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Commissioner of Income-tax Tamil Nadu-v Vs. S. Sivaprakasa Mudaliar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Judge
Reported in[1983]144ITR285(Mad); (1983)IIMLJ419
ActsIndian Partnership Act 1932 - Sections 29 and 37; Tamil Nadu Agricultural Income-tax Act; Code of Civil Procedure (CPC), 1908 - Order 21, Rule 49
AppellantCommissioner of Income-tax Tamil Nadu-v
RespondentS. Sivaprakasa Mudaliar
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateN.C. Ananthachari, Adv.
Cases ReferredIn State of Tamil Nadu v. Sadanandam
Excerpt:
.....moeity of his shares in two partnerships was valid - assessee's declaration throwing into joint family one-half of partnership interests in two firms was valid and be given effect to in assessment to income-tax of share income from two firms - question answered in affirmative. - - 49, clearly show that a partner's interest as such, is not only a species of property in itself, but is capable of being dealt with, as such, both under the substantive law and under the procedural law. the legal position on this point is now well settled, although its application in individual cases might pose problem. 13. thus, an interest in a partnership can be a joint family asset, just like any other property, and none the less so, for the fact that the family, as such, is not recognised by..........of declaration under which he impressed one-half of his partnership interest with the character of joint family property. he further declared that he would there forward hold one-half of his interest in the two firms only in his capacity as karta of his joint family. he then claimed before the ito that the shares of profits from the two firms, namely, 3/28ths and 3/17ths must be taken to consist of two halves, one half alone to be included in his personal assessment, the other half to be considered in the hands of the joint family. 3. the ito rejected this claim and continued to assess the whole of the 3/28ths shares from one firm and the whole of the 3/17ths share from the other firm in the assessee, s individual assessment. the officer ignored the assessee, s deed of declaration dated.....
Judgment:

Balasubrahmanyan, J.

1. This is case stated by the Income-tax Appellate Tribunal. It at once raises a point of partnership law and a point of Hindu law.

2. The assessee who fingers in this reference is an individual, being assessed as such on his separate income. He is the karta of an HUF, the other members being his wife, two sons and three daughters. The assessee was a partners in two partnership firms called 'Cuddalore Palayacot Company' and, 'Kasthuri Palayacot Company '. He has a 3/28ths share in one firm, and a 3/17ths share in the other firm., On October 20, 1969, he executed a deed of declaration under which he impressed one-half of his partnership interest with the character of joint family property. He further declared that he would there forward hold one-half of his interest in the two firms only in his capacity as karta of his joint family. He then claimed before the ITO that the shares of profits from the two firms, namely, 3/28ths and 3/17ths must be taken to consist of two halves, one half alone to be included in his personal assessment, the other half to be considered in the hands of the joint family.

3. The ITO rejected this claim and continued to assess the whole of the 3/28ths shares from one firm and the whole of the 3/17ths share from the other firm in the assessee, s individual assessment. The officer ignored the assessee, s deed of declaration dated October 20, 1969. The officer commented that the assessee, s deed of declaration has not been followed up by a bifurcation of the assessee, s capital accounts in the two partnerships.

4. On appeal, the AAC agreed with the ITO. He gave another reason for not acting upon the assessee, s deed of declaration. According to the Appellate |Assistant Commissioner, a share in a partnership involved risk of loss and liability, and hence such an asset could not, under the Hindu law, be blended with joint family property.

5. On further appeal by the assessee, the Tribunal reversed the decisions of the I. T. authorities. According to the Tribunal, the assessee's, declaration throwing into the joint family hotchpot one-half of his partnership interests in the two firms was valid and could be, and must be given effect to in the assessment to income-tax of the share income from the two firms.,

6. The Department then obtained a reference to this court from the order of the Tribunal on the following question of law :

'Whether, ion the facts and in the circumstances of the case, the Tribunal was justified in holding that half of the share of income from M/s. Cuddalore Palayacot Company and M/s. Kasthuri Palayacot Company belonged to a Hindu undivided family and, consequently, has to be excluded from the assessment of the assessee made in the status of an individual for the assessment year 1972-73?'

