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Shah Purshottamdas Ghelabhai Vs. Commissioner of Income-tax, Gujarat-i - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 52 of 1970
Judge
Reported in[1974]96ITR443(Guj)
ActsIncome-tax Act, 1922 - Sections 26A
AppellantShah Purshottamdas Ghelabhai
RespondentCommissioner of Income-tax, Gujarat-i
Appellant Advocate J.M. Thakore, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredSundar Singh Majithia v. Commissioner of Income
Excerpt:
direct taxation - partnership firm - section 26a of income tax act, 1922 - partnership within individual members of hindu undivided family - individual coparcener can enter into contract with karta of family in respect of his personal assets - coparcener may retain his status as member of family - partnership firm may be constituted without separation of coparcener from hindu undivided family. - - 6. the income-tax officer was not satisfied with the explanation offered by the assessee and cancelled the registration granted to the assessee-firm for the assessment years 1957-58 to 1961-62 under rule 6b. on the question of applicability of rule 6b, the judicial members was on the opinion that for the purpose of registration of a firm under section 26a, the income-tax officer is required.....p.d. desai, j.1. this reference made at the instance of the assessee, which purports to be a partnership firm carrying on business in cotton textiles, relates to assessment years 1957-58 to 1961-62. the assessee-firm was initially registered for the purpose of assessment to income-tax under section 26a of the indian income-tax act, 1922, in assessment year 1057-58 and the registration was thereafter renewed from year to year up to assessment year 1961-62. the registration was, however, cancelled subsequently by the income-tax officer under rule 6-b of the income-tax rules, 1922, principally on the ground that, in the facts and circumstances of the case, two of the partners of the firm who were coparceners of a hindu undivided family could not have validity entered into partnership family.....
Judgment:

P.D. Desai, J.

1. This reference made at the instance of the assessee, which purports to be a partnership firm carrying on business in cotton textiles, relates to assessment years 1957-58 to 1961-62. The assessee-firm was initially registered for the purpose of assessment to income-tax under section 26A of the Indian Income-tax Act, 1922, in assessment year 1057-58 and the registration was thereafter renewed from year to year up to assessment year 1961-62. The registration was, however, cancelled subsequently by the Income-tax Officer under rule 6-B of the Income-tax Rules, 1922, principally on the ground that, in the facts and circumstances of the case, two of the partners of the firm who were coparceners of a Hindu undivided family could not have validity entered into partnership family and that the firm was, therefore, not lawfully constituted. On appeal, the Appellant Assistant Commissioner upheld the said decision but came to the conclusion that where a partnership was illegal or non est, rule 6B could not be invoked an, therefore, the order cancelling the registration of the firm was ultra vires. On further appeal, the Income-tax Appellate Tribunal concurred with the decision of the taxing authority to the effect that the firm was not validity constituted. On the question of application of rule 6B, there appears to have been some different of opinion between the Judicial Member and Accountant member of the Tribunal. Still, however, the Tribunal ultimately came to the conclusion that the registration of the assessee-firm was validity cancelled under rule 6B. The assessee-firm thereupon moved the Tribunal to state a case and the Tribunal has accordingly referred the following two questions for the opinion of this court :

'(1) Whether, on the fact and in the circumstance of the case, there was a valid and/or genuine partnership amongst C. P. Shah, as representing the Hindu undivided family, and Anubhai Chimanlal and Rajnikant being the son and grandson respectively of C. P. Shah, in their individual or separate capacities

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Officer had jurisdiction to cancel the registration under rule 6B ?'

2. A few facts required to be stated in detail in order to appreciate the points involved in the reference. Prior to November 15, 1955, a Hindu undivided family consisting of Chimanlal P. Shah (karta) his son, Anubhai Chimanlal, his adult grandson, Rajnikant Anubhai and three other grandsons was carrying on business in cotton textiles in the name and style of 'Shah Purshottamdas Ghelabhai'. Anubhai, and Rajnikant were also regular employees of the said family firm and they were remunerated at the rate of Rs. 3,6000 and 1,500 per annum, respectively, for the services rendered by them. The remuneration received by each of them was treated as his separate income and it was assessed to income-tax in their respective hands in their individual capacity.

