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Hotchand Chattaram Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 47 and 137 of 1967 (Reference Nos. 19 and 50 of 1967)
Judge
Reported in[1974]96ITR586(Mad)
ActsIncome Tax Act, 1961 - Sections 256(1)
AppellantHotchand Chattaram
RespondentCommissioner of Income-tax
Appellant AdvocateS. Swaminathan and ;K. Ramagopal, Advs.
Respondent AdvocateJ. Jayaraman, Adv.
Cases ReferredOfficer v. A. Thimmayya
Excerpt:
.....- whether refusal to register firm justified - assessee contending that there was partition in family and partnership came into existence - partnership was registered firm having registered certificate - income tax officer rejected claim on ground that no partition in family - no discrepancies noticed lead to inference that no genuine partnership firm came into existence - no justification for refusal to register firm. - - the application was rejected for the above reasons as well as for the reasons that the application was belated. if the case contains anything ex facie which is bad in law and bears upon the determination, it is obviously erroneous in point of law. this is clearly wrong. if it had meant by this statement that there should have beena partition of the business..........individually but the department did not accept it and assessed the income from the business as a hindu undivided family consisting of hotchand, his son, bherumal, and bherumal's sons.muli bai had advanced her money of rs. 13,000 as a loan in the name of her minor son, harischand, and that was repayable to her. a return of income for this business was filed accordingly for the previous year relevant for the assessment year 1954-55, in the status of a hindu undivided family. on march 31, 1954, a partition deed was executed. under this partition, the business concern including its goodwill was allotted to bherumal and his two minor sons, harishchand and hashmatraj. the business was valued at rs. 8,000 and bherumal was directed to pay rs. 5,000 to muli bai, rs. 1,500 to hotchand and rs......
Judgment:

Ramaswami, J.

1. One Hotchand Chattaram, his son, Bherumal, and the three sons of Bherumal, namely, Kishoredas, Harishchand and Hashmat-raj, constituted a Hindu undivided family. They migrated from Pakistan at the time of partition of India and had settled down in Madras. 'They brought with them only the available cash of Rs. 30,000 when they left Pakistan out of which a sum of Rs. 13,000 belonged to Muli Bai, the wife of Bherumal. Bherumal had also preferred a claim to the Evacuee Settlement Officer for a sum of Rs. 33,832 in respect of the movable and immovable properties left in Pakistan. There was a business by name 'Hotchand Chattaram, Madras'. Bherumal had been contending that this business belonged to him individually but the department did not accept it and assessed the income from the business as a Hindu undivided family consisting of Hotchand, his son, Bherumal, and Bherumal's sons.Muli Bai had advanced her money of Rs. 13,000 as a loan in the name of her minor son, Harischand, and that was repayable to her. A return of income for this business was filed accordingly for the previous year relevant for the assessment year 1954-55, in the status of a Hindu undivided family. On March 31, 1954, a partition deed was executed. Under this partition, the business concern including its goodwill was allotted to Bherumal and his two minor sons, Harishchand and Hashmatraj. The business was valued at Rs. 8,000 and Bherumal was directed to pay Rs. 5,000 to Muli Bai, Rs. 1,500 to Hotchand and Rs. 500 to Kishoredas. Bherumal and his minor sons were to take Rs. 1,000. It is seen from the balance-sheet of the joint family as on March 31, 1954, that the liabilities of the business amounted to Rs. 28,764-14-5 while the assets were valued at only Rs. 21,995-8-10, leaving a sum of Rs. 7,209-11-1 as the excess of liabilities over the assets. One of the liabilities shown is a sum of Rs. 15,814-2-3 in the name of Harishchandra payable, to Muli Bai. It is not clear how the sum of Rs. 13,000 stated to have been advanced by Muli Bai as a loan swelled to Rs. 15,814-2-3. The partition deed recites that Muli Bai agreed to receive Rs. 5,000 from the parties and offered to take back the balance of Rs. 8,000 with interest at 6% when the claim amount from the Evacuee Settlement Officer is received. It is further stated that she agreed to relinquish her claim if no amount is received from the Evacuee Settlement Officer as the business was not in a position to repay the entire debt due to her. When this sum of Rs. 15,814-2-3 is taken out thus from the liabilities, the business showed a net asset of Rs. 8,605 which was rounded off to Rs. 8,000 and that is how the business came to be valued at Rs. 8,000 in the partition deed. On April 1, 1954, Bherumal, as one of the partners, and Kishoredas, major son of Bherumal, as the second partner, entered into partnership for carrying on the business of 'Hotchand Chattaram' as a partnership business with equal rights and liabilities. In this partnership deed it was recited that Hotchand and the son, Bherumal, were divided in status even in 1944, that Bherumal was carrying on the business of Hotchand Chattaram as a sole proprietary concern though he adopted the name of his father out of affection and respect for him, that Muli Bai had agreed to help Bherumal to the extent of a sum of Rs. 10,000 on condition that Kishoredas was taken as a partner and, accordingly, they were entering into a partnership. This partnership was registered with the Registrar of Firms as seen from the certificate of registration dated April 14, 1954, issued by the Registrar of Firms, Madras. A current account was opened in the name of Hotchand Chattaram with Bherumal and Kishoredas as partners with the Bank of Bikaner on April 7, 1954, as seen from the certificate issued by the Bank of Bikaner Ltd.

