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Commissioner of Wealth-tax Vs. J.K.K. Angappa Chettiar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 497 of 1974 (Reference No. 241 of 1974)
Judge
Reported in[1979]116ITR456(Mad)
ActsIncome Tax Act, 1922 - Sections 25A
AppellantCommissioner of Wealth-tax
RespondentJ.K.K. Angappa Chettiar
Appellant AdvocateNalini Chidambaram, Advs.
Respondent AdvocateS. Swaminathan and ;K. Ramgopal, Advs.
Cases ReferredAppovier v. Rama Subba Aiyan
Excerpt:
.....with under partition shall belong to assessee - clause did not in any manner affect legal right of sons to profits arising from partnership firms and other investments for profits did not vest in assessee wholly or exclusively. - - the deed recited that the assessee is intending to enter the cinema field and also do partnership business in a big way in partnership with third parties and that since the panchayatdars and well-wishers decided that such business would not be in the interest of the family and desired the minors to be relieved from any possible liabilities, the parties have decided to divide the huf and effect the partition. the tribunal held that the legal right of the minors to claim the share of profits attributable to their capital cannot be defeated even if there is..........a right to division of profits of the partnership firms. since there has been a partition of the family capital account in the four partnership firms between the assessee and his two minor sons and since the assessee was exclusively receiving income from the partnership firms, there is a legal liability to account for the minors' share in the profits.' 3. it further held that since the assessee had gained an advantage in derogation of the rights of the minor sons in the capital account and by taking advantage of the position gained something exclusively for himself, he has a legal liability to share the profits under section 90 of the indian trusts act. on these findings the tribunal was of the view that the profits, assets, accretions and investments made out of the profits from the.....
Judgment:

V. Ramaswami, J.

1. The assessee was a member of the HUF consisting of himself and his two minor sons up to the assessment year 1961-62. The HUF had interest in various partnership firms. There was a partition on March 31, 1961, in the presence of panchayatdars as a result of which the capital account of the family in the various partnership firms was equally divided between the assessee and his two minor sons, Kandaswami and Ashokan. The claim of partition was also accepted and an order under Section 25A of the Indian I.T. Act, 1922, was also made by the ITO. In respect of the assessment years 1962-63 and 1963-64, the assessee on September 18, 1963, filed his wealth-tax returns. In these returns, the entire interest in the various partnership firms was shown as belonging to the assessee and the only liability claimed was to the sons as shown in the balance-sheet representing the amounts due to the sons in the capital account according to the panchayatdar's award. This amounted to Rs. 1,26,574 and Rs. 1,34,168, respectively, for the assessment years 1962-63 and 1963-64 in favour of the minor, Kandaswami, and Rs. 1,25,354 and Rs. 1,32,875, respectively, for the assessment years 1962-63 and 1963-64 in favour of the minor, Asokan. The profits in the various partnership firms received by the assessee for the assessment year 1962-63 was Rs. 9,86,258, for the assessment year 1963-64 Rs. 7,85,166 and for the assessment year 1964-65, Rs. 15,67,609. For the assessment years 1962-63 and 1963-64, the assessee filed revised returns contending that in the total wealth is included the share of profits from the partnership firms and since 2/3rds of the capital account in the firm belonged to his two minor sons by virtue of the partition their share in the profits should be excluded in the computation of his net wealth. The amount to be excluded was worked out at Rs. 6,57,506 for the assessment year 1962-63 and Rs. 5,23,442 for the assessment year 1963-64. For the assessment year 1964-65; the assessee submitted a return on the same basis dividing the profits and investments in partnerships between himself and his two minor sons. The WTO came to the conclusion that the capital standing to the credit of the assessee in the books of the various partnership firms in which he was originally a partner as the karta of the HUF was divided equally among the assessee and his sons under the partition deed dated March 31, 1961. 3ut all the same he held, relying on certain recitals in the partition deed, that the sons had no further interest in the partnership business, that the assessee was exclusively entitled to the interest in the partnership and that, therefore,the entire share of profits in the business belonged to the assessee. In support of this conclusion, the WTO also relied on the income-tax assessments where the full share of income from the firm was shown by the assessee till the assessment year 1964-65 and also the fact that in the original wealth-tax returns filed by the assessee for the assessment years 1962-63 and 1963-64, the assessee had disclosed the full interest of the partnership firms as belonging to him.

