T. U. MEHTA J. - The assessee in all these five references are the respondents. They were partners in a firm names M/s. Gujarat Automobiles, Ahmedabad, along with two others who are their brothers. Each of them represented his own Hindu undivided family as a partner of that firm in his capacity as the karta of the Hindu undivided family till January, 1961. Each one of them had the share of Rs. 0-3-3 in a rupee. The Hindu undivided family of each one of them was partitioned on January 10, 1961, as from January 1, 1961, as per deed of partition found at annexure 'A'. The question which is involved in each of these references is whether after the said partition, there was any sub-partnership of each of these assessees with their respective family members as a result of the said partition.
So far as the assessee, Chandulal C. Shah, is concerned, the years of assessment of the income are 1963-64 and 1964-65 in Reference No. 60/74 and 1965-66 and 1966-67 in Reference No. 114/74.
So far as the assessee, Navinchandra C. Shah, is concerned, years of assessment are 1963-64 and 1964-65 in Reference No. 119/74 and 1965-66 and 1966-67 in Reference No. 219/74.
So far as the assessee, Ramanlal C. Shah is concerned, the years of assessment are 1963-64 and 1964-65 in Reference No. 171/74.
The assessee, Chandulal C. Shah, had a family consisting of himself, his wife, Kusum, his major son, named Bipinchandra, and three minor sons, named Hasmukh, Jitendra and Jagat.
So far as the assessee Navinchandras family is concerned, his family consists of himself, his wife, Urmila, and his minor son, Bankim.
So far as Ramanlal is concerned, his family consists of himself, his wife Madhukanta, his major son, Dilip, and his two minor sons, Yogesh and Nitin.
Facts relating to the cases of all these three assessees are the same and, therefore, we shall mention the facts relating to the case of Chandulal C. Shah or order to appreciate the points at issue. As already stated, this assessee was a partner of the above-referred firm in his capacity as the karta of his own Hindu undivided family till January 1, 1961. On January 10, 1961, there was a partial partition as regards the investments made by the respective families of each of the assessee in the firm as well as as regards the business which was carried on by the firm. The family of Chandulal had to its credit the total amount of Rs. 92,978.41 as deposit in the firm. This amount stood distributed to the credit of different members of the family. As a result of this partition, it was agreed that the assessee Chandulal, his wife, his major son and his three minor sons should each have 1/6th share in the business share of 0-3-3 in the firm. It was found that it was not possible to partition this share of 0-3-3 in the business of the firm and, therefor, the parties to the partition agreed that the assessee, Chandulal C. Shah, should continue to represent them (i.e., the wife and the sons) in the firm. It was further agreed that the assessee should received the share of 0-3-3 from the income of the firm as a representative of other members of his family and, should thereafter distribute the respective shares of the members of the family to each of them as stipulated in the deed of partition. Following is the relevant clause in the partition deed which is the bone of contention between the parties in all these reference :
'It is mutually agreed by and between the parties hereto that the steps be taken to get the cash deposit amounts transferred to their respective names of the members as per division made by these presents. WHEREAS it is realised by the parties hereto that it is not possible to partition the 3 annas 3 pies partnerships interest of M/s. Gujarat Automobiles by metes and bounds due to administrative and other practical difficulties. Parties hereto therefore agree that the said Chandulal should continue to represent them in firm of M/s. Gujarat Automobiles as it is not possible for the firm to take every one of them as partner. Only mode left the parties hereto is to divide the income (i.e., 3 annas 3 pies share of profit) receivable from the firm. The said Chandulal agrees to receive the said shares of profits from the firm of M/s. Gujarat Automobiles as an agent of of the said Kusum, the said Vipin, the said Hasmukh, the said Jitendra and the said Jagat and agrees to distribute and hand over their respective shares of profits as stipulated by these presents.'