3. On February 1, 1955, Chimanlal in his capacity as the karta of the Hindu undivided family and Anubhai and Rajnikant in their individual capacities entered into a partnership agreement. In the preambulary part of the agreement it was recited that Anubhai and Rajnikant were engaged as paid employees of the family firm 'because of the old age of the first party and if he cannot work in the shop, he cannot run the shop and the family business may have to be divided'. It was further recited that as and from Samvat year 2011 Anubhai and Rajnikant had intimated that they would be willing to attend to the business of the family firm only if their salary was increased and they were given a share in the profits of the firm. The agreement further recited that since the discontinuance of the association of Anubhai and Rajnikant with the family firm was not in the interest of the Hindu undivided family, the karta had agreed to induct the said two persons as partners in the family firm in their individual capacity on and with effect from Kartak Sud 1, S.Y. 2012 on the terms and conditions set out in the said agreement. The partnership agreement then sets out in elevan clauses the various terms and conditions of partnership. Clause (i) provided that the family business carried on in the name and style of Messrs. Purshottam Ghelabhai was converted into a partnership business (on and with effect from November 15, 1956). Chimanlal, as the karta of the Hindu undivided family, would have ten annas share and Anubhai and Rajnikant would respectively have four annas and two annas share in the profits and losses of the firm, Anubhai would be entitled to receive a sum of Rs. 6,000 per annum as salary and Rajnikant would be entitled to receive Rs. 3,000 per annum as salary for S.Ys. 2012 and 2013. For the subsequent years, Rajnikant would also be entitled to get salary at the rate of Rs. 6,000 per annum. The net profit and losses of the firm (after deducting the aforesaid payment made towards salary and other expenses of the firm) were to be shared by the partners in accordance with the provision made in clause (i). Clause (iii) provided that the karta would be responsible for the investment of funds for carrying out the business of the firm. Clause (iv) provided that the karta would not be entitled to receive invested by him. In case, however, Anubhai and Rajnikant contributed any capital, they would be entitled to receive interest on the amount invested by them at the rate of 6% per annum. Clause (v) provided that the partnership business would be run in the same name in which the joint family business was carried on and the management of the business was to be done as heretofore, subject to such charges which the partners may deem fir to make. Clause (vi) provided that bank accounts were to be continued as heretofore and not charges was to be effected therein. Clause (vii), inter alia, provided that Anubhai and Rajnikant would have no right in the goodwill of the firm and that they were inducted in the partnership merely as working partners. The karta would be entitled to enforce their retirement from the partnership as and when he thought fit and proper. The Hindu undivided family would have no right in the salary and share in the profits of the firm received by Anubhai and Rajnikant. Clause (viii), inter alia, provided that Anubhai and Rajnikant would be responsible for the working of the firm. Clause (ix) incorporated an arbitration agreement, and clause (x) provided that the partnership was a partnership at will. Clause (xi) again reiterated that the bank accounts and sharafi accounts of the firm were to be continued as heretofore 'since the entire responsibility for contributing the working capital was that of the third part are only working partners'.

4. It appears that in due course an application was made on behalf of the partnership firm for registration of the firm for the purpose of assessment to income-tax. By an order dated November 15, 1957, made by the Income-tax officer under section 26A of the Indian Income-tax Act, 1922, the firm was granted registration initially for the assessment year 1957-58. As stated earlier, the registration was, thereafter, renewed from year to year up to the assessment year 1961-62. The assessee's assessment to income-tax was completed for the aforementioned assessment years treating it as a registered firm. Anubhai and Rajnikant were also separately assessed to income-tax in their individual capacities.

5. By a notice dated January 20, 1965, the Income-tax Officer jurisdiction over the assessee-firm for the purpose of assessment to income-tax, called upon the assessee to show cause as to why the certificate of registration granted to the assessee under section 26A should not be cancelled under rule 6B since there was no genuine firm in existence and further as to why the assessment for the assessment years 1957-58 to 1961-62 should not be reopened. The assessee showed cause by a letter dated February 22, 1965, addressed by the assessee's legal adviser to the Income-tax Officer concerned. The assessee pointed out that the joint family firm was converted into a partnership firm and Anubhai and Rajnikant were inducted as partners in the said firm in view of the fact that both of them had expressed their unwillingness to attend to the family business merely as employees and demanded that they should be given higher salary and their remuneration should be made dependent upon the earning of the firm and further having regard to the fact that the karta, who was an old man aged about 70. Could not have managed the business all by himself. It was also pointed out that both Anubhai and Rajnikant had invested funds in the partnership business and that the said investments were made out of their separate property acquired without any detriment to the joint family. It was lastly pointed out that in the circumstances of the case, the partnership firm which was brought into existence in the interest of the joint family was valid and there was no ground for cancellation of the registration of the firm.

6. The Income-tax Officer was not satisfied with the explanation offered by the assessee and cancelled the registration granted to the assessee-firm for the assessment years 1957-58 to 1961-62 under rule 6B. The main order of the Income-tax Officer has been passed in proceedings for cancellation of registration of the firm for the assessment year 1960-61. The Income-tax Officer gave the following reasons for coming to the conclusion that there was no genuine firm in existence and that the registration granted to the firm was not in conformity with law :

(i) that before the formation of the partnership, there was no division of the joint family property including the assets of the family business between the coparceners;

(ii) that with reference to coparcenary properties members of the Hindu undivided family cannot at the same point of time be both coparceners and partners;

(iii) that in respect of a business on by a joint family, the karta cannot enter into a valid partnership with some of the coparceners of the family in their individual capacity;

(iv) that the admission of the two major coparceners in the family business was detrimental to the interest of the other members of the Hindu undivided family;

(v) that the said two coparceners had subsequently thrown their entire earnings from this business in the family hotch-potch and the amount thus thrown in the hotch-potch was divided amongst all the members of the family; and

(vi) that the mere fact that the two coparceners contributed some capital out of their personal earnings would not make the partnership in the instant case valid since the consideration in admitting them as partners was not capital which they contributed to the business.

7. It may be mentioned that in reaching the aforesaid conclusion, the Income-tax Officer relied heavily on the decision of this court in Pitamberdas Bhikhabhai and Co. v. Commissioner of Income-tax and this is apparent from the order cancelling registration which he has passed in relation of the assessment year 1961-62.