2. On appeal by the assessee, the AAC held that a reading of the partition deed shows that only the capital invested in the various partnership firms had been divided and nothing has been mentioned regarding the right to profits and that, therefore, the minor sons of the assessee had no right to claim a share in the profits from the partnership firms. All the same, the AAC held that the minor sons of the assessee are entitled to the amount awarded to them by the panchayatdars with 6% of the amount in the capital account in the partnership firms which is referable to the minors' 2/3rds share. On a further appeal, the Tribunal held :

'There was a division of the capital account among the coparceners of the joint family. The interest in the various partnership firms belonging to the joint family was to be held by the assessee and his two sons as tenants-in-common with a right to division of profits of the partnership firms.

Since there has been a partition of the family capital account in the four partnership firms between the assessee and his two minor sons and since the assessee was exclusively receiving income from the partnership firms, there is a legal liability to account for the minors' share in the profits.'

3. It further held that since the assessee had gained an advantage in derogation of the rights of the minor sons in the capital account and by taking advantage of the position gained something exclusively for himself, he has a legal liability to share the profits under Section 90 of the Indian Trusts Act. On these findings the Tribunal was of the view that the profits, assets, accretions and investments made out of the profits from the 'partnership firms attributable to the minors' share can no longer be considered as the wealth of the assessee and consequently they have to be excluded in the computation of the, net wealth of the assessee. At the instance of the revenue, the following questions of law have been referred under Section 27(1) of the W. T. Act, 1957:

'1. Whether, on the facts and in the circumstances of the case and having regard to the terms of the partition deed dated March 31, 1961, the right to share the future profits of the firms was held both by the assessee and his divided sons and was not vested in the assessee wholly and exclusively

2. Whether, on the facts and in the circumstances of the case, Clause 5 of the partition deed cannot override the legal rights and obligations created under the document and, therefore, it should not be interpreted to mean that the profits from the partnership firms exclusively belonged to the assessee

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the profits and accretions attributable to the share of the assessee's sons in the partnership firms should be excluded from the wealth-tax assessments made on the assessee as individual for assessment years 1962-63 to 1964-65 ?'

4. Before dealing with the questions, it is necessary to set out the terms of the partition deed. The partition deed was executed between the assessee and his two minor sons, Kandaswami and Ashokan, represented by their mother and guardian. The deed recited that the assessee is intending to enter the cinema field and also do partnership business in a big way in partnership with third parties and that since the panchayatdars and well-wishers decided that such business would not be in the interest of the family and desired the minors to be relieved from any possible liabilities, the parties have decided to divide the HUF and effect the partition. Under para. 3 of the partition deed, the immovable properties of the joint family were divided among the three sharers, namely, the father and the two minor sons and the properties were allotted to them separately. Under para. 4, all capital investments in partnership were divided into three equal shares and one share allotted to each one of them. We will deal with para. 5 a little later. In para. 6, it is stated that, apart from the immovable and movable properties and investments that have been divided, there are no other properties belonging to the joint family. In para. 5, it is stated that 'all the family business and interest in partnerships shall hereafter belong to J. K.K. Angappa Chettir (assessee). The investments made in partnerships and the profits received up to date had been respectively brought into account. The rest shall be taken by J.K.K. Angappa Chettiar '. The WTO and the AAC considered that this clause entitles the assessee to claim the entirety of the profits arising from investments of capital in the partnership firms though the amount invested as capital had been divided into three shares among the assessee and his two minor sons. The Tribunal held that the legal right of the minors to claim the share of profits attributable to their capital cannot be defeated even if there is a stipulation in the partnership deed that in spite of division of the capital account of the family in the various partnerhip firms, the profits in the firms exclusively belonged to the assessee. As already stated, the Tribunal took the view that in respect of the profits received by the assessee and referable to the capital of the minors, the assessee was undera legal liability to share the profits under Section 90 of the Indian Trusts Act.