For the assessment year 1963-64, the share of income from the business of the firm, which came into the hands of Chandulal was Rs. 19,295. In accordance with the terms of the partitions deed, referred to above, the sum of Rs. 3,216 was paid by Chandulal to each of the members of the family, namely, himself, his wife, and his four sons. While making the assessment for the year 1963-64, the Income-tax Officer thought that there was as sub-partnerships between Chandulal and his family members by virtue of the above-referred stipulations of the deed of partition and, therefore, the provisions contained in section 64(1)(i) and (ii) of the Income-tax Act, 1961, were attracted. The Income-tax Officer, therefore, included the sum of Rs. 16,079 being the 5/6ths share of Chandulals wife and four sons and brought this amount to tax in the hands of Chandulal. The contention of Chandulal that there was no sub-partnership between him and his family members was negatived by the Income-tax Officer. The assessee, Chandulal, being aggrieved by this decision of the Income-tax Officer appealed to the Appellate Assistant Commissioner who relied upon the decision given by the High Court of Bombay in the case of Seth Motilal Manekchand v. Commissioner of Income-tax : 31ITR735(Bom) and held the by an overriding title, 5/6ths share of profits from the firm was, by virtue of the deed of partition, diverted to others and, as such, the assessee should have been taxed only on 1/6th share of the said profit. Thus, the assessee, Chandulal, won in the appeal preferred by him before the Appellate Assistant Commissioner. The revenue feeling aggrieved by that decision of the Appellate Assistant Commissioner, approached the Appellate Tribunal, by preferring an appeal. The learned Accountant Member of the Tribunal agreed with the Income-tax Officer that there was a sub-partnership between Chandulal and his family members. But the learned Judicial Member was of a different view, as, according to him, the above-quoted stipulations of the deed of partition, did not amount to creation of any sub-partnerships between Chandulal and the remaining members of his family. The matter was thereupon referred to a third Member, who agreed with the view taken by the learned Judicial Member. Thus, by majority, the Tribunal confirmed the view taken by the Appellate Assistant Commissioner with the result that the revenue has preferred this reference.
The facts of the remaining references are exactly the same and, therefore, in all the five references, the Tribunal has referred to us the following two question, for our opinio :
'(1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the relation subsisting between the assessee, his wife and sons was that of co-owners, is correct in law i
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that there was no sub-partnership between the assessee, his wife and his sons in the firm of M/s. Gujarat Automobiles ?'
On behalf of the revenue, it was contended by the learned Advocate General that the arrangement made between the parties in the deed of partition as per the stipulations quoted above, amounts to creation of a sub-partnerships, because there is an agreement to share the profits, and there is also an agreement by which an agency in favour of each of the assessees is created by the remaining members of his family. The learned Judicial Member and the Third Member of the Tribunal, to whom the matter was referred, have observed that the facts of the case show that the necessary element of mutual agency between the members of the family of each of the assessees is lacking inasmuch as the management of the shares of the family members is entrusted exclusively to the assessees, and, therefore, it is not possible to say that each of the members of family is an agent of the other for the purpose of the management of the familys share in the business of the firm. According to the learned Members of the Tribunal, therefore, there cannot be any sub-partnership between them. In answer to this contention, the leaned Advocate-General drew our attention to the decision of the Supreme Court in K. D. Kamath & Co. v. Commissioner of Income-tax : 82ITR680(SC) , wherein a view is taken that the fact that the exclusive power and control was vested in one partner, and the further circumstance that only one partner could operate the bank accounts or borrow on behalf of the firm, are not destructive of the theory of partnerships provided the two essential conditions of partnerships were satisfied, namely, (1) that there should be an agreement to share the profits as well as losses of the business; and (2) the business must be carried on by all or any of them acting for all. Relying upon this decision, it was contended on behalf of the revenue that even if it is revealed from the facts of this case that the respective assessees were given exclusive control of the management of the share in the firm of M/s. Gujarat Automobiles and that any of the other partners could not have been constituted as agent of the remaining members of the family, there would be no justification for holding that the family has not constituted itself in a sub-partnership because what the law contemplates is only an agency in favour of any one of the partners on behalf of the remaining members.
It is found from the judgment recorded by the learned Members of the Tribunal that the assessee had relied upon the decisions of the Supreme Court in Charandas Haridas v. Commissioner of Income-tax : 39ITR202(SC) as well as Bagyalakshmi & Co. v. Commissioner of Income-tax : 42ITR727(Mad) . The learned Advocate-General contended that none of these decisions is strictly relevant to the facts of the present case, because in none of them the court has considered whether in such cases a sub-partnerships is created between the parties concerned.
On a close consideration of the above-quoted stipulations of the deed of partition, we are of the opinion that these stipulations do not contain anything which is suggestive of the relationship of partners between the members of the family. It should be noted that partnership, as under-stood in the partnerships Act, is in its essence a relationship which results from a contract and a valid contract pre-supposes that parties to its a legally capable of entering into it. If the document of partition found at annexure 'A' is taken to be also an agreement creating a sub-partnership between members of the family, then it must follow that all the signatories to this document entered into a contract to form a partnership. But who are these signatories The document shows that even minors represented by their guardians have signed the deeds of partition, which are produced in the record. It, therefore, follows that if the document in question is held to be evidencing an agreement of sub-partnership, the minors were parties to the said agreement and became full-fledged partners in the socalled sub-partnership. Thus, the construction of the relevant stipulations in the deed of partition, as canvassed by the revenue, leads to a situation which is patently illegal, because no minor can legally enter into a partnership agreement. Section 30 of the partnership Act puts a specific ban against a minor to be a partner, though it allows a minor being admitted to the benefits of a partnership with the consent of all the partners. The learned Advocate-General contended that the relevant portion of the document of partnerships should be constructed as providing only for the admission of the minors not to be partnership itself but only to benefits of the partnership. It is difficult to comprehend on what basis such a construction, as is suitable to the revenue, can be put to this document. In fact, the relevant portion of the document does not speak of any partnership at all. It is the construction of the document as canvassed by he revenue which brings the concept of partnerships into the picture and if this construction is accepted as correct, we are further asked to presume that the minors were admitted only for the purpose of sharing the profits and not the losses of the partnerships. We find absolutely no basis for a series of such unwarranted presumptions and inferences. The fact of the matter is that the minors have actually shared the losses. This is evident from the following observations found in the order recorded by the Appellate Assistant Commissioner. In para. 6 of his order, the Appellate Assistant Commissioner has observed as unde :
'It is also been that the minors have been filing the returns showing losses before the assessment under appeal was completed. Under the circumstances, it cannot be presumed as has been done by the Income-tax Officer that the minors are not liable to share the losses.'