8. The Appellate Assistant Commissioner concurred with the view of the Income-tax Officer that the partnership in question was invalid. In coming to this conclusion, the Appellate Assistant Commissioner also relied upon the decision of this court in Pitamberdas Bhikhabhai's case which according to him had taken the view that 'two capacities of a person. One as a coparcener and the other as a partner, are irreconcilable and, therefore, a valid partnership cannot come into existence'. The Appellate Assistant Commissioner, however, held that rule 6B could be invoked 'only where a firm obtained registration by putting up some thing which in facts was not genuine and the genuine partners are detected afterwards'. In the opinion of the Appellate Assistant Commissioner. 'Where a partnership is illegal or where a partnership was non est in law, rule 6B could not be invoked'. In this view of the matters the Appellate Assistant Commissioner, although he concurred with the decision of the income-tax Officer as regards the invalidity of the firm, allowed the appeal and set aside the orders passed by the Income-tax Officer.

9. The Income-tax Appellate Tribunal also assented to the conclusion of the income-tax authorities that the partnership in question was not valid. The Tribunal referred to three decisions which dealt with an identical or similar question in the context of different sets of facts and the decision referred to were Lachhman Das v. Commissioner of Income-tax, Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax and Pitamberdas Bhikhabhai's case According to the Tribunal, the ratio of these decisions was that :

'So far as the coparcenary property is concerned, coparceners could not enter into a partnership with the karta of the joint Hindu family in respect of the joint family business'.

10. According to the Tribunal, in the present case the karta had entered into partnership with Anubhai and Rajnikant in respect of the family business and such a partnership could not have been validity constituted. Before the Tribunal, it was specifically contended that the accumulated remuneration of the said two partners, which was credited in their respective accounts in the books of the family business, was transferred on formation of the partnership to their respective capital accounts and, therefore, they became partners in their individual capacity quoted their separated property. The Tribunal, however, felt that the present case was covered fairly and squarely by the decision of this court in Pitamberdas Bhikhabhai's case, wherein in similar circumstances, it was held that the partnership was invalid and in these circumstances it concurred with the view of the Income-tax Officer and the Appellate Assistant Commissioner that the partnership was invalid. On the question of applicability of rule 6B, the Judicial Members was on the opinion that for the purpose of registration of a firm under section 26A, the Income-tax Officer is required to be satisfied that the firm is both genuine and valid and that if the Income-tax Officer in a given case is satisfied that the firm cannot legal come into existence, he necessarily comes to the conclusion that the firm is not genuine and he would in such a case be entitled to invoke the provisions of rule 6B and cancel the registration on the ground that the firm could not have been validity brought into existence. The Accountant Member was of the view that the word 'genuine' has meaning which is different from 'illegal' and that merely because a partnership is invalid, it would not necessarily follow that the firm is not genuine. In the instant case, according to the Accountant member, there was no dispute about the genuineness of the firm; in fact, by assessing the firm in the status of an unregistered firm as a protective measure after the cancelling of the registration, the Income-tax Officer proceeded on the assumption that there was a genuine firm in existence. However, since the Judicial Members was inclined to take the view that the word 'genuine' was comprehensive enough to embrace illegality and invalidity of partnership and there was no clear decision on the point taking a contrary view, the Accountant member ultimately agreed with the conclusion of the Judicial Members as regards applicability of rule 6B. The Tribunal, having regard to the conclusions aforesaid allowed the appeal and restored the decision of the Income-tax Officer.

11. Before we proceed to deal with the arguments advanced at the hearing of the reference, two more facts may be noted. First, it has been the assessee's case throughout and that case is supported by documentary evidence on record and has not been disputed at any stage heretofore that the amounts of remuneration which Anubhai and Rajnikant received in lieu of the services rendered by them to the joint family firm were credited in their respective accounts in the books of account of the family firm and that on the date on which the partnership came into existence, Rs. 4,812.12 and Rs. 3,746.19, which stood to the credit of Anubhai and Rajnikant and Rs. 3,746.19, which stood to the credit of Anubhai and Rajnikant, respectively, in the said accounts were brought forward as outstanding balances in their is respective new account opend with the partnership firm. In other words, there is material on record to show that though there was no obligation under the partnership agreement on the part of Anubhai and Rajnikant to contribute and sum towards capital or towards the carrying on of the business of the partnership firm, each one of them had in fact put into the partnership what was admittedly his separate property held in his individual capacity and unconnected with the family funds. Secondly, though the first question referred by the Tribunal to this court is couched in rather wide language in that it raises a question both as to the validity and/or genuineness of the firm in question, it has not been the case of the revenue before any of the firm in question, it has not been the case of the revenue before any authorities below that the firm is not genuine in the sense that the persons purporting to be partners are not real partners or that there were any other partners whose names and shares are not disclosed or that the firm was merely a fake persons. The expressions 'valid' and 'genuine' used in the first question must, therefore, be taken to have been used synonymously and the only question which consequently falls for our determination is whether in the facts and circumstances of the case there was a legally constituted partnership.