5. It is seen from the facts that originally the assessee as the karta of the HUF was a partner in the various partnership firms since the HUF as such could not be a partner. This was so because, as pointed out by the Privy Council in Pichappa Chettiar v. Chokalingam .

'Where a managing member of a joint family enters into a partnership with a stranger the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Contract Act. In such a case the family as a unit does not become a partner, but only such of its members as in fact enter into a contractual relation with the stranger : the partnership will be governed by the Act.'

6. The assessee was receiving his share of profits on behalf of the HUF. When the partition took place, the HUF ceased to exist in so far as the capital investments were concerned. But since there is no division in metes after the partition, the parties were holding investments as tenants-in-common and thus they were entitled to the profits arising from such investments in accordance with their shares in the investments. This legal position has also been held in some decided cases. The Madhya Bharat High Court in Ramchandra v. Pannalal, AIR 1957 M p 113, held that where a joint Hindu family has been disrupted, there is severance in status and the members of the family cease to be joint tenants ; they become tenants-in-common and do not remain coparceners. In the words of the Privy Council in Appovier v. Rama Subba Aiyan [1866] 11 MI A 75 :

'Nothing can express more definitely a conversion of the tenancy, and with that conversion a change of the status of the family quoad this property. The produce is no longer to be brought to the common chest, as representing the income of an undivided property, but the proceeds are to be enjoyed in six distinct equal shares by the members of the family, who are thenceforth to become entitled to those definite shares.'

7. The profits realised by the assessee thus did not belong to him exclusively and he was holding it on behalf of himself and his two sons who were entitled to the same. With reference to the rights of a divided member against the manager, the following passages from Mayne's Hindu Law, 11th edn., at pages 518 and 519, may be quoted ;

'As from the date when the right to partition accrues, however, the manager will be bound to render an account of the same nature as would be demanded from a trustee or agent. The time from which such an account can be demanded would seem to be the date of the severance. It will be the date of the first unequivocal declaration by a member of the family of his desire to enforce a partition.

Until a severance in status is effected, no member of the coparcenary has a defined share, and consequently he can put forward no claim for mesne profits or for any share of income from the joint family properties. The moment a severance takes place, whether by mutual agreement, or by unilateral declaration of intention or otherwise, the right to claim mesne profits as from that moment arises.'

8. It may be seen from these passages that the karta on and from the date of partition becomes liable to render an account of the profits and the liability to such account is as that of a trustee or agent. Thus, when there is no division by metes and bounds of the capital investments on partition, a change in the legal liability in respect of accounting takes place. The assessee who was holding the profits as karta before partition holds the same after partition as a trustee or agent. The Supreme Court considered a similar question in Charandas Haridas v. CIT : [1960]39ITR202(SC) with reference to the effect of partition upon the position of the karta of a HUF who was a partner in a partnership. The Supreme Court held (p. 208):

'In our opinion, here there are three different branches of law to notice. There is the law of partnership, which takes no account of a Hindu undivided family. There is also the Hindu law, which permits a partition of the family and also a partial partition binding upon the family. There is then the income-tax law, under which a particular income may be treated as the income of the Hindu undivided family or as the income of the separated members enjoying separate shares by partition. The fact of a partition in the Hindu law may have no effect upon the position of the partner, in so far as the law of partnership is concerned, but it has full effect upon the family in so far as the Hindu law is concerned. Just as the fact of a karta becoming a partner does not introduce the members of the undivided family into the partnership, the division of the family does not change the position of the partner vis-a-vis the other partner or partners. The income-tax law before the partition takes note, factually, of the position of the karta, and assesses not him qua partner but as representing the Hindu undivided family. In doing so, the income-tax law looks not to the provisions of the Partnership Act, but to the provisions of Hindu law. When once the family has disrupted, the position under the partnership continues as before, but the position under the Hindu law changes. There is then no Hindu undivided family as a unit of assessment in point of fact, and the income which accrues cannot be said to be of a Hindu undivided family. There is nothing in the Indian income-tax law or the law of partnership which prevents the members of a Hindu joint family from dividing any asset. Such diviion must, of course, be effective so as to bind the members ; but Hindu law does not further require that the property must in every case be partitioned by metes and bounds, if separate enjoyment can otherwise be secured according to the shares of the members. 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, and the law does not contemplate that a person should do the impossible. Indeed, the result would have been the same, even if the dividing members had said in so many words that they had partitioned the assets, because in so far as the firms were concerned, the step would have been wholly inconsequential.'