7. This question, as we earlier indicated, involves a consideration of two distinct matters, one touching the partnership law and the other touching Hindu law.

8. The legal conception of a partner's interest has become settled law in this country, especially after the pronouncement of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa, : [1966]3SCR400 . The interest of a partner in a partnership firm, according to this decision, does not mean that he has any title to any specific assets of the firm as and towards his share, nor to any part or segment of the firm, s assets, nor even no any fractional share in all the firm's assets. On the contrary, a partner's interest in the partnership only consists in his right to a share of profits so long as the partnership[is a going concern, and to a right to participate in what remains of the surplus assets of the firm on dissolution and winding up of the partnership after payment to all the creditors. Under this conception, the interest of a partner is not a mere fraction of the net assets of the partnership, but altogether a different species of property in itself, so that the sum total of all the partner's interests does not make up the partnership property as such. Just as the firm owns its assets, so does a partner own his interest in that partnership. The firm can deal with its assets, and any partner having the requisite authority can represent the firm and deal with the firm's assets. But the firm, as such, cannot deal with the interest of a partner; the concerned partner alone can do that, because it is his interest.

9. If follows from the above that the partner's interest is capable of being freely transferred just as any other species of property is transferable. There is no bar to the transfer, or assignment, as it is family called in legal discussion, of the partner's interest. Where the partner assigned his interest in the partnership to a stranger to the firm, the assignment will not entitle the assignee to claim partnership rights by virtue merely of the assignment in his favour. This disability, however, can be cured by the remaining partners agreeing to take the assignee as a partner with the interest he has acquired under the assignment. In the event of a dissolution and winding up of the firm, the assignee, even if he is a stranger, would be entitled to the surplus assets to the same extent to which his transfer would have been entitled if there has been no assignment-vide s. 29 of the Indian Partnership Act 1932. Where a partner assigned his share to another partner, and not to a stranger the only result of it would be a reduction in the personnel of the partnership and an augmentation of the share of the partner who happens to be the assignee. In every case, the assignment is of the partner's interest as such, and the assignment is of the partner's interest as such, and the assignment becomes complete as between the assignor and the assignee, m irrespective of the consequences in terms of the partnership status.

10. Section 29 of the Partnership Act apparently convert an assignment of a partnership interest inter vivos. Order 21, r. 49 of the CPC provides for an involuntary transfer of the interest of a partner, in execution of a decree obtained against that partner as an individual. Under this procedure, the court would pass what is called a charging order' under this procedure, a receiver would be appointed by the court for the share held by the judgment-debtor in the partnership. The receiver so appointed would collect the share of profits due to the judgment-debtor from the firm. The court may also direct accounts of the partnership to be rendered, or enable any of the other partners to buy off the judgment-debtor's interest in the partnership.

10. The provisions of s. 29 of the Partnership Act and of O. 21, r. 49, clearly show that a partner's interest as such, is not only a species of property in itself, but is capable of being dealt with, as such, both under the substantive law and under the procedural law.

11. A partner's interest is not only capable of being transferred inter vivos as any other species of property; it is also subject to devolution on succession by death of the partner. Section 37 of the Partnership Act is an indication that the interest of a partner would devolve on his harries or other legal personal representatives. For, this section provides that the deceased partner's legal representatives have an option either to continue to receive the deceased, s share of profits or to receive interest on the deceased's credit balance in the firm, so long as the accounts are not settled. The Supreme Court have held in the case of a firm where partners has agreed to the continuance of the firm notwithstanding the death of a partner, that the share of the partnership goodwill of the deceased partner would devolve on his heirs or other legal personal representatives; vide K. K. Shah v. Mrs. Khorshed Banu, : [1970]3SCR689 .

