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A. Shanthi Nainar and Sons Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 116 of 1968 (Reference No. 45 of 1968)
Judge
Reported in[1974]97ITR356(Mad)
ActsIncome Tax Act, 1961 - Sections 184(7)
AppellantA. Shanthi Nainar and Sons
RespondentCommissioner of Income-tax
Appellant AdvocateK. Srinivasan and ;K.C. Rajappa, Advs.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredAgarwal & Co. v. Commissioner of Income
Excerpt:
.....- section 184 (7) of income tax act, 1961 - whether refusal to register assessee-firm for assessment year 1962-63 under section 185 valid - according to partnership deed a was admitted as partner in his individual capacity - partnership deed dated 30.05.1958 was not modified and relationship continued to be same - as such renewal for registration be granted - question answered in negative. - - the said business as well as the interest of shanthi nainar in the assessee-firm were the subject-matter of the said partial partition. 3. the assessee-firm preferred an appeal to the appellate assistant commissioner but without success. it, however, felt that the other circumstances of the case clearly pointed out that shantbi nainar was not a partner of the assessee-firm in his..........as already stated, the partnership deed is clear and unequivocal, and according to the partnership deed, shanthi nainar has been admittedas a partner only in his individual capacity. the partnership deed datedmay 30, 1958, has not been modified and the relationship between the twopartners referred to therein continued to be the same. whatever be therelationship between shanthi nainar and his three sons as per the deed ofpartial partition or as per the partnership deed dated may 2, 1960, shanthinainar's relationship with his partner under the partnership deed datedmay 30, 1958, has not undergone any change. in our view, the renewal of registration in this case should be granted.the result is, that the question referred to us is answered in the negativeand in favour of the assessee. the.....
Judgment:

Ramanujam, J.

1. The assessee is a firm of two partners, A. Shanthi Nainar and A. Padmaraj, dealing in silk cloth. The partnership was constituted under a deed of partnership dated May 30, 1958. According to the said deed, the profits or losses are to be shared in the ratio of 13:5 between Shanthi Nainar and Padmaraj. The firm was registered under Section 26A of the Indian Income-tax Act, 1922, for the year 1959-60, and, later, registration was renewed up to the assessment year 1961-62. On April 13, 1960, there was a partial partition in the family of one of the partners, i.e., Shanthi Nainar. That family, in addition to the I3/18ths share held by Shanthi Nainar in the assessee-firm, was having a separate wholesale business in handloom cloth. The said business as well as the interest of Shanthi Nainar in the assessee-firm were the subject-matter of the said partial partition. As per the said partition, the separate business in handloom cloth and the 13/18ths share in the assessee-firm dealing in the silk cloth were converted into a partnership business of Shanthi Nainar and his three sons by an instrument of partnership dated May 2, i960. There was, however, no change effected in the terms of the partnership deed dated May 30, 1958, by admitting the divided members of Shanthi Nainar's family as partners in the assessee-firm ; nor was there any separate deed of partnership bringing in Shanthi Nainar's sons as partners of the assessee-firm. The partnership deed of May 2, 1960, provided that the 13/18ths share held by the family in the assessee-firmshould be divided equally between Shanthi Nainar and his sons as also the share of the profits therefrom.

2. The assessee-firm applied for renewal of registration for the assessment year 1962-63 under Section 184(7) of the Act. But renewal of registration was refused by the Income-tax Officer on three grounds: (1) that no fresh instrument was drawn up to give effect to the changes in the nucleus of the divided family of Shanthi Nainar and his sons ; (2) that the partnership deed dated May 30, 1958, did not specify the individual shares of the partners with effect from May 2, 1960 ; and (3) that the firm constituted under the partnership deed dated May 1, 1960, was the real partner of the firm and that there could not be a valid partnership between an individual and a firm.

3. The assessee-firm preferred an appeal to the Appellate Assistant Commissioner but without success. The Appellate Assistant Commissioner upheld the order refusing renewal of registration holding. (1) that the partnership deed dated May 30, 1958, did not incorporate the change in the constitution of the firm ; (2) that the same did not specify the individual shares of the partners ; and (3) that the share of profits has been all along treated as the income of the firm of Shanthi Nainar and his sons showing that the newly constituted firm of Shanthi Nainar and his sons is the real partner in the assessee-firm. The assessee-firm took the matter to the Tribunal. The Tribunal took the view that if there was no other evidence available on record apart from the partnership deed dated May 30, 1958, the assessee perhaps could successfully contend that Shanthi Nainar was a partner of the assessee-firm in his individual capacity and that, therefore, even after the formation of the partnership between Shanthi Nainar and his sons under the partnership deed dated May 2, 1960, the assessee-firm is entitled to the renewal of registration. It, however, felt that the other circumstances of the case clearly pointed out that Shantbi Nainar was not a partner of the assessee-firm in his individual capacity, but only as a karta of the family consisting of himself and his three sons, and, hence, Shanthi Nainar was not the real partner of the firm but the Hindu undivided family of Shanthi Nainar and his sons was the real partner of the assessee-firm. It is in this view the Tribunal upheld the order refusing renewal of registration of the firm. At the instance of the assessee, the following question has been referred for our consideration:

'Whether, on the facts and in the circumstances of the case, the refusal to register the assessee-firm for the assessment year 1962-63, under Section 185 of the Income-tax Act, 1961, is valid in law ?'