9. A Division Bench of the Calcutta High Court in CIT v. Dudwala & Co. : [1950]18ITR653(Cal) had to consider the nature of the liability of the manager after partition with reference to the capital invested in a partnership firm. In that case, the partners of a firm consisted of the manager of a joint Hindu family representing the family and a stranger. A suit for partition of the family was instituted by one of the members of the family which resulted in a compromise. The consent decree passed provided the shares of each of the members and further stated that the parties had twelve annas share in the firm which would remain joint and they would be entitled thereto according to the shares mentioned in the decree. When an application under Section 26A of the I.T. Act for registration of the firm was filed, it was refused by the ITO on the ground that as the joint family had come to an end it could not form a partnership with a stranger as such until and unless the separate members of the family along with the stranger formed themselves into a partnership and applied for registration. It was held that the fact that there was a disruption of the joint family had no effect at all on the constitution of the firm or the manager's status as a partner of the firm and, therefore, the partnership firm should be registered under Section 26A of the Indian I.T. Act. It was further held that on such partition only the nature of the liability of the manager vis-a-vis his coparceners was changed. In the words of the learned judges (p. 659):

'After the partition decree was passed, the Rai Bahadur would be liable to render account in respect of the twelve annas share on a different basis. But still he would continue to be a member of that firm and the partnership would not be in any way affected by the passing of that decree in the partition suit......

Vis-a-vis the members of the family the Rai Bahadur might be liable to account, as I said before, on a different footing. But he did not cease to be a partner of the firm and as such the application was rightly made under Section 26A on behalf of the firm...... '

10. These authorities clearly show that on and from the date of the partition the assessee was not entitled to the profits in its entirety and that he was entitled to only that portion of the profit referable to his share in the capital investment and the minors are entitled to the profits referable to their shares.

11. But what is contended by the learned counsel for the revenue is that Clause 5 enabled the assessee to appropriate the entirety of the profits to himself. We are unable to read anything in this clause as entitling the asses-see to appropriate the entirety of profits received from the investments in the partnership to himself. The original partition deed is in vernacular. We have given a true translation of the same above. The second sentence in that clause clearly shows that the investments made in partnerships and the profits received up-to-date had been respectively brought into account. This could only mean that the capital had been divided and brought to the account. All the profits up-to-date also had been brought to the account and divided. In fact, this is the finding of all the authorities. The first sentence, namely, that all the family business and interest in partnerships shall hereafter belong to J.K.K. Angappa Chettiar (assessee) shall be read in the context of a division of the capital and the necessity for disrupting the family itself. As already pointed out, the earlier portion of the partition deed mentions that the assessee was trying to enter into a partnership with third parties in a big way and also enter into cinema field taking a grave risk. The panchayatdars and the well-wishers of the family did not wish the family itself to take the risk and the assessee was to be left to himself. It is under those circumstances they mentioned in the first part of Clause 5 that anything which he does thereafter would be his liability, but it has nothing to do with the profits arising from the investments of joint family funds already made. The third sentence in para. 5 extracted above is in the nature of a residuary clause to the effect that whatever that is not dealt with under the partition shall belong to the assessee. We are unable to read anything in Clause 5 as suggesting that though the capital investment had been divided between the members of the joint family, the profits arising from them should exclusively belong to the assessee. We are of the view that Clause 5 does not in any way affect the legal right of the sons to the profits arising from the partnership firms and other, investments. Accordingly, we hold that the share of future profits from the firms was held by the assessee and his two divided sons and was not vested in the assessee wholly and exclusively and Clause 5 of the partition deed did not in any way affect this right. Accordingly, the profits attributable to the interest of the assessee's two minor sons in the various partnership firms have to be treated as their wealth and consequently they have to be excluded in computing the net wealth of the assessee. Accordingly, we answer the three questions in the foregoing terms and against the revenue. The assessee will be entitled to his costs. Counsel's fee Rs. 500.


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