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Commissioner of Income-tax, Tamil Nadu-ii Vs. K.T.S. Nagamanickam Chettiar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 1374 of 1977 (Reference No. 959 of 1977)
Judge
Reported in(1984)39CTR(Mad)288; [1984]148ITR115(Mad)
ActsIncome Tax Act, 1961 - Sections 185
AppellantCommissioner of Income-tax, Tamil Nadu-ii
RespondentK.T.S. Nagamanickam Chettiar
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateK. Srinivasan, Adv.
Excerpt:
.....of its development, their lordships think that it is nor 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. if follows from this that be able to utilise this property at his will, he must be accorded the freedom to enter into contractual relation with others, including his family, so long as it is represented in such transactions by a definite personality like its manager......which was his individual property, not acquired with the aid of or with any detriment to the joint family property. if follows from this that be able to utilise this property at his will, he must be accorded the freedom to enter into contractual relation 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 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.....
Judgment:

Ramanujam, J.

1. The following question has been referred to this court by the Income-tax Appellate Tribunal under s. 256(1) of the I.T. Act :

'Whether, on the facts and in the circumstances of the case, the assessee-firm consisting of the karta of the Hindu undivided family as one of the partners and four other coparceners of the said Hindu undivided family as other partners and they having brought in their separate property was a validly constituted firm and was entitled to registration ?'

2. The circumstances under which the reference came to be made may briefly be stated. The HUF of which Sri K. T. S. Nagamanickam Chettiar is the karta was carrying on two business, viz., sale of petroleum products of the Indian Oil Corporation and rice business. The said family consisted, inter alia, of the karta, his wife and ten sons of whom seven were major during the relevant period. On April 1, 1973, the business in the sale of petroleum products was converted into a partnership firm. This was done by the karta taking in four of his major sons, Viswanathan, Thirumalaiswamy, Venugopal and Prabhakaran as partners. A deed of partition was entered into among them on the same day. The karta contributed a capital of Rs. 70,000 besides bringing into the partnership a site measuring 9,080 sq. ft. in which petrol and diesel pumps were located, both being assets of the HUF. Each of the four sons contributed capital of Rs. 3,500 from out of their separate funds. The deed also provided that the profits or loss was to be shared equally among the five partners.

3. The said firm applied for registration, but the ITO by orders dated March 31, 1975, refused to grant registration on the ground that there was no division of the property belonging to the HUF including the above business and that no valid partnership can be entered into a by a HUF with some only of its coparceners. Having refused registration, he completed the assessment adopting the assessee's status as association of persons.

4. Aggrieved by the order of the ITO refusing to grant registration, the assessee filed an appeal before the AAC contending that it was open to the HUF to enter into a partnership with some of the coparceners provided the coparceners brought in their separate funds or properties as their capital, and, therefore, the partnership should be taken to be valid. The AAC held, relying upon the decision of the Gujarat High Court in Shah Purshottamdas Ghelabhai v. CIT [1974] 96 ITR 442, that the HUF cannot be said to have suffered any detriment by the admission of the four coparceners as partners in the assessee-firm and that, therefore, the firm should be taken a validly constituted one and, in that view, he held that the firm is entitled to registration.

5. The Revenue took the matter in appeal to the Tribunal contending that so long as the HUF remained joint, it not possible for the coparceners to carry on business along with the karta as partners, that since the entire, share of K. T. S.Nagamanickam Chettiar was not held on his behalf but was held on behalf of the other four partners, he should be taken to be a benamidar for the other partners, that, consequently, Explanation to s. 185(1) of the I.T. Act will stand attracted and that, therefore, the assessee-firm cannot be treated as a validly constituted one. The Tribunal rejected the contentions advanced on behalf of the Revenue and held that it is open to the karta of a HUF to enter into partnership with some coparceners of the said family if the coparceners brought in their separate funds into the partnership and that it is not necessary for a division to take place in the HUF before a coparcener enters into a partnership with the karta. Thus, according to the Tribunal, the Partnership in this case is entitled to registration under s. 185(1) of the I.T. Act. Aggrieved by the decision of the Tribunal, the Revenue has come before this court.