12. We shall first take up for consideration the first question referred by the Tribunal. The argument on behalf of the assessee with reference to the said question was as follows :

(a) that an individual coparcener, without separating himself from the family, can possess, enjoy and utilise property acquired by him by personal labour and without the use or help of joint family funds, and

(b) that in order to enjoy the benefit of such separate property, he can without breaking away from the family enter into contractual relations with others including his family represented by the Karta;

(ii) that the two coparceners in the present case had their separate property in the shape of savings made out of remuneration earned by them on account of their personal skill and labour and that each one of them had in fact out in such separate property into the partnership firm at the time of his induction in the partnership;

(iii) that the partnership in question was, therefore, in subsequent and effect one which was entered into for enjoying the benefits of the separate property of each one of the said two coparceners and the fruits its investment and that such a partnership is clearly legal and valid;

(iv) that, in any event, the principle of Hindu law which in terms recognises that the karta of a joint Hindu family could enter into partnership with an individual member of the coparcenary quoad his separate property was not confined merely to property in the shape of money but embraced within its fold the case of an individual coparcener contributing to the partnership merely his skill, experience and labour all of which are incorporeal property or intangible assets and since in the present case the two coparceners were taken up as working partners on account of their skill and experience and had to put in labour to look after the entire business of the partnership, the partnership was legally and validly constituted.

13. Reliance was placed in support of these argument principally on the decision of the Judicial Committee in Lachhman Das's case that of the Supreme Court in Bhagat Ram's case and that of the Mysore High Court in I. P. Munavalli v. Commissioner of Income-tax. The decision of this court in Pitamberdas Bhikhabhai case was sought to be distinguished on the ground that, unlike the present case, it was a case where two coparceners were sought to be admitted as partners in their individual capacity in what was in substance and effect a joint family business to the detriment of the joint family without their bringing into the business any separate property held by them in their individual capacity and unconnected with the family funds.

14. It would be convenient to refer to the authorities before dealing with the arguments urged on behalf of the assessee. The fact in Lachhman Das's case were that on Lachhman Das had seven sons one of whom was Daulat Ram Lachhaman Das and his sons including Daulat Ram constituted a joint Hindu family. Daulat Ram had his separate property in the shape of a cash amount of Rs. 48,000. There was a partnership consisting of the undivided family of Lachhman Das and his sons of the one part and Daulat Ram in his individual capacity of the other part and this a partnership owned a certain mill called 'The Indian Woollen Textile Mills'. Daulat Ram had invested Rs. 48,000 which was his separate property in the said mills. In the course of assessment to income-tax of the Hindu undivided family the question arose whether the mill could be held to belong to the joint family of Lachhman Das and his sons or to a partnership consisting of the joint family of the one part and Daulat Ram of the other. The Income-tax Officer held that the mill belonged to the joint family and that the sum of Rs. 48,000 should be treated as a loan by Daulat Ram to the family. On appeal, the Appellate Assistant Commissioner upheld the order of the Income-tax Officer. On further appeal, the Tribunal reversed the said decisions and held that the mill belonged to the partnership and that the partnership was validly constituted since it was competent for a member of a joint Hindu family to contract in his own individual capacity with the family as a matter of partnership and to maintain a separate interest for himself in that concern. The matter went on a reference before the Lahore High Court which reversed the decision of the Tribunal. The High Court held that though it was true that the rules of Hindu law permitted formation of a partnership between the managing member of a Hindu joint family on the one hand and a stranger on the other, Daulat Ram could not be regarded as a stranger so long as he continued his connections with the undivided family in his capacity from his separate funds. There could, therefore, be no valid partnership between Lachhman Das on the one hand and Daulat Ram on the other and the mill was, therefore, required to be treated as the asset of the joint Hindu family. An appeal was carried to the Privy Council which reversed the decision of the High Court. The first of the decision of the Privy Council is contained in the following observations

'After careful consideration, their Lordships cannot accept this view and on general principles they cannot find any sound reason to distinguish the case of a stranger from that the of a coparcener who puts into the partnership what is admittedly his separate property held in his individual capacity and unconnected with the family funds. Whatever the view of a Hindu joint family and its property might have been at the early stages of its development, their Lordships think that it is now firmly established that an individual coparcener, while remaining joint, can possess, enjoy and utilise, in any way he likes, property which was his individual property, not acquired with the aid of or with any detriment to the joint family property. It follows from this that to be able to utilise this property at his will, he must be accorded the freedom to enter into contractual relations with others, including his family, so long as it is represented in such transactions by a definite personality like its manager. In such a case he retains his share and interests in the property of the family, while he simultaneously enjoys the benefit of his separate property and the fruits of its investment. To be able to do this, it is not necessary for him to separate himself from his family... It is clear that if a stranger can enter into partnership, with reference to his own property, with a joint Hindu family through its karta, there is no sound reason in their Lordships view to withhold such opportunity from a coparcener in respect of his separate and individual property.'

15. The ratio of the decision of the Privy Council clearly is that an individual coparcener, without separating himself from his family, can enter into contractual relations with the karta of the joint Hindu family in respect of his separate and individual property. A coparcener can, therefore, validly enter into partnership with the karta provided he puts into the partnership his separate property held in his individual capacity and unconnected with the family funds and to be able to do this it is not necessary for him to separate from the family.