2. For the assessment year 1955-56, a return of income was filed by the assessee herein in the status of a firm of partnership with Bherumal and Kishoredas as partners. An application for grant of registration of the firm under Section 26A of the Indian Income-tax Act, 1922, was also filed before the Income-tax Officer. The Income-tax Officer rejected this claim on the ground that there was no partition in the family. For the assessment year 1956-57 also a return was filed in the status of a partnership firm with an application under Section 26A. The application was rejected for the above reasons as well as for the reasons that the application was belated. The appeals preferred to the Appellate Assistant Commissioner against the rejection of the registration of the firm under Section 26A for the above two assessment years were also dismissed on the ground that the applications were belated. For the assessment years 1957-58 and 1958-59, the assessee applied for registration of the firm under Section 26A, contending that there was a partition in the joint family on March 31, 1954, and the partnership came into existence on April 1, 1954, in respect of the business. In addition to producing the partnership deed dated April 1, 1954, the partition deed dated March 31, 1954, the certificate of registration issued by the Registrar of Firms and the letter of the Bank of Bikaner showing opening of a current account by the firm, the assessee also produced sales tax assessment orders on the firm for 1954-55 onwards, import quota obtained by the firm, account books of the firm showing separate capital account of partners and allocation of profits during the year and accounts for the disposal of old stock of the erstwhile family business separately and unconnected with the firm. It may be mentioned that though the old stock-in-trade of the erstwhile family business was allotted to Bherumal, that stock was not brought into account as the opening stock of the partnership firm but it was claimed that they were sold separately and the sundry debtors of the old business of the family were paid off with that money. According to the auditor's letter, dated 26th September, 1958, the capital contributed by Bherumal was Rs. 1,000 and that of Kishoredas was Rs. 700 and these were stated to have been obtained as loans from friends. The Income-tax Officer was of the view that the statement of assets and liabilities in the status of a Hindu undivided family as on March 31, 1954, narrated in the partition deed is not correct with reference to the balance-sheet of the family as on March 31, 1954. Since the partition deed was not in consonace with the balance-sheet of the family, according to him, 'it cannot be said that there has been a partition of the Hindu undivided family in the manner contemplated by law. If there has been no partition of the family, it cannot be said that the partnership deed which follows subsequent to the partition of the family is a genuine document which is to be acted upon. On this groundalone, the assessee's claim for registration of the firm stated to have come into existence on April 1, 1954, consequent on the dissolution of the family is to be rejected as no genuine firm has come into existence'. In this view, he rejected the application for registration of the firm under Section 26A and also held that, in view of the scheme of the Income-tax Act, the Hindu undivided family will have to be assessed as such until it was established that a partial or full partition had taken place by metes and bounds. He concluded by stating: ' It is held that no genuine firm came into existence as there was no partition of the family as on March 31, 1954.' For 1958-59 also, he rejected the application under Section 26A on the ground that there was no partition of the Hindu undivided family in the manner contemplated by law as on March 31, 1954. Against the rejection of the application under Section 26A and the assessments made on the Hindu undivided family in respect of the assessment years 1957-58 and 1958-59, four appeals were preferred by the assessee to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the refusal of the Income-tax Officer to register the firm was misconceived both on facts and law. He found that the closing stock of the business of the erstwhile Hindu undivided family was not handed over to the new firm but instead sold gradually by the persons to whom it was allotted, viz., Bherumal and his minor son, Harishchandra. It will not, therefore, find a place as an opening stock in the partnership firm. He also held that even assuming that there was a discrepancy between the assets and liabilities of the erstwhile Hindu undivided family and the new firm, it would not be sufficient ground for rejecting the appellant's claim for registration of the partnership firm. In this connection he also relied on the decision of this court in Meyappa Chettiar v. Commissioner of Income-tax, : [1950]18ITR586(Mad) . He referred to the evidence produced by the assessee the details of which were referred to above and came to the conclusion that there was substantial evidence showing complete partition of the family and constitution of the partnership firm.' He accordingly set aside the orders of the Income-tax Officer under Section 26A and directed him to register the firm and to apportion its profits or losses amongst its partners. In that view he also set aside the assessments on the Hindu undivided family with a direction to pass fresh assessment orders de novo in the status of a registered firm. The department preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal set aside the orders of the Appellate Assistant Commissioner on the following grounds : Though the balance-sheet of the joint family as on March 31, 1954, showed a liability of Rs. 7,209, that liability was not divided in the partition deed but by some sort of strange adjustment it was valued at Rs. 8,000, Whereas thepartition deed proceeded on the footing that the business belonged to the Hindu undivided family and the figures are worked out on that basis, the partnership between Bherumal and his sons had stated that the business was the individual business of Bherumul and Hotchand was not possessed of any property. The partnership deed recited that Mali Bai agreed to advance a sum of Rs. 10,000 to the firm if Kishoredas was also taken as a partner, but there was no proof that the sum of Rs. 10,000 was given by Muli Bai and this was invested in the business of the firm. On the other hand, the auditors in their letter dated September 25, 1958, stated that Rs. 1,000 was invested by Bherumal and Rs. 700 was invested by Kishoredas. The department had already held prior to the alleged partition that the business was that of a Hindu undivided family. Therefore, if the concept of the firm had to take shape, the Hindu undivided family which was in the way had to be got out. This has not been done. The assets and liabilities of the erstwhile family business which were allotted to Bherumal's share were kept separate and distinct from the new partnership. There are variations in the figures and statements. Therefore, there was no partnership and no genuine-firm came into existence.