6. According to the learned counsel for the Revenue, a karta of a HUF can enter into a partnership with a third party but he cannot enter into a partnership with some of the coparceners of the same undivided family even if they contribute capital from out of their own funds. But this contention of the Revenue runs counter the principle laid down by the Privy Council in Lachhman Das v. CIT [1948] 16 ITR 35 , which has been approved by the Supreme Court in Firm Bhagat Ram Mohanlal v. CEPT : [1956]29ITR521(SC) . Therefore, it is not possible to accept the said contention of the Revenue.

7. In Lachhman Das v. CIT [1948] 16 ITR 35 , one Sri Lachhman Das had seven sons, one of whom was Daulat Ram. Lachhman Das and his sons including the said Daulat Ram constituted a HUF. Sri Daulat Ram had his separate property. A partnership consisting of the HUF of Lachhman Das and his sons on the one part and Daulat Ram in his individual capacity on the other, entered into a partnership and acquired a mill. In the course of the assessment to income-tax of the HUF, the question arose whether the mill could be held to belong to the joint family of Lachhman Das or to the partnership consisting of the said family on the one part and Daulat Ram on the other. The High Court held that Daulat Ram could not be considered as a stranger so long as a he continued his connection in the undivided family in his coparcener and, consequently, there was no valid partnership between Lachhman Das on the one hand and Daulat Ram on the other hand the mill had to be, therefore, treated as an asset of the HUF. The matter ultimately went up before the Privy Council and the Privy Council reversed the decision of the High Court. The relevant observations of the Privy Council are thus (at p. 40 of 16 ITR) :

'After careful consideration, their Lordship cannot accept this view and on general principles they cannot 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 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 nor 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. If follows from this that be able to utilise this property at his will, he must be accorded the freedom to enter into contractual relation 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 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 without such opportunity from a coparcener in respect of his separate and individual property.'

8. Thus, the view taken by the Privy Council was that any individual coparceners without separating himself from the family can enter into a contractual relationship with a karta of a HUF in respect of his separate and individual property and, therefore, a coparcener can validly enter into a 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 that to be able to do business along with the karta in partnership, it is not necessary for him to get separated from the family.

9. The above principle laid down by the Privy Council has been accepted by the Supreme Court in Bhagat Ram Mohanlal (Firm) v. CEPT : [1956]29ITR521(SC) . The decision of the Supreme Court has also been followed by the Gujarat High Court in Pitamberdas Bhikhabhai & Co. v. CIT : [1964]53ITR341(Guj) , the Mysore High Court in I. P. Munavalli v. CIT : [1969]74ITR529(KAR) and the Allahabad High Court in CIT v. Motilal Bankers : [1973]88ITR391(All) . Thus, in view of the preponderance of judicial opinion to the effect that there can be a valid partnership between the karta of a HUF and some of its coparceners, the partnership in this case should be held to be a valid partnership entitled to registration under s. 185(1) of the I.T. Act.

10. As a matter of fact, it is not contended by the Revenue that the business carried on by the firm in this case is only the exclusive business of the HUF and that the partnership arrangement was only a sham and nominal. Even the ITO has assessed the firm only as an association of individuals and not on the basis that it is a joint family business.

11. Another contention has been raised by the Revenue that since the share income of the karta belongs to the HUF and since other partners are also entitled to the benefits thereof in their capacity as coparceners, the karta-partner should be treated as a benamidar for the other partners and, therefore, the Explanation to s. 185(1) stands attracted with the result, the firm should be treated as not validly constituted. We are unable to accept the above contention. We do not see how the karta can be treated as a benamidar for the other four partners who are some of the coparceners of the HUF. The karta-partner himself has got his interest in the joint family, and therefore, he cannot in any sense be considered to be a benamidar of the other partners. In this view, we have to uphold the view taken by the Tribunal. Accordingly, the question referred to us is answered in the affirmative and against the Revenue. The Revenue will pay the costs of the assessee. Counsel's fee Rs. 500.


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