Even the learned Judicial Member has observed in this connection as under in para. 12 of the orde :
'It is also brought to our notice that in fact there were losses sub-sequently and they were dividend among all the parties including the minors.'
The learned Advocate-General contended that in fact the losses referred to in the above observations were capable of being adjusted against the profits of other processing years with the result that the minors were not required to suffer any loss, and hence it must follow that the intention of the parties was not to make the minors suffer the losses in partnerships business. This contention is wholly unacceptable because if minors were not to suffer any loss, nothing could be deducted from their profits of the previous years on account of the loss suffered in the business during a particular period.
It cannot be disputed that the document of partition evidences two things, namely, (1) agreement to share income derived by Chandulal, Navinchandra and Ramanlal from the business of the firm and, (2) agreement to appoint these persons as representatives of the members of its respective families to receive the share of income from the business of the firm. It was, therefore, contended on behalf of the revenue that these two facts evidence two essential requirements of the partnerships as contemplated by section 4, namely, (i) agreement to share the profits, and (ii) carrying on business by one on behalf of other members of the family. The contentions was that if these two important ingredients of section 4 are fulfilled, the existences of such partnerships must be presumed.
Now, it is a settled position in law that though sharing of profits is an essential element of partnership, the mere fact that in a particular arrangement there is agreement to share profits, would not render that arrangement and agreement of partnership. Again, agency is equally a necessary ingredient of every partnership, but it would be fallacious to state that whenever there is an agreement creating an agency, a partnership in law is created. Further, there would be cases where both the elements, namely, (1) sharing of profits, (2) creation of agency are in existence with regard to some persons who are parties to the arrangement and yet intention to create partnerships is found to be lacking because of the fact that the remaining persons were not legally capable of entering into a partnership agreement. The present case is one of the cases of that type because even if the minors have appointed their fathers as their agents to receive the share of income, from the business of the firm of Gujarat Automobiles, they could not have done so under law for the purpose of forming any partnership.
A further and the most important fact which should be borne in mind is the nature of the agreement which is arrived at by the parties by virtue of the above-quoted stipulations of the deed of partition. It is an admitted position that it was not possible for the parties to divide the share of each of the assessee in the firm by metes and bounds. In such circumstances, the law contemplates the actual partition should be made only as the circumstances of the case permit. As observed by the Supreme Court in the case of Charandas Haridas v. Commissioner of Income-tax : 39ITR202(SC) , for an asset of this kind, there was no other mode of partition open to the parties, if they wished to retain the property and yet hold it, not jointly, but in severalty, because the law did not contemplate that the person should do the impossible. It was for this reason that the assessees family members though it most convenient to allow the assessee to represent them in the firm of Gujarat Automobiles and to receive their share of income from the business of the partnership on their behalf, on the condition that immediately after receiving the said share, each one of them should distribute the said share amongst the members of the family, who were in law the co-owners of that share. The Tribunal has rightly remarked that if parties to the partition deeds in question had stopped ask simply saying that the shares of each of the assessee was partitioned in a particular proportion amongst the members of his family, and had not said anything further in the form of the stipulations, which are quoted above, it would not have made any difference, because, even in that case, each of the assessees would have been legally obliged to receive his share in the income of the partnership business on behalf of the remaining members of his family and to distribute the same among the members in accordance with their shares. It is, therefore, apparent that what the stipulations quoted above have done, is nothing more than what would have legally happened even in their absence. In the absence of these express stipulations, a plea of sub-partnership would not have been available to the revenue in view of the decisions in Charandas Haridas v. Commissioner of Income-tax : 39ITR202(SC) and Motilal Manekchand v. Commissioner of Income-tax : 31ITR735(Bom) . Under the circumstances, if absence of these stipulations could not have turned the respective families of the assessee into sub-partnerships, it is difficult to understand how their existence would make any difference.
