K.T. Desai, C.J.
1. This is a reference under section 66(1) of the Indian Income-tax Act, 1992, at the instance of Messrs. Pitamberdas Bhikhabhai & Co., applicants in R.A. No. 1154 of 1960-61 and Shri Pitamberdas Bhikhabhai, applicant in R.A. No. 1155 of I960-61. At the request of the aforesaid assessees, these two reference have been consolidated. These two references year 1958-59, the accounting year being Samvat year 2013, corresponding to the period 3rd November, 1956, to 23rd October, 1957.
2. One Bhikhabhai Gokaldas was the head male member and karta of a joint and undivided Hindu family consisting of himself and his three sons Pitamberdas, Amritlal and Jekisandas. The joint family carried on business in kirana, tea and grains. On 16th November, I939, Pitamberdas and Amritlal separated from the joint family and on separation, became entitled to the entire business owned by the joint family as aforesaid, subject to the liabilities of that business. Thereafter, Pitamberdas and Amritlal continued that business in partnership. On 5th May, 1943, a deed of partnership was entered into between Pitamberdas and Amritlal and the Income-tax Act, 1922, for the years 1943-44 up to 1957-58. Even though the business was acquired by Pitamberdas and Amritlal on separation from the joint family and the share of each of them was therefor held by him on behalf of his joint family, each of them was assessed as an individual in respect of the profit of the business coming to his share. At the end of the Samvat year 2012, i.e. 2nd November, 1956, Amritlal retired from the partnership after receiving his share therein. There was a regular deed of dissolution of the partnership executed on 29th July, 1957. On the said dissolution, as from 3rd November, 1956, Pitamberdas become entitled to the business and the business constituted joint family in his hands. Pitamberdas had at that time seven sons, three of whom were minors, and four unmarried daughters and had a wife living. On 9th November, 1956, Pitamberdas purported to make a gift of Rs. 10,000 to each of his sons, Ramanlal and Jayantilal. The purported gift was made by debiting a sum of Rs. 20,002 in the books of the business to Pitamberdas Bhikhabhai and crediting a sum of Rs. 10,001 to Ramanlal Pitamberdas and a sum of Rs. 10,001 to Jayantilal Pitamberdas. Pitamberdas then took Ramanlal and Jayantilal as partner in the business as from 3rd November, 1956, and a deed of partnership was executed on 18th November, 1956. In the deed of partnership it was recited that Pitamberdas was the absolute owner of all the assets of the business. It was further declared that he had 'not acquired any ancestral property of whatsoever nature'. It was further recited that whatever capital was credited to his account was earned by him personally in the business and that out of the said capital of his, he had paid as and by way of gift the aforesaid two sums of Rs. 10,001 to Ramanlal and Jayantilal respectively, and that Ramanlal and Jayantilal were the absolute owners of the said amounts. It was further recited that the said amounts had been brought in by Ramanlal and Jayantilal 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. Under the terms of the partnership, it was provided that the name of the partnership would be Messrs. Pitamberdas Bhikhabhai and Co., and that Pitamberdas, Ramanlal and Jayantilal would be entitled to shares of eight annas, four annas and four annas respectively in the profits or losses of the partnership.
3. An application was made by Pitamberdas Bhikhabhai and Co. under section 26A of the Indian Income-tax Act, 1922, for the registration of the firm. The Income-tax Officer rejected the clam for registration. He took the view that the business of the firm of Pitamberdas Bhikhabhai and Co. belonged to the Hindu undivided family of Pitamberdas Bhikhabhai and he brought to tax the whole of the income from that business in the hands of the Hindu undivided family. The matter was carried in appeal to the Appellate Assistant Commissioner. The matter was carried in appeal to the Appellant Commissioner. The Appellate Assistant Commissioner took the view that there was no firm which could be granted registration. He came to the conclusion that the business of Pitamberdas Bhikhabhai and Co. belonged to an association of persons consisting of the Hindu undivided family of Pitamberdas and its coparceners Ramanlal and Jayantilal in their individual capacity and he accordingly set aside the assessment made upon the Hindu undivided family. The department felt aggrieved by this decision and filed two apple as before the Tribunal, one against Messrs. Pitamberdas Bhikhabhai and Co. and the other against Pitamberdas Bhikhabhai Hindu undivided family, being Income-tax Appeals Nos. 889I and 8892 of I959-60. Income-tax Appeal No. 8106 of I959-60 was also preferred by Messrs. Pitamberdas Bhikhabhai and Co. All the three appeals were heard together and disposed of by a common order by the Tribunal. The Tribunal took the view that the business of Pitamberdas Bhikhabhai and Co. was joint family business and that income from that business was liable to be assessed in the hands of the Hindu undivided family of Pitamberdas Bhikhabhai, the Hindu undivided family, thereupon required the Tribunal to refer certain question of law which arose from the decision of the Tribunal and the Tribunal has according made this reference raising the following question :
'1. Whether Ramanlal and Jayantilal in their personal capacities and Pitamberdas, in his representative capacity as the karta of the Hindu undivided family consisting of himself and his several sons including the said Ramanlal and Jayantilal, can enter into partnership in respect of the business
2. Whether the whole of the income from the said business is property taxable in the hands of the Hindu undivided family of Pitamberdas or only a moiety there of that belongs to Pitamberdas in his representative capacity as karta of the said family ?'