16. This decision of the Judicial Committee was in terms referred to and approved by the Supreme Court in Bhagat Ram's case. The question in that case was whether there was a change in the person carrying on business within the meaning of section 8(1) of the Excess Profits Tax Act, 1940, and the question arose in the context of the following facts. The firm of Bhagat Ram Mohanlal originally had three partners. One of her partners, holding eight annas share, was the Hindu undivided family known by the same name. One Mohanlal was the karta of the said joint Hindu family which consisted of himself and his two brothers Chhotalal and Bansilal. In the accounting years ending 1943 and 1944, the firm made profits on which it was assessed to excess profits tax. During the year ending 1945, however, it sustained a loss and acting under section 7 of the Excess Profits Tax Act, the concerned officer set off the profits of the firm for the years ending 1943 and agianst the deficiency of profits during the years ending 1945. Under section 8 of the said Act, such relief could not have been granted if there was a change in the person carrying on business and there was on fact such a change in the constitution of the firm in question during the relevant period since it was reconstituted under an agreement dated October 17, 1944, consequent upon the disruption of the joint family consisting of Mohanlal and his brothers. Under the said agreement Mohanlal, Chhotalal and Bansilal were all introduced as partners of the firm along with the two other original partners and there was also a change in share of each partner. The order granting relief under section 7 to the Hindu undivided family was thereupon set aside by the Excess Profits Tax Commissioner in pupated exercise of his powers of rectification. The firm thereupon moved the High Court of Nagpur for a writ of certiorari and the writ application was dismissed by the High Court. The matter was carried in appeal to the Supreme Court and one of the arguments which was advanced before the Supreme Court was the the persons who entered into the contract of partnership originally were not merely Mohanlal as Karta of the joint family and two strangers but also Chhotalal and Bansilal in their individual capacity and that therefore they were partners under the ordinary partnership law right from the inception. There was, accordingly, no change in the constitution of the firm under the new partnership agreement. This argument was negatived, firstly, on the ground that it was a clear after-thought and was following important observation which may be cited in extenso :

'But, even apart from this, it is difficult to visualise the situation which the appellant contends for, of a Hindu joint family entering into a partnership with strangers though 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 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 quoad his separate property. It was also held by the Privy Council in Sundar 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 the Mohanlal was its karta and that he entered into the partnership as karta on behalf of the joint family. It is difficult to reconcile this position with that of Chhotalal and Bansilal being also partners in the firm in their individual capacity, which can only be in respect of their separate or divide property. If members of a coparcenary to be regarded as having become partners in a firm with stranger, 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 coparcenery properties the members can at the same time be both coparceners and partners.'

17. It would appear that the principle of law laid down by the Judicial Committee, namely, that the karta of a joint Hindu family could enter into partnership with an individual member of the coparcenary in respect of his separate property was quoted with approval by the Supreme Court at two places on the aforesaid citation. It can be said without any reservations, therefore, that there is no room for doubt as regards the validity of a partnership between the karta of a joint Hindu family and a coparcener which falls within the principle enunciated by the Judicial Committee in Lachhman Das's case.

18. The facts in Pitamberdas's case decided by this court, were as under : One Bhikabhai Gokaldas was the karta of a Hindu undivided family consisting of himself and his three sons, Pitamberdas, Amrutlal and Jekisandas. The joint family carried on business in various articles. Some time in 1939, Pitamberdas and Amrutlal separated from the joint family. The said business was contained in partnership by the two brothers thereafter. Each one of them was assessed as an individual in respect of the profits of the business coming to his share. Some time in 1956, Amrutlal retired from the partnership and, on the said dissolution, Pitamberdas became entitled to the business. Pitamberdas had at the time of dissolution, seven sons, four unmarried daughters and a wife. The business to which he became entitled on dissolution did not obviously belong to Pitamberdas absolutely as his separate self-acquired property but was an asset of the Hindu undivided family consisting of Pitamberdas, his wife, his sons and daughters. Within a week or so of the dissolution of partnership, Pitamberdas purportud to make a gift of Rs. 10,001 to two of his major sons, Ramanlal and Jayantilal, by debiting a sum of Rs. 20,002 in the books of account of the business to Pitamberdas Bhikhabhai and crediting a sum of Rs. 10,001 each to the two sons. Pitamberdas then took the two sons as partners in the business and in the deed of partnership it was recited that Pitamberdas was the absolute owner of all the assets of the business, that whatever capital to his account in the books of the firm was earned by him personally, that out of the said capital he had made gifts of the two amounts as stated above, that the said amounts of which the two sons were absolute owners were brought in by the two sons as their respective capital in the business and that the same were credited to their respective accounts in the books of account of the partnership that was formed. It may be mentioned that, under the agreement, Pitamberdas was to have eight annas share and the two sons were to have four annas share each respectively in the profit or loose of the partnership. An application was made by the partnership firm for registration under section 26A of the Income-tax Act. The application was rejected by the Income-tax Officer and he brought to tax the whole of the income from the business in the hands of the Hindu undivided family. On appeal, the Appellate Assistant Commissioner held that there was no firm which could be granted registration and that the business belonged to an association of persons consisting of the Hindu undivided family and its two coparceners in their individual capacity. Though registration was not granted to the firm, the assessment made upon the Hindu undivided family was, in conformity with the said finding, set aside by the Appellate Assistant Commissioner. On further appeals, the Tribunal restored the decision of the Income-tax Officer. At the instance of the partnership firm and the Hindu undivided family, reference was made to the High Court and one of the questions and Pitamberdas as the karta of the Hindu undivided family could have entered into partnership in respect of the business carried on by them. This court took the view that the business in the hands of Pitamberdas was ancestral in character and that it did not belong to him absolutely as his self-acquired property and further that even the sums of Rs. 10,001 purported to have been gifted by Pitamberdas to each of his two sons belonged to the said Hindu undivided family. Having made this finding, this court posed the question which feel for its determination in the following words :

'The controversy thus boils down to the narrow question whether in respect of a business belonging to a Hindu undivided family, the coparceners can be taken as partners in the business in their individual capacity with specific shares.'