3. On the direction of this court in a petition filed by the assessee under Section 66(2) of the Indian Income-tax Act, 1922, the following two questions were referred in T.C. No. 137 of 1967 relating to assessment years 1957-58 and 1958-59 :

'1. Whether the refusal to register the firm of Hotchand Chattaram is justified

2. Whether the assessment made in the status of a Hindu undivided family is justified ?'

4. For the assessment years 1959-60 and 1960-61 also, the applications for registration of the firm under Section 26A were rejected by the Income-tax Officer following his earlier orders. The Appellate Assistant Commissioner, following his order, allowed the appeal. The Appellate Tribunal reversed the order of the Appellate Assistant Commissioner and upheld the orders of the Income-tax Officer following its decision in respect of the assessment years 1957-58 and 1958-59. At the instance of the assessee, the Tribunal has referred under Section 256(1) of the Income-tax Act, 1961, identical questions as were referred to for the years 1957-58 and 1958-59.

5. Both the Income-tax Officer and the Appellate Tribunal proceeded on an erroneous assumption that if the partition had not been effected strictly with reference to the shares of the members in the assets and liabilities of the Hindu undivided family there could not be a partition of the Hindu undivided family in the manner contemplated by law and if there had been no such legal partition of the family, there could not be a partnership which according to them could only follow the partition of the family. Apart from the fact that this view is untenable in law, the view of the Tribunal on facts that there could not have been a partition in the joint family is vitiated by utter misunderstanding of the facts and the conclusion of the Tribunal arrived on such misunderstanding vitiates the entire order. The facts found also, in our opinion, do not lead to the inference that there could not have been any genuine partition. As already noticed, while setting out the facts, though the balance-sheet of the joint family as on March 31, 1954, showed an excess of liability of Rs. 7,209 odd, the business was valued at Rs. 8,000 after making certain other adjustments. The Tribunal did not disbelieve that Muli Bai had advanced Rs. 13,000 to the business originally. The balance-sheet as on March 31, 1954, showed that a sum of Rs. 15,814 odd stood in the name of Harishchand which was payable to Muli Bai. The partition deed stated that Muli Bai agreed to take Rs. 5,000 from the parties towards the amount due to her and take the balance, if any amount is received from the Evacuee Settlement Officer or, otherwise, relinquish her claim. This resulted in the estimated valuation of the business at Rs. 8,000. There is nothing strange in this adjustment made in the partition deed. It may be mentioned, the sum of Rs. 13,000 formed part of the cash of Rs. 30,000 which the parties brought from Pakistan. The family lost a lot of property due to the partition of India. Muli Bai is the wife of Bhenimal. These facts were completely overlooked by the Tribunal. We are also unable to see how the statement in the partnership deed that the business of Hotchand Chattaram was the proprietary business of Bherumal could in any way disprove the partition or affect its legality. The Tribunal itself had noticed that Bherumal had been setting up his case that the business belonged to him individually, that the department would not accept it and taxed the income from the business in the year 1954-55 as belonging to the Hindu undivided family. That might have necessitated the partition, but at the same time Bherumal did not give up his case that the business