NATENSAN J. - This is a reference under section 66(2) of the Income-tax Act, 1922, and the question referred runs thus :
'Whether there were materials on record to justify the conclusion of the Tribunal that there was no effective partition of July 24, 1954, with reference to any of all the assets mentioned in the Tribunals orde ?'
The assessee is Kuppiah Mudaliar as the karta of an undivided Hindu family consisting of himself and his son, Balasubramanian. He seeks to exclude the income from certain sources as not income of the undivided Hindu family, setting up a completed partition of the related items on July 26, 1954, pursuant to an agreement for partition entered into on June 14, 1954. The assessment orders involved in the references are for the assessment years 1955-56, 1956-57 and 1957-58. An order under section 25A(1) has been refused, but that does not preclude the assessee from contending that there has been partial partition in respect of particular movable items. The sources of income of the family were taken to b : (1) a dwelling house, (2) Government promissory notes, and (3) shares the family had in three partnership : (a) Haridranathi Rice Mill, Mannargudi, (b) Dhanalakshmi Rice Mill, Thiruthuraipundi, and (c) Dhanalakshmi Rice Trade, Thiruthuraipundi. The assessee seeks exclusion of the income from the partnerships and the Government promissory notes as not income of the Hindu undivided family.
The agreement for partition dated June 14, 1954, is shown as annexure 'A' to the agreed statement of the case. It refers to the division of movable properties of the Hindu undivided family and division of outstandings receivable by and payable to the family and sets out that the rice mill business of the Hindu undivided family would thereafter be conducted as co-owners. Provision is made for a registered deed of partition dividing the family properties by metes and bounds and the agreement ends with a declaration that the father and son, the two coparceners, shall thereafter have no relation in properties but only in blood. A regular registered deed of partition followed on July 26, 1954, and this sets out that the parties were members of an undivided Hindu family till June 14, 1954, and in accordance with the memorandum of agreement dated June 14, 1954, and, oral agreement they had divided the movable and immovable properties belonging to the Hindu undivided family as and from that date. In the Tribunals order, which is a common order for all the three assessment year, it is noticed that by the memorandum dated June 14, 1954, followed by a regular deed of partition dated June 26, 1954, all the agricultural lands and assets of the family were purported to have been partitioned. It is stated further that in the books maintained the capital was mutated by necessary entries on July 26, 1954, and the son opened his own books for the share of capital so received, while the father continued to hold the family books for his share. Referring to the division, the Appellate Assistant Commissioner in his order finds that, besides the agricultural lands, as regards which there was no dispute that there was a completed division, the family had the following asset : (1) capital, Rs. 2,25,539-15-4; (2) insurance policy on the life of the son; (3) share income in the three registered firms set out above; and (4) the dwelling house. The division of the above assets is stated to have been effected according to the Appellate Assistant Commissioner thu : A capital of Rs. 1,11,169 had been credited to the account of the son and this included the Government bonds of the value of Rs. 55,960, the character of income from which is now in question. These bonds had been lodged with the State Bank of India as security against an overdraft of Rs. 47,000 taken by the Hindu undivided family. These securities were obtained from the bank and endorsed by the father in whose name they stood in favour of his son only on November 16, 1956.
The Appellate Assistant Commissioner records that appropriate entries in the books of the firms, Dhanalakshmi Rice Mill and Dhanalakshmi Rice Trade, had been made showing the assessee and his son as partners and such admission had been recognised in the assessment of the two firms for the assessment year 1955-56. But the capital accounts relating to the investments of the family in the three firms were divided only on April 12, 1957, with effect from December 31, 1956, in the family books. The Appellate Assistant Commissioner took the view that, in regard to these two firms, for a completed partition during the relevant period, it was necessary that in the family books the capital account should have been divided on June 14, 1954. According to him, if that had been done, then even if the father and son had not been clearly admitted independently as partners in those firms, the existence of a sub-partnership could be recognised. As the capital in the books of the Hindu undivided family had been actually divided only on April 12, 1957, the share income from the firms till that date was held as belonging to the Hindu undivided family and therefore taxable as such in the hands of the karta, even though the firms had admitted the members as partners. With reference to the Government bonds, he took the view that as they had been transferred to the sons on November 16, 1956, only, the interest that might have been received thereafter on such bonds should be excluded from the income of the Hindu undivided family.