19. Reference was then made to the Privy Council decision in Lachhman Das's case, and the said decision was distinguished on the ground that the business in which Ramanlal and Jayantilal were sought to be admitted as partners continued to be joint family business and that they were sought to be given shares in the business in their individual capacity to the detriment of the joint family without their bringing into the business separate property held by them in their individual capacity and unconnected with the family funds. Reference was next made to the decision in Bhagat Ram's case, and this court found that the said decision was determinative of the point which arose for decision and that, on the basis of the principle laid down in the said decision, the partnership in question was not valid. This conclusion was recorded in the following words :

'On the facts of the present case, Pitamberdas as karta of the Hindu undivided family sought to give to two coparceners of the Hindu undivided family, namely, Ramanlal and Jayantilal, interest as partners in the business which was coparcenary property, with the result that to the extent of the eight annas share in that business held by Pitamberdas as karta of the joint Hindu family, Ramanlal and Jayantilal as members of the Hindu undivided family would have an interest and they would also be untitled in their individual capacity. They would thus have an interest both as coparceners and as partners at the same time in what was essentially joint family business. Such a situation, as laid down by the Supreme Court, is not permissible and such a partnership is not one which can be constituted under law.'

20. In order to appreciate correctly the ratio of this decision, it would have to be borne in mind that two facts were clearly found in that case; first, that the business in the hands of Pitamberdas was an ancestral business and, secondly, that the sums of Rs. 10,001 gifted by Pitamberdas to Ramanlal and Jayantilal and put by them into the business also belonged to the Hindu undivided family. The net effect of these findings was that Ramanlal and Jayantilal put into the partnership only the said two sums, that they did not contribute to the alleged partnership only the said two sums, that they did not contribute to the alleged partnership what was their separate property unconnected with the family and that the entire capital of the said firm in substance and effect continued to be contributed by the Hindu undivided family. The business, therefore, retained its ancestral character and coparceners become partners in it without putting in their separate property. It is against the background of these facts that it was held by his court that the partnership in that case was invalid and, with respect, rightly, since the attempt was to admit two coparceners who still retained their joint character as partners in their individual capacity in what was in fact and substance a joint family business without their putting into the partnership their separate and individual property unconnected with the family funds. Pitamberdas's case was on its own facts clearly distinguishable from Lachhman Das's case and fell squarely within the principle laid down by the Supreme Court in Bhagat Ram's case namely, that with reference to coparcenary properties, members of a coparcenary cannot at the same time be both coparceners and partners.

21. The principle which emerges on a combined reading of the aforementioned three authorities is that there could be a valid partnership between the karta of a joint Hindu family and one or more of its coparceners in their individual capacity, while still remaining joint, if the coparcener puts into the partnership what is admittedly his separate property held in his individual capacity and unconnected with the family funds. Such a partnership could be entered into not only in respect of a new business but also in respect of an existing joint family business. However, if the karta admits as partners in the joint family business one or more coparceners in their individual capacity without their bringing into the business their separate and individual property, such partnership would be invalid since in such a case coparceners would hold a dual capacity, namely, the capacity of a coparcener and that of a partner, in respect of coparcenary property.