4. The ancestral character of the business in the hands of Pitamberdas on retirement of Amritlal is not and cannot be disputed. The question that arises for consideration is whether in respect of such ancestral business, Pitamberdas as the karta of the Hindu undivided family or otherwise, had a right to take his two sons, Ramanlal and Jayantilal, who were coparceners of the said Hindu undivided family, as partners therein. At the time when Pitamberdas sought to taken them as partners there were, as already stated, two other adult sons of Pitamberdas who were coparceners of the said Hindu undivided family and three minor sons who also were members of the said coparcenery. He had four daughters and wife who were also members of the said Hindu undivided family. When he purported to enter into the deed of partnership, he did so on the footing that the business belonged to him absolutely and that no other person had any share or interest therein. This stand taken by him in the deed of partnership was obviously wrong. The business did not belong to Pitamberdas absolutely as his separate self-acquired property, but was an asset of the Hindu undivided family of Pitamberdas, his wife and his sons and daughters. Even the sums of Rs. 10,000 purported to have been gifted by Pitamberdas to Ramanlal and Jayantilal belonged to the said Hindu undivided family. The controversy thus boilsi 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. The question is covered by certain observations of the Supreme Court to which we shall presently refer. But before we do so, we will examine one decision of the Privy Council on which considerable reliance was place by Mr. S. P. Mehta on behalf of the assessees.
5. That decision is the one given by the Privy Council in Lachhman Das. v. Commissioner of Income-tax. In that case the Privy Council dealing with the contention that there could be no valid partnership between a karta of a Hindu undivided family representing the family on the one hand and a coparcener of that family in his individual capacity on the other, has stated that on general principles they could not find any sound reason to distinguish the case of a stranger from that of a coparcener who puts into the partnership what is admittedly his separate property held in his individual capacity and unconnected with family funds, and if a partnership was possible between a karta of a Hindu undivided family and a stranger, a partnership was equally possible between a karta of Hindu undivided family and a coparcener who brings into the partnership what is admittedly separate property held in his individual capacity and unconnected with family funds. The Privy Council observed :
'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 posses, 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, while he simultaneously enjoy 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. This must be dependent on other considerations, and the result of a separate act evincing a clear intention to break away from the family. The error of the Income-tax Officer lay in his view that, before such a contractual relationship can validly come into existence, the 'natural family relationship must be brought to an end'. This erroneous view appears to have coloured his and the subsequent decisions of the income-tax authorities. In this view of the Hindu law, 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.'
6. The decision cannot, in our opinion, help the assessees for the business in which Ramanlal and Jayantilal were sought to be admitted as partners was joint family business and Ramanlal and Jayantilal 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 any separate property held by their in their individual capacity and unconnected with the family funds.
7. The decision which concluded the matter against the assessee is the decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax. That case arose under the provisions of the Excess Profits Tax Act, I940. Dealing with a contention similar to the one raised in the present case, Venkatarama Ayyar J., delivering the judgment of the Supreme Court, observed at page 526 as follows :
'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. 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 coparcenery quoad his separate property. It was also held by the Privy Council in Sunder Singh Majithia v. Commisioner 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 I940 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 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 divided property. If members of a coparcenery 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 coparcenery properties the members can at the same time be both coparceners and partners.'
8. These observations are in our opinion decisive of the present controversy and leave no scope for argument on behalf of the assessees. 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 coparcenery 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 entitled in their own right to a four annas share each in the business as partners 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. In view of what we have stated above, it is not necessary for us to consider any other aspect of the matter. As no valid partnership was created, the business continued belong to the Hindu undivided family of Pitamberdas Bhikhabhai and the whole of the income of that business for the assessment year in question was liable to be assessed in the hands of the aforesaid Hindu undivided family.
9. Our answers to the questions, therefore, are (1) in the negative, (2) the whole of the income of the said business is properly taxable in the hands of the Hindu undivided family of Pitamberdas Bhikhabhai. The assessees will pay to the Commissioner costs of the reference fixed at Rs. 400.