was his proprietary concern and not the joint family business. Therefore, the statement in the partnership deed that it was his proprietary concern was consistent with his case and does not in any way affect the partition effected on the basis that it was a joint family business. The assets and liabilities of the old business were allotted to Bherumal's share but he did not bring those assets and liabilities in the new partnership and, as noticed by the Tribunal, they were kept separate and distinct from the new partnership. We are unable to understand how this could lead to the inference that the new partnership was not a genuine one. Actually, as noticed earlier, the stock-in-trade was sold and some of the sundry debtors of the old business were paid off. One other circumstance referred to by the Tribunal as going against the genuineness of the firm is that though the partnership deed recited thatMuli Bai agreed to advance Rs. 10,000 on condition that Kishoredas was taken in as a partner, the partnership accounts did not prove the advance of Rs. 10,000. We are unable to agree with the Tribunal that this fact leads to the inference that the partnership was not genuine. It may be that she agreed to give but after the partnership came into existence she did not, in fact, give. But it is seen from the order of the Tribunal itself that it is not as if she did not advance any money at all. She had been advancing smaller amounts on various dates and not as a lump sum. We are, therefore, of the opinion that none of the facts found or the discrepancies noticed, in any way, lead to the inference that no genuine partnership firm came into existence.

6. The learned counsel for the assessee submitted that a disruption of the joint family is not essential to the validity of a partnership among the members of the joint family and in this connection relied on the decision of the Privy Council in Sundar Singh Majithia v. Commissioner of Income-tax, [1942] 10 I.T.R. 457 . In that case, a Hindu undivided family consisting of a father, his wife and three sons owning among others a sugar factory submitted an application for registration of a firm stating that the father, wife and three sons divided the sugar factory among themselves in a certain fixed share while retaining the status of a joint Hindu family in respect of the other properties and a partnership has been formed in respect of the sugar factory under a partnership deed between the father, wife and sons. On a rejection of the application for registration on the ground that Section 25A of the Income-tax Act prevented a partial partition of the family property without a disruption of the family itself being recognised, the Privy Council held that Section 25A does not prohibit members of an undivided Hindu family from entering into a partnership in respect of a portion of the joint family property. The Privy Council observed :

'When a document purporting to be an instrument of partnership is tendered under Section 26A on behalf of a firm and application is made for registration of the firm as constituted under such 'instrument, a question may arise whether the instrument is intended by the parties to have real effect as governing their rights and liabilities inter se in relation to the business or whether it has been executed by way of pretence in order to escape liability for tax and without intention that its provisions should in truth have effect as defining the rights of the parties as between themselves. To decide that an instrument is in this sense not genuine is to come to a finding of fact; whether there was evidence upon which it was open to the income-tax authority to come to such a decision is a question of law.'

