba Naidu in that while they were entitled only to 2 annas and 1 anna4 pies share in accordance with the partition deed, they were shown in thepartnership deed as holding 7 1/2 annas and 2 1/2 annas shares respectivelyand, therefore, the Tribunal rightly held that the said partnership could notbe registered under section 26A of the Act.

7. Mr. Swaminathan, learned counsel for the respondent contended that thepartition of the family's beneficial interest in the partnership business hasno relevance to the question of registration of the partnership under the Act,for, according to him, the income-tax authorities are only concerned with thevalidity and genuineness of the partnership deed executed by the partnersthereof and not with the dealings of any one of the partners in respect of hisshare with third parties.

8. We have held in The Commissioner of Income-tax, Ahmedabad v. M/s. A.Abdul Rahim & Co., Baroda [1965] 2 S.C.R. 12, that the Income-tax Officercan reject the registration of a firm if it is not genuine or valid and if theapplication for registration has not complied with the rules made under theAct. Here we have admittedly a genuine partnership. It cannot even be suggestedthat it is invalid. The only objection is that Guruswamy Naidu and VenkatasubbaNaidu have less shares in the partition deed than those shown in thepartnership deed. If the distinction between the three concepts is borne inmind much of the confusion disappears. A partnership is a creature of contract.Under Hindu law a joint family is one of status and right to partition is oneof its incidents. The income-tax law gives the Income-tax Officer a power toassess the income of a person in the manner provided by the Act. Except wherethere is a specific provision of the Income-tax Act which derogates from anyother statutory law or personal law, the provisions will have to be consideredin the light of the relevant branches of law. A contract of partnership has noconcern with the obligation of the partners to others in respect of theirshares of profit in the partnership. It only regulates the rights andliabilities of the partners. A partner may be the karta of a joint Hindufamily; he may be a trustee; he may enter into a sub-partnership with others;he may, under an agreement, express or implied, be the representative of agroup of persons; he may be a benamidar for another. In all such cases heoccupies a dual position. Qua the partnership he functions in his personalcapacity; qua the third parties, in his representative capacity. The thirdparties, whom one of the partners represents, cannot enforce their rightsagainst other partners nor the other partners can do so against the said thirdparties. Their right is only to a share in the profits of theirpartner-representative in accordance with law or in accordance with the termsof the agreement, as the case may be. If that be so, Guruswamy Naidu could havevalidly entered into a genuine partnership with others taking a 10 annas sharein the business, though in fact as between the members of the family he hasonly a 2 annas share therein. He would have been answerable for the profitspertaining to his share to the divided members of the family, but it would nothave affected the validity or genuineness of the partnership. So much isconceded by the learned Attorney-General. If so, we do not see why a differentresult should flow if instead of one member of the divided family two membersthereof under some arrangement between the said members of the family took 10annas share in the partnership. If the contention of the revenue was of noavail in the case of representation by a single member, it could not also haveany validity in the case where two members represented the divided members ofthe family in the partnership. As the partnership deed was genuine, it must beheld that the shares given to Guruswamy Naidu and Venkatasubba Naidu in thesaid partnership are correct in accordance with the terms of the partnershipdeed.

9. This court in Charandas Haridas v. Commissioner of Income-tax, Bombay : [1960]39ITR202(SC) , had to consider a converse position. There a karta of aHindu undivided family was a partner in 6 managing agency firms and the shareof the managing agency commission received by him as such partner was beingassessed as the income of the family. Thereafter, there was a partial partitionin the family by which he gave his daughter a one pie share of the commissionfrom each of two of the managing agencies and the balance in those agencies andthe commission in the other four managing agencies were divided into five equalshares between himself, his wife and three minor sons. The memorandum ofpartition recited that the parties had decided that commission which accruedfrom January 1, 1946, ceased to be joint family property and that each becameabsolute owner of his share. Notwithstanding the partition, the Income-taxauthorities assessed the said total income as the income of the joint family.The Bombay High Court agreed with that view. But this court held that as thepartition document was a genuine one, it was fully effective between themembers of the family and therefore the income in respect of the dividedproperty was not the income of the Hindu joint family. In that contextHidayatullah J., speaking for the Court, made the following observation :

'The fact of a partition in the Hindu law may haveno effect upon the position of the partner, insofar as the law of partnershipis concerned, but it has full effect upon the family insofar as the Hindu lawis concerned. Just as the fact of a karta becoming a partner does not introducethe members of the undivided family into the partnership, the division of thefamily does not change the position of the partner vis-a-vis the other partneror partners. The Income-tax law before the partition takes note, factually, ofthe position of the karta, and assesses not him qua partner but as representingthe Hindu undivided family. In doing so, the Income-tax law looks not to theprovisions of the Partnership Act, but to the provisions of Hindu law. Whenonce the family has disrupted, the position under the partnership continues asbefore, but the position under the Hindu law changes. There is then no Hindu undividedfamily as a unit of assessment in point of fact, and the income which accruescannot be said to be of a Hindu undivided family. There is nothing in theIndian Income-tax law or the law of partnership which prevents the members of aHindu joint family from dividing any asset.'

10. These observations support the conclusion we have arrived at. Thedivision in the joint family does not change the position of the karta as apartner vis-a-vis the other partner or partners in a pre-existing partnership,because the law of partnership and Hindu law function in different fields. Ifso, on the same principle a divided member or some of the divided members of anerstwhile joint family can certainly enter into a partnership with thirdparties under some arrangement among the members of the divided family. Theirshares in the partnership depends upon the terms of the partnership; the sharesof the members of the divided family in the interest of their representative inthe partnership depends upon the terms of the partition deed.

11. For the aforesaid reasons, we hold that the High Court has given correctanswers to the questions propounded.

12. In the result, the appeals fail and are dismissed with costs. Onehearing fee.

13. Appeals dismissed.


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