It should be noted here that after the partition agreements were entered into, the Income-tax Officer has passed an order under section 171 of the Income-tax Act for the assessment year 1962-63 in the case of each of the assessee. The order passed by the Income-tax Officer under section 171 of the Act is found n the record of the case at annexure 'B' and it is of July 11, 1963. Therein the Income-tax Officer has observed as unde :
'The division of capital and the deposits with M/s. Gujarat Automobiles is supported by the entries passed in the books of accounts of the firm. Regarding the division of 3 annas 3 pies partnerships share of the Hindu Undivided family in the firm of M/s. Gujarat Automobiles it seems that there were certain practical and legal difficulties for the assessee to get the concerned coparceners admitted to the partnership by the effecting necessary changes in the constitution of the firm itself. The main difficulties which the assessee experienced wer :
(1) other partners were not willing to make relative changes by admitting the coparceners.
(2) minor coparceners could be admitted to the benefits of partnership only under the Partnerships Act while according to the partition deed they have also to share losses.
The difficulties which are pointed out above have been recognised by the Income-tax Officer himself and, therefore, he passed the final order in the proceedings under section 171 as unde :
'In the light of the facts mentioned above and having considered the evidence produced I hold that a genuine partial partition of the Hindu undivided family took place with effect from January 1, 1961. The effect of this order will be that the income from the ancestral house property is alone assessable in the hands of the Hindu undivided family. The 0-3-3 share that was hitherto assessed in the hands of the Hindu undivided family will be assessed in the hands of the six individual members - Shri Chandulal C Shah, Smt. Kusum Chandulal Shah, Shri Vipin Chandulal Shah and minors, Shri Hasmukh Chandulal, Jitendra Chandulal and Jagat Chandulal, 1/6th each, the salary portion of the share being assessable in the hands of Chandulal Chimanlal Shah (individual) in terms of the partition deed.'
The above order, therefore, makes it clear that the partition in each of the cases was genuine and has been recognised by the Income-tax Officer at least for the year 1962-63. Now, if once it is believed that the partition in question was genuine, it must follow that the joint status of the members of the family of each of the assessees with regard to the assets, which were partitioned, came to an end and they became co-owners. The learned Advocate-General drew our attention to several decisions going to show that even after the partition, the property could be held in sub-partnership. For this proposition he relied upon the decision of the Supreme Court in the case of Commissioner of Income- tax v. Bagyalakshmi & Co. : 55ITR660(SC) an the decision of the Calcutta High Court in Sheodayal Khemka v. Joharmull Manmull : AIR1924Cal74 as well as Privy Council decision in Giuseppe Bianco v. Giovanni Vincenzo Demarco AIR 1932 PC 63. Now, so far as the principle goes, there cannot be any dispute regarding the proposition that even after the partition of a particular property amongst the members of a joint Hindu family, the said property can be held by the said members in sub-partnership. But the question here is whether in fact any such sub-partnership has been created between the assessees and the members of their families. We find that there is absolutely no evidence to show any such sub-partnership and the stipulations on which reliance is placed by the revenue do not envisage the creation of any partnership relation between the parties concerned.
The learned Advocate-General drew our attention to the fact that the members of the family of each of the assessees have agreed to retain the cash deposits, which came to their share as a result of the partition, in the firm of Gujarat Automobiles. According to the learned Advocate-General the continuance of this deposit should be treated as in consideration of the shares which were to be received by the members of the sub-partnerships from the income earned by the firm of Gujarat Automobiles. This contention is wholly unacceptable because the contention that the deposits are kept in consideration of the shares which family members of the assessees receive from the businesses of Gujarat Automobiles is based purely on surmises, as there is nothing in the record to show that the person in whose names these deposits are standing are bound to keep these deposits with the firm so long as they receive benefits from the business of the firm. As the facts stand they can withdraw these deposits at any time they like, irrespective of the question whether the assessees continued to represent them in the business of the firm as partners. Therefore, the mere fact that for the time being these deposits were allowed to continue in the name of the individual members of the family of each of the assessees in the account of the firm shows nothing to suggest that there was partnership.
In view of this, we are of the opinion that the view taken by the Tribunal on this controversial issue is correct. We, therefore, hold that the findings of the Tribunal that the relations subsisting between each of the assessee, his wife and sons is that of co-owners with regard to the assessees share in the firm Gujarat Automobiles, is correct in law, and that there was no sub-partnership between any of the assessee and the remaining members of his family. We, therefore, answer both the questions, which are referred to us, in the affirmative, i.e., favour of the assessees and against the revenue.
The revenue shall bear its own costs and the costs of the assessees in this reference. References are accordingly disposed of.