7. As seen from the facts in that case, with respect to a joint family business which was one of the assets of the joint family, the Privy Council held that there is nothing in the Hindu law which prohibits the members of a Hindu undivided family while remaining joint from entering into a partnership in respect of a business which they have partitioned and the registration of the firm shall not be refused. But the question in this case is whether the business was partitioned or remained a joint family asset. If the business was partitioned, then there is nothing preventing the constitution of a partnership firm. But, the Income-tax Officer and the Tribunal were of the view that there was no genuine partnership on the ground that there was no legal or genuine partition. If the Tribunal's findings were to be accepted, the decision is not applicable to this case.

8. The counsel for the revenue contended that the question whether there was a partition of the joint family business is essentially a question of fact and that could not be challenged on a reference under Section 66 of the Indian Income-tax Act, 1922. In various decisions dealing with this matter, the legal position is put in different ways. In some cases, it is held that inference from facts stated are matters of law and can be questioned on a reference. The same remark is true as to the construction of documents. The conclusions of the Tribunal on proved or admitted facts may themselves be conclusions of pure fact. In such cases, the determination in point of law is that the facts proved or admitted provide evidence to support the Tribunal's conclusion. If the Tribunal had acted without any evidence, or upon a view of the facts which could not reasonably be entertained, the court could interfere with that finding. If the case contains anything ex facie which is bad in law and bears upon the determination, it is obviously erroneous in point of law. Even without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law should have come to the determination which was come to by the Tribunal. In such circumstances, the court must intervene. It is not necessary for us to refer to the various decisions on this aspect because primarily the question will have to be decided with reference to the facts and circumstances in each case. Is the evidence in this case such that the Tribunal was obliged to act upon If the evidence was not such on which the Tribunal was obliged to act, the conclusion cannot be questioned. But if the evidence is such that the Tribunal was obliged to act and the Tribunal ignored or did not act even if the ultimate finding is substantially a finding of fact, the conclusion could be challenged in a properly framed reference. The learned counsel for the assessee is welt-founded in his contention that the facts in this case do not warrant an inference that there was no genuine partnership and the questions referred to this court enable us to decide the justifiability of that inference. We have already seen that the evidence in this case was acceptable and that the conclusions of the Tribunal are vitiated by a wrong understanding of the complicated facts. The proposition that inference to be drawn from facts proved or found, which itself may be a finding of fact, is not liable to challenge in a reference is subject to the conditions that the evidence available is correctly and properly understood and that the evidence which is to be acted upon is not improperly or illegally rejected and that it does not suffer from any confusion in the mind or wrong understanding of the facts. The evidence in this case as noticed earlier was acceptable, but the Tribunal did not act upon it on unfounded suspicion. Further, the Income-tax Officer thought that if the division of assets and liabilities were not in accordance with the shares to which the members of the family are entitled that partition would not be in accordance with the law and that is enough to hold that there was no partition. This is clearly wrong. An unequal partition is not unknown to law. An unequal partition can never be a real partition as held in Meyyappa Cheittiar v. Commissioner of Income-tax. The Tribunal did not give a specific finding that there was no legal partition. It characterised the evidence as 'lot of confusion, departure from facts and variation in figures and statements'. The Tribunal also observed that, 'if the concept of the firm had to take shape, the Hindu undivided family which was in the way had to be got out. This has not been done'. On this view, it held, 'there was no partnership and no genuine firm came into existence'. We have noticed in the beginning of this judgment the facts in their sequence. The facts, though complicated, are definitely not confusing or conflicting. The Tribunal was also not fully correct in law in observing that if the concept of the firm had to take shape, the Hindu undivided family which was in the way has to be got out. If it had meant by this statement that there should have beena partition of the business before the constitution of the partnership firmin respect of the same, it is perfectly justified. But, if it had meant thatthere should have been a disruption of the joint family before there couldbe a partnership firm with reference to the business, then that would notbe correct and against the decision of the Privy Council in Sundar SinghMajithia v. Commissioner of Income-tax. As we understand the order, theTribunal only meant that the business should cease to be the joint familybusiness before it could be carried on as a partnership concern. As wehave seen above, the facts in this case could lead to the only conclusionthat there was a partition of the business under the deed of partition datedMarch 31, 1954. We have also the undisputed facts that the firm was registered with the Registrar of Firms, that the partnership opened an accountwith a bank in the name of the firm with Bherumal and Kishoredas aspartners and that the individual partners were credited with their capitalsand profits of the firm The firm consisted of only two partners and the other members of the original joint family are also not partners. The firm was assessed to sales tax as a partnership firm right from 1954-55. Import licences were issued to the partnership firm on the basis that there is a genuine partnership. On these facts, we are of the opinion that there was no justification for refusal to register the firm.