12. The question which then arise is : if a partner's interest in a firm is a species of property in itself, m could it not be the subject of an act, or process, by which it could become the property of a joint Hindu family? Having regard to the course of our earlier discussion, the answer cannot be far to seek, It is, however, necessary to clear a preliminary point : Whether a joint Hindu family can conceivably be the owner of an interest in a partnership? The legal position on this point is now well settled, although its application in individual cases might pose problem. For it requires a wholesome understanding of the inter-action of partnership law and HIndu law. The legal position may be stated thus : when an undivided coparcener in a joint family becomes a partner in a partnership firm, contributing to the firm his share of capital which he finds either firm the family funds or by some other means detrimental to the joint family, then both the interest belong to the family, even though not all the member of the family, ipso jure, are to be regarded as partners in that firm. In such a case it is a matter of indifference to the other partners and to the firm a such, whether the partner's capital contribution comes from his joint family or it its detriment, or whether it is the partner's own separate property. As between the partner in question and his joint family, however, the interest in the partnership can by no means be regarded, in the circumstances, as his individual or separate share, but must only partake of the character of joint family property, if the interest is acquired with the aid of or to the detriment of the joint family. While, therefore, the other coparceners and the family as such have no say in the partnership affairs, the particular coparcener, who is so nominee a partner would hold his position in the firm only for and on behalf of the family and, accordingly, would be answerable and accountable to them in the same way as he would be accountable as respects any other item of joint family property in hi hands or which he intermeddles with.

13. Thus, an interest in a partnership can be a joint family asset, just like any other property, and none the less so, for the fact that the family, as such, is not recognised by the law of partnership as capable of becoming a partner. We have seen that joint family can acquire a partnership interest by providing the requisite share capital to its karta or other coparcener for becoming a partner in a firm. Likewise, the family is at liberty to acquire a partnership interest in other ways open to it under the Hindu law. For instance, it can buy a partnership share from a stranger to the family. It can also buy such an interest in a firm from a member of the family who is a partner in a firm in his individual capacity.

14. Under the Hindu law, family can become the owner of the separate

property of a coparcener either by purchase or by formal gift. The same result would flow where the coparcener concerned throws his separate property into the joint family hotchpot, as the saying goes. This position would, in our judgment, apply also to a partnership share held by an undivided member in a firm, as his separate property. It would be open to him to give up his separate dominion over his partnership interest by converting it into joint family property. We do not find any impediment in the way of a coparcener declaring, by added or by other unequivocal means, his individual partnership interest to be joint family property. If it is the karta who happens top be the partners, he can blend his separate partnership share with the family assets in his hands. EVen where the family as such possesses no property of its own and there can be no blending, literally so called, the coparcener concerned can clothe his separate partnership interest with the character of joint family property.

15. In the foregoing paragraph we have just about exhausted all the metaphors which writers on Hindu law employ in the discussion of this subject. In 'blending', conversion', 'throwing into the joint family hotchpot' and 'clothing the property with the character of joint family property', we have a mixed bag of metaphors, which any one, writing on this topic of Handy law, cannot, perhaps, do without. But all of them mean only one thing' that the coparcener concerned, as the individual owner of an asset, be if a partnership share or other property, gives up his separate and exclusive dominion over that property and intends and wills that property should thenceforth be treated and respected as part of the joint family estate with all the attributes which coparcenary property possesses.

16. It is quite clear from the above discussion that the individual share of a coparcener in a partnership fir, m, as a species of property, is quite amenable to being converted into joint family property by the expression of unequivocal intention in that regard by the coparcener concerned. This position is not bereft of earlier examples in the law reports. In State of Tamil Nadu v. Sadanandam : [1978]113ITR453(Mad) , which is an agricultural income-tax case, a partner in firm, who was an undivided member of a Mitakshara coparcenary, converted his partnership interest into joint family property. The joint family in question has minor coparceners. They were the children of the partner who his purported to convert his partnership interest into joint family property. The question before this court was whether the partner's act of throwing his partnership interest into his joint family botchpot would amount to transfer without adequate consideration in favour of his minor children. This court held that the process by which the separate property of a Mitakshara coparcener becomes clothed with the character of joint family property does not amount to 'transfer' within the meaning of the relevant provision in the Tamil Nadu Agricultural Income-tax Act. This court further held that when once the partnership interest becomes joint family property by this process, the income flowing therefrom has to be taken as the income of the joint family and not that of the respective individuals.