On appeal by the assessee, the Tribunal laid emphasis on the fact that the Government promissory notes had been endorsed in favour of the son who claimed them as having been allotted to his share in the partition only on November 16, 1956. With regard to the shares in the three firms, Tribunal pointed out that new deeds of partnership had been entered into only in respect of Haridranathi Rice Mill and Dhanalakshmi Rice Mill, while there was no information about the third firm. The new deed of partnership with reference to Haridranathi Rice Mill came in January, 1957. The deed of partnership relating to Dhanalakshmi Rice Mill, it was stated, is dated May 26, 1955. The Tribunals approach to the question is found in the following observations :
'The aforesaid assets are one which are held not as assets of any general business but independently on the basis of various documents of title, the Government promissory notes by the scrips and shares in partnership by the respective partnership deeds. Division of such assets must be through such documents. The books maintained by the assessee and the entries therein become totally irrelevant as no one can claim title through them.'
In that view, with reference to Dhanalakshmi Rice Mill for which registration had been granted under section 26A from 1955-56, the Tribunal observed that the department must be considered as having accepted partial partition. The profits from this concern were accordingly directed to be excluded from assessment for all the three years under appeal.
It is well settled that where a partial partition has been effected among the members of a Hindu undivided family, the income from the assets to the extent there has been division ceases to be income of the family and should no longer be assessed as such in the hands of the karta. To the extent there has been a completed division of the properties, the income from the properties would be the income of the individual members among whom the properties have been divided. It is equally clear, as pointed out in Commissioner of Income-tax v. Ramakrishnier, that an item of property which is not capable of division by metes and bounds such as the interest of the family in a firm can be divided by making necessary entries in the books of account and that would be satisfactory evidence of the partition of such an asset. Physical division on partial partition in respect of an item of joint family property could be insisted upon only where such division is practicable. Otherwise an allotment of shares should suffice. In the case of a trade, completed partition could be brought about and definite portions allotted by mere books entries. We shall examine in the light of the above principles whether there is evidence to justify the conclusion that there was no effective partition on July 26, 1954, with reference to the Government promissory notes and the share of the family in the other two partnership firms, Haridranathi Rice Mill and Dhanalakshmi Rice Trade. We have to bear in mind that it is not the case of the revenue that the partition in the assessees family was a pretence or sham.
We take up first the Government promissory notes. These securities stood in the name of Kuppiah Mudaliar who was the karta. In the division of the capital of the family which was shown as Rs. 2,25,539-15-4, on July 26, 1954, a sum of Rs. 1,11,169 was transferred to the credit of Balasubramanian, the son as seen from annexure D. This sum of Rs. 1,11,169 is made up, inter alia, of the Government promissory notes of the value of Rs. 55,960. Interest on these securities was credited to the account of Balasubramanian in the books of Kuppiah Mudaliar after April 13, 1954, vide annexure 'F'. The only basis on which interest on the Government promissory notes prior to November 16, 1956, have been treated by the Tribunal as income of the family it that the actual endorsements on the bonds were made on November 16, 1956. But when it is not the case of the revenue that the partition is unreal, it is clear that as and from July 26, 1954, the property in the Government promissory notes vested in the son. It may be that the securities stood in the name of the father and were actually endorsed in favour of the son on November 16, 1956. The promissory notes had been pledged with the State Bank for loan taken for the family and so the endorsement was made after they were got back on November 16, 1956. The entries in the books of account of the family clearly show the allotment of the promissory notes to the son, they being a component of the capital of Rs. 1,11,169 transferred to the share of the son. The trial balance was struck on April 12, 1954, and partition effected on July 26, 1954. As stated in the agreed statement of case, the son was got credited with the interest on the securities. Obviously, it is the allotment of the securities for the sons share in the partition that confers on him his separate title to the same. After the allotment, even though the securities may stand in the name of the father, he does not hold it as the karta of the family. The item has ceased to be the property of the undivided Hindu family and became the property of the son. In this connection we may usefully refer to the Full Bench decision of this court in Muthuveeran Chetty v. Govindan Chetty, where it has been held that a member to whom a promissory note was allotted on partition of the joint family properties is entitled to sue on the note even without an endorsement or deed of assignment in writing. On partition and allotment, the property in the note vested in the allottee by operation of law. That being the true legal position, in our view, there is nothing on record in this case to detract from the logical consequence following the allotment of these Government promissory notes to the share of the son on July 26, 1954. As between the father and son, both unity of ownership and enjoyment have been severed on the allotment.