22. Let us now turn to examination of the fact of the present case in the light of these principles. In order to ascertain whether the partnership in place is whether Anubhai and Rajnikant each had any separate property which was not acquired by them with the aid of or with any detriment to the joint family property and, secondly, whether both of them entered into partnership with the karta of the Hindu undivided family of which they were coparceners with reference to or in respect of such property. So far as the first of these two aspects is concerned, as stated earlier, there is material on record which shows that, prior to the formation of the partnership, the two coparceners were prior to the formation of the partnership, the two coparceners were employees of the family firm and that out of the remuneration received by them while in the employment of the ancestral business, Anubhai saved an amount of Rs. 4,812.12 and Rajnikant had saved an amount of Rs. 3,746.19. The remuneration received by each of them was treated as his separate income and it was assessed to income-tax in their respective hands in individual capacity. The remuneration which they received from the family firm was earned by them on account of their personal skill, experience and labour and without the use or help of joint family funds. In these circumstances, it cannot be disputed and it was indeed not disputed that the saving which each one of them made from the salary income constituted separated and individual property in the hands of each of them. As regards the second aspect. We will have to look at the substance of the transaction in order to determine whether the partnership was formed with reference to or in respect of the separate property of each of the said two coparceners. The substance of the transaction can only be ascertained by taking an integral view of the terms and conditions of the partnership and the actual conduct of the parties at or about the time when the partnership came into existence. Now, it is true that on a conjoint reading of the preambulary part and a few of the various clauses of the partnership deed it appears that both Anubhai and Rajnikant were inducted in the partnership as working partners and that they were given share in the profits and losses of the firm in order to induce them to continue to attend to the business of the firm and that it was the sole responsibility of the karta to contribute to the partnership capital on which no interest was payable to him. At the same time, however, it is apparent from clauses 4 of the partnership deed that Anubhai and Rajnikant were also at liberty to bring in and invest in the partnership their own separate funds and that in case such investment was made by them, both of them were entitled to receive interest at the rate of 6% per annum on the moneys put by them into the partnership. It would thus appear, reading the partnership deed as a whole, that though it was not obligation on the two coparceners to contribute any sum towards capital to get carrying on the business of the partnership, one of the incidents of the partnership which was clearly in contemplation of the parties was that the two coparceners may invest their separate property in the partnership firm and thereby enjoy the fruits of its investment. A reasonable and integral reading of the various clauses of the deed of partnership clearly beings out the fact that enjoyment of the benefit of the separate property of the two coparceners by its investment in the firm was one of the objects in contemplation of the parties. Next, there is the circumstance that the amount of remuneration which Anubhai and Rajnikant had received for the services rendered by them to the family firm were credited in their respective accounts in the books of account of the family firm and that on the date on which the partnership was formed, the said amounts were brought forward as outstanding balances in their respective new accounts opened with the partnership firm. The net effect of the transaction as a whole, therefore, was that the karta and the two coparceners in their individual capacity entered into partnership with the contemplation in mind that the two coparceners may put into the partnership their separate property held by them in their individual capacity and that on the very day on which the partnership was formed, the two coparceners did in fact bring into the partnership their separate property for being utilised in the business of the partnership. It would thus appears that in substance this is a case where two coparceners in their individual capacity entered into partnership with the karta while still retaining their joint status by putting into the partnership what was undisputedly their separate property for the enjoyment of its benefit. The case, therefore, falls squarely within the principle enunciated in Lachhman Das's case by the Judicial Committee and the partnership cannot be said to be invalid on the ground that it violated any well-established rule or principle of Hindu law.

23. On behalf of the revenue it was strenuously urged that the partnership was not genuine since various terms and conditions incorporated in the partnership deed revealed that the business still retained its ancestral character and that the transaction in substance was an attempt or a device to enable the coparceners in their individual capacity to participate in the profits of a joint family business. The argument, in other words, was that in the guise of partnership, in substance and effect, the transaction was one entered into with a view to making it possible for the two coparceners to share in specified proportions in the earnings from a joint family business and that the transaction was, therefore, not genuine. Reliance was placed in this connection on the following features of the partnership agreement :

(a) that the coparceners were introduced as partners in ancestral business;

(b) that they were introduced merely as working partners;

(c) that there was no obligation on their part to contribute any amount towards capital or working funds of the firm;

(d) that the entire responsibility for contributing the capital of the firm was that of the karta;

(e) that the coparceners had no share in the goods will of the firm l; and

(f) that the business was to be continued to be run in the same old name and bank and sharafi accounts were also to be continued to be run as heretofore.

24. We are unable to accept this contention. In the first place, as stated earlier, the validity of the partnership has not been challenged by the revenue before the taxing authorities except on the limited ground that, assuming the partnership to be otherwise genuine, it is not permitted by question referred to us. The challenge which is now sought to be formulated is, therefore, not open. That apart, the argument runs against the tenor of the partnership agreement, which clearly states that the family business was converted into a partnership business and that from the date of the formation of the partnership, the joint family only had a ten annas share in the business through its karta. Secondly, the entire capital or working funds of the partnership were not contributed by the joint family separate funds and, therefore, also it cannot be said that the business was owned by the joint family or that it retained its ancestral character. Thirdly, the terms and conditions on which reliance is placed on behalf of the revenue for showing the continuance of the ancestral character of the business are not inconsistent with the business shedding its ancestral character and assuming the character of a partnership business. Such terms can be found in any agreement of partnership between two or more persons and they are not inconsistent with any of the provisions of the Partnership Act. In our opinion, therefore, there is no substance in this argument.

25. It was next urged that this case falls within the mischief of the rule enunciated by the Supreme Court in Bhagat Ram's case. It was urged that, if the partnership in this case were to be held valid, it would cut at the root of the notion of a Hindu undivided family since it would amount to holding that, with reference to coparcenery properties, the members at the same time can be both coparceners and partners. Reliance was placed on the following observations in Bhagat Ram's case in support of this argument :

'But even apart from this, it is difficult to visualise the situation which the appellant contends for, of a Hindu joint family entering into a partnership with strangers through its karta and the junior members of the family also becoming at the same time its partners in their personal capacity... 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.'