9. The learned counsel for the revenue next contended that without an order under Section 25A recognising the partition, the joint family could not be considered to have disrupted for the purpose of the Income-tax Act and, therefore, the registration of the firm under Section 26A could not be effected. As held by the Supreme Court in Additional Income-tax Officer v. A. Thimmayya, [1965] 55 I.T.R. 667 .:

'The scheme of Section 25A is, therefore, clear: a Hindu undivided family hitherto assessed in respect of its income will continue to be assessed in that status notwithstanding partition of the property among its members. If a claim is raised at the time of making an assessment that a partition has been effected, the Income-tax Officer must make an inquiry after notice to all the members of the family and make an order that the family property has been partitioned in definite portions, if he is satisfied in that behalf. The Income-tax Officer is by law required still to make the assessment of the income of the Hindu undivided family, as if no partition had taken place and then to apportion the total tax liability and to add to the separate income of the members or groups of members the tax proportionate to the portion of the joint family property allotted to such members or groups of members and to make under Section 23 assessment on the members accordingly.' If no claim for recording partition is made, or if a claim is made and it is disallowed or the claim is not considered by the Income-tax Officer, the assessment of the Hindu undivided family which has hitherto been assessed as undivided will continue to be made as if the Hindu undivided family has received the income and is liable to be assessed. '

10. In this case, at the time of assessment the assessee claimed that there was a partition in the joint family and the constitution of a partnership firm. The Income-tax Officer held that in view of the scheme of the Income-tax Act to assess a Hindu undivided family until it establishes that a partial or full partition had taken place by metes and bounds, the income is liable to be assessed in the status of a Hindu undivided family. Thus, the order of the Income-tax Officer was a composite order both refusing to recognise a partition and rejecting the application for registration of the firm. Four appeals were preferred against this order to the Appellate Assistant Commissioner in respect of the assessment years 1957-58 and1958-59. Two of the appeals were against the order rejecting the application for registration under Section 26A and the other two were against the assessments made in the status of a joint faintly contending that the assessments should have been made in the status of a firm or partnership. The Appellate Assistant Commissioner allowed all the appeals directing further to make an assessment de novo in the status of a registered firm. On an appeal by the department, the Tribunal set aside the order of the Appellate Assistant Commissioner and held that no partnership and no genuine firm came into existence. It further observed: 'It follows that the assessment will have to be made in the hands of the Hindu undivided family.' The two questions referred also cover both these aspects. We have held that there is no justification for refusing to register the firm and, therefore, it follows that the assessments made in the status of a Hindu undivided family is also not justified.

11. For the foregoing reasons, we answer the questions in T. Cs. Nos. 137 of 1967 and 47 of 1967 in the negative and against the revenue. The petitioner will be entitled to costs. Counsel's fee, Rs. 150, in each of the cases.


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