We shall now take up for consideration the character of the income from the interest which the family had in the two partnership concerns, Haridranathi Rice Mill and Dhanalakshmi Rice Trade. As pointed out already, the Tribunal itself has excluded from the income of the family the income from Dhanalakshmi Rice Mill. The contention of the assessee is that after July 26, 1954, these income bearing assets have ceased to belong to the Hindu undivided family and even if there had been no reconstitution of the partnership firms vis-a-vis his son, the father was not a partner in the firm as karta of the undivided family. While under the income-tax law the undivided family is as such a unit of assessment, the partnership law as such does not treat the Hindu undivided family as a person who could enter into a contract of partnership. The contract of partnership may no doubt be with the head of the family; but he enters into the partnership contract as an individual. By the karta becoming a partner, the other members ipso facto do not become partners of the firm. No doubt the creditors of the firm would be entitled to proceed against the joint family assets including the shares of the other coparceners, but that is by reason of the personal law which entitles the karta in certain circumstances to pledge the credit of the joint family to the extent of its assets. The partition in the family has no effect upon the relationship of the parties inter se under he partnership law. But so far as the family is concerned, the effect of disruption is that the karta will cease to represent the other members in that capacity and an effective partition will efface the family as a unit for assessment of income-tax. Where the asset of the family in question which is subjected to division is a share in a partnership concern, there need be no immediate change in the partnership concern by the division in the family and the erstwhile karta may continue to be the partner. The partnership may refuse to take the several shares of the familys interest in the partnership as partners. But qua the members of the family, there will be change in the character in which the share is held. The karta will no more receive the income from the shares as head of an undividual family. Once an effective and binding division is brought about between the members with reference to any particular item, the income therefrom cannot be deemed to be the income of an Hindu undivided family. Of course, the division must be complete to the extent practicable, one that is possible and convenient in the circumstances having regard to the nature of the assets. When the asset in question is a share in a partnership and the family desire to retain the property, it will not always be possible for the allottees of the share to get themselves taken as partners of the firm. It will be at the option of the partnership to let in others. The question that will have to be considered in cases of assets of this kind is whether the parties took effective steps to divide their joint interest into separate interests and whether as between the members of the family who purport to get themselves divided with reference to the share, it is immediately effective.
Now to examine the case with reference to these two firms in the light of the above principle : As regards Haridranathi Rice Mills, in the assessees books of account the share of the profits of the son separately credited for the years 1954, 1955 and 1956 - vide annexure 1. No doubt, the capital adjustments were made only on April 12, 1957, as effective from December 31, 1956. But the agreement of partition specifically states that the father and son shall conduct the rice mill business thereafter as co-owners. The basis of rejection of the assessees claim in regard to this firm by the Income-tax Officer is that the shares stood in the name of Kuppiah Mudaliar and the son had not been admitted as a partner. The Income-tax Officer would state that therefore the share income would be in the assessees assessment. In our view, having regard to the nature of the assets, the members of the family having agreed to divide the assets and hold the same separately and profits received having been separately credited to the sons share, effective division has been brought about in respect of this asset. As between the father and son, it can clearly be posited that there has been a division of the assets by the agreement for partition followed up by the division of the income. In Appovier v. Rama Subba Aiyar the Privy Council observed :
'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.'