26. This argument is also devoid of merit. In the first place, it proceeding the assumption that the business continued to retain its ancestral character and that in such a business the two coparceners while still remaining joint became partners in their individual capacity. This assumption is not warranted by the facts and circumstances of the case. Secondly, the aforesaid observations of the Supreme Court have to be read in the light of the facts of that case. The argument before the Supreme Court in that case in substance and effect was that even prior to there constitution of the firms on October 27, 1944, the two other coparceners were partners of the said firm along with the karta in their individual capacity quoad the share of the Hindu undivided family in the said firm. The claim of the said two coparceners that they had entered into partnership in their individual capacity was advanced not on the basis that they had contributed any separate or divided property to the partnership but on the footing that contribution made towards capital of the said firm by the karta representing the joint family must be deemed to have been made by them along with the karta. In other words, the contention was that the coparceners while still remaining joint had become partners in the firm in their individual capacity without contributing any capital and that their share in the partnership was comprised in the Hindu undivided family's share in the said partnership which share was coparcenary property. The Supreme Court negatived this contention on the ground that if members in their a coparcenary are to be regarded as having become members in their individual capacity in a firm with strangers, they would also become under the partnership law partners inter se and that with reference to coparcenary property, namely, the Hindu undivided family's share in the partnership business, the members cannot at the same time be both coparceners and partners. On the facts of the present case, this principal has no application. The two coparceners here have contributed their own funds earned by them without detriment to the joint family and the partnership is with reference to such property.

27. It was then contended that in order that the ratio of the decision in Lachhman Das's case may apply, there should be an obligation on the part of the two coparceners to contribute to the capital or working funds of the partnership and since there was no such obligation in the present case, it could not be said that the partnership was entered into with reference to or in respect of the separate or divided property of the coparceners. We do not think that this contention is well-founded. The decision of the Judicial Committee does not in terms lay down any such proposition nor does it follow by necessary implication from the observations made or facts found in that case. That apart, the question is one of substance rather than of form. Even in a case where it is obligatory on the coparcener funds of the partnership deed to contribute to the capital or working funds of the partnership, the partnership may still be not valid if in fact no contribution is made by him. On the other hand, in a case like the present, where enjoyment of the benefit of the separate property of each coparceners by its investment in the partnership firm is one of the objects in contemplation of the parties and the said object is in fact carried out by the coparceners by putting into the partnership their respective separate property, there can be no valid reason for holding that the partnership is not legal. The applicability of the principal laid down by the Judicial Committee must depend on the real intention of the parties as gathered from the construction of the deed of partnership as a whole viewed in the light of the conduct of the parties. It is not the apparent form in which the transaction is couched but its real substance and character together with the surrounding circumstances which must be held to be determinative.

28. It was next argued that the principal in Lachhman Das's case would apply only to a case where the partnership formed between business is sought to be converted into a partnership business by introduction of the coparcener therein as partner in his personal capacity and with reference to his separate property. A close reading of Lachhman Das's case is sufficient to negative this argument. One of the arguments advanced in that case was that the case of partnership with a stranger was distinguishable from the case of a partnership with a coparcener on the ground that the karta's entering into partnership on behalf of the joint family amounts to an alienation so far as it permits the person accepted into partnership to participate in the fruits of the family business and that such an alienation may be permitted in certain events in favour of a stranger but not in favour of a coparcener. This argument was negatived by the Judicial Committee on the basis that acceptance of a stranger to the benefits of partnership in a family property and also on the ground that even if it could be regarded as an alienation, a joint Hindu family can alienate an asset belonging to it to a member of the family without causing a disruption of the family. This argument and the answer furnished to it by the Judicial Committee make it clear that the rule laid down in Lachhman Das's case would apply even in case of introduction of a coparcener to his separate property.

29. In conclusion, it was urged that the principal laid down in Lachhman Das's case would not apply to the instant case because each of the two coparceners brought into the partnership insignificant amounts. There is no factual basis submission. There is no material on record to show that the amount put into the partnership by the two coparceners was insignificant as compared to the contribution of the Hindu undivided family to the capital of the firm. In any event, there is no finding to that effect. That apart, the quantum of contribution by self cannot determine the validity or otherwise of the partnership unless possibly it can be said ex facie that it is so insignificant as to amount to a colourable device to defeat the prohibition against such partnership enunciated in the Hindu law.

30. In our opinion, therefore, on the facts and circumstances of the present case, the partnership between Chimanlal on the hand and Anubhai and Rajnikant on the other was a valid and genuine partnership, since the latter two had put into the partnership their separate property acquired by them without detriment to the Hindu undivided family and the partnership was formed, inter alia, with the object in contemplation that the two coparceners might enjoy the benefit of their separate property by its investment in the firm. In this view of the matter, it is not necessary for us to enter upon a consideration of the alternative argument urged on behalf of the assessee, namely, that even in a case where an individual coparcener contributes to the partnership only his skill, experience and labour, there could still be a valid partnership between such coparcener in his individual capacity and the karta of the family of which he is the coparcener. The question was debated before as at some length and able arguments were urged on behalf of both sides in support of their rival claims. The arguments raise a question of some importance and the answer to the question is beset with doubt and difficulties. Since on the view taken by us, it is unnecessary to examine this question, we would prefer not to express any opinion upon it.

31. It view of the answer which we propose to give to the first question referred to us, it is not necessary to answer the second question. The second question would have been required to be answered only if the answer to the first question had gone against the assessee.

32. We, therefore, answer the two questions referred to us for opinion as under :

Question No. 1 : In the affirmative.

Question No. 2 : Not necessary to be answered.

33. The Commissioner will pay the costs of the reference to the assessee.


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