17. Mr. Jayaraman, the learned standing counsel for the Department, pointed out that in the decision cited this court did not have to decide the basic question whether a partnership interest belonging to a coparcener as his separate property is at all capable of being thrown into the joint family hotchpot. What Mr. Jayaraman says of the point at issue in that case is quite true. Even so, the case at least has the merit of serving as an illustration of the position that a partnership interest has been, and could be dealt with by a coparcener in the same way as any other separate property of his, so as to get it converted into joint family property.

18. Mr. Jayaraman urged more than once the reason why we should not accept the position in this case that the assessee's separate partnership interest could, in law, become joint family interest. He said, in the first place, that a partnership interest, as a species of property is unlike any other property that a coparcenary normally holds as part of the family estate. He pointed out that a partnership interest is subject to the pulls and pressures not only of partnership articles, but also of the partnership statute wherever the partnership deed is silent. Chief among the hazards to which a partnership interest is subject was said to be its exposure to the working of unlimited liability and its vulnerability to losses which is inherent in business. Learned counsel said that a partner subjects himself not only to the consequences of his own mistakes but also to the acts of commission and omission of his co-partner. These peculiar characteristics of partnership ventures and relationship would truly affect the nature and content of a partnership interest as a species of property. Since a firm may have its ups and does in business, the interest of a partner too would necessarily and helpless get invoked in those ups and downs, As a species of property, therefore, a partnership interest cannot always be a plus quantity. At times such an interest may cease to be an asset and degenerate into liability. According to Mr. Jayaraman, a partnership interest which always has liability potential cannot be an acceptable subject, under the Hindu law, for the process of conversion into joint family property. Learned counsel went to the extent of saying that to apply the 'hotchpot doctrine' to a coparcener's partnership interest would amount to accepting the position that it is open to a coparcener to throw his liability into the joint family hotchpot, and not merely his assets.

19. We agree that a partnership interest, even as a share in the limited company, may posses attributes of a kind which distinguishes it, in matters of detail from certain other species of property, such as lands, buildings, and the like. But the distinction drawn by Mr. Jayaraman does not involve any difference in kind. It only involves a difference in degree. A partnership interest, according to the picture painted by learned counsel, is a chancy and risky kind of property, prone to end up in a total loss or liability. We accept the possibility of this tendency. But is is not a peculiarity at all of this kind of proprietary interest,. No species of property for that matter, is everlasting. They are susceptible to deterioration, decay, and destruction in varying degrees. It is all a question of time. Some perish early. Others last longer. What is more, the susceptibility of properties to losses and liabilities of different kinds is common to every kind of property. That characteristic is more pronounced in the case of business interests than in other cases of proprietary interests. That is all. At all events, Hindu law does not abhor the joint family investing in properties and assets of a kind which are prone to the risk of loss. It recognises, for instance, the the institution of trading families. Such families could enter into trading ventures all by themselves, and carry them on, even though there is always an element of risk in such ventures. And, as we have earlier mentioned, a joint family can participate in partnership business with stranger, s by a allowing a coparcener, preferably the Karta, to enter into formal partnership relation with them. The law not only recognises the involvement of joint families in what may be called the partnership sector, but as we have seen it also lays done special rules as to how the partnership relationship is to be sustained as between the firm, the family and the individual who is a member of both. We are of the view that there is no to be under the Hindu law which prevents the conversion into joint family property of partnership interest held by an individual coparcener in a firm.

20. Mr. Jayaraman seemed to rely on K. A. Ramachar v. CIT : [1961]42ITR25(SC) , as providing some support for his contention that a partnership9 interest of a coparcener in a Mitakshara family cannot be converted into joint family property. An examination of this case, however, shows that no question arose in that case of a transfer or a assignment of a partnership, let alone conversion of a coparcener's separate partnership document which figured in that case, it was found that what was transferred was a mere right to share in the future profits of the firm, and not an out and out assignment of the partnership interest s such. The decision, therefore, is not so use to any party in the present discussion.