4. Mr. K. Srinivasan, learned counsel for the assessee, points out that all the authorities below, including the Tribunal, are in error in going behind the terms of the partnership deed and dealing with the question ofregistration of the assessee-firm in the light of other facts and circumstances. According to the learned counsel, the partnership deed dated May 30, 1958, contemplated only two partners, Shanthi Nainar and Padmaraj, who were to share the profits and loss in the ratio of 13: 5, respectively. The partnership deed, as such, does not anywhere indicate that Shanthi Nainar represents the joint family of himself and his three sons. It may be that Shanthi Nainar in fact represented the Hindu undivided family of himself and his three sons in the assessee-firm and his share of the profits from the firm has been taken as the asset of the undivided family and dealt with as such. But the circumstance that Shanthi Nainar was liable to share his profit from the assessee-firm with the other coparceners of his family does not make the coparceners the partners of the assessee-firm.

5. The learned counsel relies on the decision in Commissioner of Income-tax v. Bagyalakshmi & Co., : [1965]55ITR660(SC) . in support of his submission. In that case, their Lordships of the Supreme Court has pointed out that a contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership, that it only regulates the rights and liabilities of the partners inter se, that a partner may be a karta of a Hindu family, he may be a trustee, he may enter into a sub-partnership with others, he may, under an agreement, express or implied, be the representative of a group of persons, he may be a benamidar for another, that in all such cases he occupies a dual position, that as regards the partnership, he functions in his individual capacity, but as to third parties, in his representative capacity. As per the said decision, Shanthi Nainar's sons, the other coparceners in the family, cannot claim to have any interest in the partnership. The Tribunal has referred to the above decision but has stated that, as, in this case, Shanthi Nainar was sharing his profits with his other coparceners of the joint family to the knowledge of the other partner, it must be held that the assessee-firm consisted of two partners, one of whom is the Hindu undivided family of Shanthi Nainar and his three sons. We are not able tc understand the reasoning of the Tribunal in this regard. The fact that the other partner, Padmaraj, had knowledge that the other partner, Shanthi Nainar, represented his Hindu undivided family will make no change in the legal position. Whether he had knowledge of the true position or not, the fact remains that the partnership deed dated May 30, 1958, on the face of it, does not show that the Hindu undivided family had any interest in the partnership. As pointed out by the Supreme Court in the same case, Shanthi Nainar might have had a dual position and he had to account for the share of the profits from the assessee-firm to the other coparceners of his family. This, however, cannot affect the rights of a partner's interest. The Tribunal hasreferred to the following observation of Mudholkar J. in Commissioner of Income-tax v. Chander Bhan Harbhajan Lal, : [1966]60ITR188(SC) . as supporting its stand :

'These observations are based on the fact that the person admitted as a partner in the firm seeking registration was so admitted as an individual. They cannot apply and were apparently not intended to apply to a kind of a case as the one we have here, that is, where the partner to the knowledge of the other partners was joining on behalf of and representing several persons.'

6. The view of Mudholkar J., that the fact that a partner was joining the firm on behalf of and representing several persons to the knowledge of the other partner or partners will affect the dual relationship between the named partners has not been accepted by two other learned judges, who delivered the majority judgment. As already stated, the correct position seems to be that, in deciding whether under the partnership deed a partner had been admitted as an individual or not, if the terms of the partnership deed are clear and unequivocal, no other consideration can be taken into account.

7. The decision of the Supreme Court in Agarwal & Co. v. Commissioner of Income-tax, : [1970]77ITR10(SC) .appears to us to be the direct decision on the point. In that case, a karta of a Hindu undivided family joined a firm as a partner. He contributed his share from out of the family funds. There also, the question arose as to whether the firm could be registered under Section 26A of the Indian Income-tax Act, 1922. Registration was refused on the ground that the real partners of the firm were the Hindu undivided families of the partners and that as the adult coparceners in the joint families exceeded 20 that could not be a valid partnership, as it contravened Section 4 of the Indian Partnership Act. Their Lordships of the Supreme Court expressed the view that for the purpose of finding out as to who are the partners of the firm, one has only to look to the partnership deed and not to go behind it, that if the partnership deed shows that the partners have entered into a partnership in their individual capacity, and there is nothing to indicate that they have done so as karta of their respective joint Hindu families it is not open to the revenue to go behind the deed and find for the purpose of registration that the partners have joined the partnership as representing their families and to refuse registration. In this case, the registration of the assessee-firm has been refused admittedly by going behind the partnership deed and taking certain facts and circumstances outside the partnership deed. This cannot be done, according to the above decision of the Supreme Court in Agarwal & Co. v. Commissioner of Income-tax. As already stated, the partnership deed is clear and unequivocal, and according to the partnership deed, Shanthi Nainar has been admittedas a partner only in his individual capacity. The partnership deed datedMay 30, 1958, has not been modified and the relationship between the twopartners referred to therein continued to be the same. Whatever be therelationship between Shanthi Nainar and his three sons as per the deed ofpartial partition or as per the partnership deed dated May 2, 1960, ShanthiNainar's relationship with his partner under the partnership deed datedMay 30, 1958, has not undergone any change. In our view, the renewal of registration in this case should be granted.The result is, that the question referred to us is answered in the negativeand in favour of the assessee. The assessee will be entitled to its costs.Counsel's fee Rs. 250.


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