With reference to Dhanalakshmi Rice Trade, the Tribunal has remarked that there was no information about this firm, when considering the execution of the new deeds of partnership in relation to Haridranathi Rice Mill and Dhanalakshmi Rice Mill. In the admitted statement of the case, in paragraph 11 it is set out that from the assessment of 1955-56 onwards, the department had granted registration under section 26A of the Income-tax Act to Dhanalakshmi Rice Mill and Dhanalakshmi Rice Trade on the basis of Kuppiah Mudaliar and Balasubramanian being partners in their separate status. We may also advert to the other observations in the statement that in the books of Dhanalakshmi Rice Mill and Dhanalakshmi Rice Trade appropriate entries had been made showing Kuppiah Mudaliar and Balasubramanian as partners and the share of each in the profits had been separately credited to their respective accounts. True the capital in each of the two firms, Dhanalakshmi Rice Mill and Dhanalakshmi Rice Trade, that is, out of Rs. 5,000, Rs. 2,500 was transferred to the debit of Balasubramanian in the books of Kuppiah Mudaliar only on April 12, 1957, with effect from December 31, 1956. But notwithstanding this, the Tribunal has deleted from the assessable income the share income in regard to Dhanalakshmi Rice Mill relying on the registration under section 26A. We fail to see why the same principle cannot be applied with reference to Dhanalakshmi Rice Trade in the circumstances. No doubt, the fact that the sons are shown as partners in the books of the firm by itself may not conclusively establish disruption of the joint family. But here we have we have a precedent agreement for division. The only distinction that can be pointed out for treading Dhanalakshmi Rice Mill alone as divided is that there has been a fresh partnership deed entered in the on May 26, 1955, itself. In our view, this is not so material. Securing a deed of partnership is not a matter wholly in the hands of the members of the family. The Appellate Assistant Commissioners view was that, as regards the share of the Hindu undivided family in the two firms, Dhanalakshmi Rice Mill and Dhanalakshmi Rice Trade, the appropriate entries in the books of those firms showing the assessee and the son as partners are not enough. What he required was that in the family books the capital account should have been divided on June 14, 1954, itself. As pointed out already, this requirement the Tribunal has not looked for so far as Dhanalakshmi Rice Trade is concerned. In our view, once the interest of the family in the asset has been divided finally as between the father and son and profits are shared, nothing further is required. We have the fact that the partnership firm has admitted the father and son as partners and that is subsequent to their agreement for partition. This admission as partners has been recognised by the revenue from the assessment year 1955-56 by registration under section 26A as stated in paragraph 11 in the statement of the case. In the light of the principles discussed above and following the decision in Commissioner of Income-tax v. Ramakrishnier cited above, without hesitation it can be stated that there is nothing on record to hold that there was no effective partition of the familys share in this firm also.
For the revenue a point was sought to be raised that the son had been allotted securities and insurance policies of the total value of Rs. 1,11,659 for his share of the capital in full settlement of his claim and that, therefore, there can be no question of division of the firms. This view was adumbrated for the department before the Income-tax Officer - vide assessment order for the year of assessment 1957-58. There is no substance in this. Certainly this view has not commended itself to the Appellate Assistant Commissioner who in setting out the assets of the family brings out the distinction between capital and the share in the three registered firms as distinct assets. It is with regard to the share of the capital that Rs. 1,11,169 was credited to the son. That does not exhaust the assets. The Tribunal has deleted the income from Dhanalakshmi Rice Mill from the assessment which cannot be correct, if the case now propounded has any basis. We do not find any room for such argument in the agreed statement of the case.
In the result, we answer the question in favour of the assessee with regard to the Government promissory notes and the share in the partnerships. The assessee will be entitled to his costs. Counsels fee Rs. 250.
Question answered in favour of the assessee.