21. Mr. Jayaraman then urged a submission with particular reference to the fact-situation in the present case., He said that it was quite odd that a partners should be in a position to assign a moiety, or other fractional share, of his interest in the partnership retaining the balance with him. According to lean5e counsel, it would be odder still to hold that a partner who was a Mitakshara coparcener could purport to take not the whole, but only a moiety of his interest in the partnership and impress that moiety with the characteristic of joint family property.

22. This argument is easily, met by observing that if a partner's interest as a whole can be valid assigned or thrown into the family hotchopt, then a fractional share therein must, by definition, be capable of a similar process on the principle that what can be done with the whole can be done with its parts. Apart from this general consideration the answer is clear from the very peculiarity of the character and incidents of the process of conversion of separate property into joint family property Mitakshara law does not require any legal formalities for impressing the separate property of a coparcener5 with the characteristics of joint family property. All it requires is an effective intention of the coparcener to give up his separate dominion over his property and thenceforward treat it as joint family property. If the intention were to throw the whole of the partnership interest in the joint family property, well and good. But if, as in the preen case, the coparcener wishes to retain a moiety of the interest with himself, yet the law will give effect to his intention to abandon his dominion over the other moiety in favour of the family. So long as conversion into family property is not half-hearted, the half that is effectively impressed with the character of joint family property would get converted and become joint family property. There is no problem in such a case even as respects the partnership status of the coparcener concerned., We have earlier referred to the legal position that in no case can a joint Hindu family as such be a partner in a firm, and he alone of the family would be a partner who is nominee a party to the partnership relationship is concerned even though the treatment of that particular share in the family is governed by the rules of personal law applicable to Hindu joint family property. This position must hold whether coparcener enters into a partnership as representing the joint family or impresses his entire partnership interest with the character of joint family property or does so only as respects a moiety or other fraction of such an interest.

23. One or to minor points remain for consideration. It was said by the departmental authorities that following the assessee, s deed of declaration, parting with one-half of his partnership interest in favour of the family, no bifurcation has been effected in the assessee, s capital accounts in the books of the two firms. We do not think this steps is necessary. Indeed, it may even be uncalled for. This is because, so far s the firms were concerned, it was a matter of supreme indifference whether the partner retained his interest in the partnerships as his separate property or whether he converted them, either in whole or in part, into the property of his joint family. The change in the nature of his holding as between the partners and his other coparceners does not affect the two firms or the other co-partners. Even otherwise, the presence of entries in the capital account does not have any legal significance; they may possess only evidentiary value, just to verify whether the assessee, s declaration has been really acted upon. But even without such entries in the capital accounts or other folios a tribunal of fact might, on other evidence, be satisfied about the truths of the transaction and its having been acted upon by the parties concerned. In the present case, there has never been any doubt about the assessee, s bona fides or about the reality of the transaction. The absence of entries in the partnership capital accounts cannot, therefore, be made much of.

24. One other objection which the departmental authorities put forward against the acceptance of the assessee, s declaration was not pressed by Mr. Jayaraman before us. The ITO took the view that for a valid blending of the separate property of a coparcener, the joint family must posses, even at that very moment, some joint family property or other. He said that there was no property worth mentioning owned by the assessee, s family at the time he made his declaration. The learned standing counsel rightly desisted from advancing any argument of this kind. it we may change the metaphor, it is not necessary that a joint family hotchpot should already hold something to enable a coparcener to throw his separate property into it; even an empty hotchpot can receive and hold what is thrown into it by the coparcener. This position is settled beyond doubt by such decisions as Subramania Iyer v. CIt : [1955]28ITR352(Mad) and CIT v. Pushpa Devi : [1971]82ITR7(Delhi) .

25. In the result, we agree with the decision of the Tribunal upholding the validity and the legal consequences of the assessee's act of impressing a moiety of his shares in the two partnerships mentioned in the question of law. We accordingly answer th question in the affirmative and in favour of the assessee. The assessee will be entitled to his costs. Counsel's fee Rs. 500.


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