1. The question that was referred to us for our decision is : 'Whether on the facts and in the circumstances of the case, the inclusion of a sum of Rs. 2,46,407 for the assessment year 1944-45, and Rs. 1,03,935 for the assessment year 1945-46 representing remuneration derived by the Managing Agency of the Devangere Cotton Mills Ltd., Devangere, in the total income of the assesses family is lawful.'
2. The assesses is a Hindu undivided family. The only question that arises for consideration in this reference is, whether the income derived by Hanumanthappa and his son under the Managing Agency agreement with the Devan-gore Cotton Mills Co., entered into on 15-3-1937 should be included in the total income of tha assesseo under Section 16 of the Act. Being an income which accrued in the native state, it is exempt under Section 14 of the Act from tax, but it could be taken into consideration under Section 16 of the Act in computing the total income of the assessee for the purpose of determining the rate. It is from that point of view that the question becomes relevant.
3. The joint family was carrying on business in British India under the name and style of R. Hanumanthappa and Son. At the time of the Managing Agency agreement, the two members, Hanumanthappa and Rama Setty constituted themselves into a firm and entered into the Managing Agency agreement. Rama Setty has a minor son and we do not know the exact date of his birth and therefore we are unable to state whether this boy was in existence on the date on which the Managing Agency agreement was entered into.
Under the Indian Companies Act, as interpreted by this court in -- 'Murugappa Chetti. and Sons. v. Commr. of Income-tax, Madras', : 21ITR311(Mad) a joint family as such cannot enter into a. Managing Agency agreement in view of the definition of 'managing agent' in Section 2, Clause 9(a), Companies Act. In the Mysore State, the Mysore Companies Act (XVIII of 1938), contains also similar provisions as the Indian Companies Act with reference to Managing agency and the definition is also identical. Though at the moment this agreement was entered into by the firm of Hanumanthappa and Son with the limited company, Devangere Cotton Mills, there was no prohibition as the Mysore Act came into force only, in 1938, still, on the language of the document, it is clear that the other party of the document was the firm and not the individuals Hanumanthappa and Rama Setty. Even if they have entered into in their individual capacity, the joint family as such would not acquire any interest in the commission earned by the Individuals, because they were not purporting to act on behalf of and for the benefit of the joint family. The fact therefore that the disability which, under the Jaw, as it now exists, viz., that a joint family as such could not enter into a managing agency agreement did not exist when this agreement was entered ,into in Mysore State would not help the revenue authorities to enable them to include this income in the total income of the assessee.
On 20-3-1940, the deed of partnership was executed between the two, Hanumanthappa and Rama Setty, whereunder it was stated that even on 15-3-1937 when the Managing agency agreement was entered into with the company, it was decided that the two individuals should constitute themselves into a partnership under the name and style of R. Kanumanthappa and Son with effect from 20-11-1936. This undoubtedly establishes that there was a partnership which was in existence even in 1937, partnership between Hanumanthappa and his son, and it was that partnership that in fact entered into an agreement with the company. The deed of partnership is also important as it contains a provision that the two partners should have the liberty to draw separately and utilise their respective shares in the income of the_ company, that is, the managing agency commission, and it will be open to them to credit to the joint Hindu family firm doing business in cotton and running several factories under the name and style of R. Hanumanthappa and Son.
It is made clear by this court that unless and until the partners divide the profits as between themselves and exercise the option of bringing that income into the income of the joint family, it would not become the income of the joint family. (Murugappa Chetti and Sons v. Commissioner of I--T.', : 21ITR311(Mad) ). This partnership deed was registered as early as 20-3-1940 under Section 58(1), Mysore Partnership Act, before the Registrar of Mysore and therefore no question of its genuineness arises. Apparently, this document was executed after the Mysore Companies Act came into force which contains similar provisions regarding Managing Agency agreement as the Indian Companies Act in which the amendments were introduced in 1936. As the assessment which is now under consideration is long after the date of this partnership deed, whatever the position might have been before 1940, this deed of partnership makes it clear that the income earned by these two persons as partners was not the income of the joint family but is the individual income of the partners.
The circumstances under which the commission earned by the members of the Hindu undivided family could be made an income of the Hindu undivided family was considered in, this court in -- 'Murugappa Chetti and Sons v. Commr. of Income-tax, Madras', : 21ITR311(Mad) As pointed out in that judgment, merely because in the previous years, the assessce did not object to treat the income as income of the joint family would not convert the subsequent income which accrued into a joint family income unless the parties who have earned the income agreed to throw it into the common stock and blend it with the income of the joint family. For these reasons, we think that the question referred to us by the Tribunal must be answered in the negative and in favour of the assessee. As the assessee has succeeded, he will be entitled to his costs, which we fix at Rs. 250/-.