SRINIVASAN, J. - For the assessment year 1952-53, a firm called Messrs. Bhagyalakshmi and Co., which were the managing agents of the Palani Andavar Mills Ltd., Udamalpet, applied for registration. Though the firm was originally constituted in 1934, it remained unregistered. For the assessment years 1939-40 and 1940-41, it had sought and obtained registration, but subsequently, there had been no application for renewal of registration. There had been changes in the constitution of the firm in 1941 and 1948. In 1950, a fresh partnership deed was drawn up. According to this document, of the several partners, one Guruswami Naidu was shown as the owner of a 7 annas 6 pies share and one Venkatasubba Naidu of a 2 annas 6 pies share. Each of the three other partners had a 2 annas share. On the basis of this partnership arrangement, the firm sought for and obtained registration for 1952-53. Renewal of registration was also granted by the Income-tax Officer for the assessment years 1953-54 and 1954-55.
In the exercise of his revisional powers under section 33B of the Act, the Commissioner of Income-tax commenced proceedings. Now, it would appear that both Guruswami Naidu and Venkatasubba Naidu were members of a Hindu undivided family and the income derived from this firm in respect of the ten annas share owned by these two persons was treated for income-tax purposes as that of a Hindu undivided family. The Hindu undivided family underwent partition. According to this partition deed executed on August 24, 1950, the ten annas share owned by the Hindu undivided family in the firm was divided among the members of the family in various proportions. Notwithstanding this partition, the share of the family in the firm continued to be represented in the partnership arrangement in the same manner as previously. It would further appear that on the assessment of Guruswami Naidu and Venkatasubba Naidu on their 7 1/2 and 2 1/2 annas share respectively, these two persons contended that their real income from the partnership related only to a two anna and one anna four pies share respectively, the rest of the income derived from the ten anna share owned by the Hindu undivided family going to the other members of the family in accordance with the partition arrangement. This contention, viz., that the real income of these two persons must be computed on the basis of the partition, was rejected by the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal, however, upheld the contention of these two persons.
On such finding of the Tribunal regarding the extent of the assessability of Guruswami Naidu and Venkatasubba Naidu, the Commissioner proceeded to hold that the partnership agreement did not specify the correct shares of the partners in the firm for the reason that the two persons did not in fact own the 7 1/2 and 2 1/2 annas shares in the firm as specified in that deed. On a notice being issued to the firm, time was applied for by the firm for submission of a reply, but the Commissioner, taking the view that the point involved was not one calling for any preparation or study involving time, proceeding to cancel the registration granted to the firm for the three assessment years 1952-53, 1953-54 and 1954-55. He further directed the Income-tax Officer to re-do the assessment as on an unregistered firm.
In the appeal before the Tribunal it was contended that the disruption of the Hindu undivided family did not in way affect the position of the two partners, Guruswami Naidu and Venkatasubba Naidu, in the firm and that at best the effect of the partition was only to bring into existence a sub-partnership. The Tribunal was apparently inclined to the view that while the division of income earned on a share held by a partner of a firm in whatever manner the earner thereof chose would not affect the validity or the genuineness of the main partnership, this was a case where the corpus of the share itself was affected, in that the two persons referred to did not in fact own the shares in accordance with the terms of the partnership document, and further that these two persons having maintained that they owned only a two anna and one anna four pies share in the firm, the partnership in which they were showing as owning shares in a different manner could not be accepted as entitled to registration.
It is in the above circumstances that on an application under section 661) of the Act, the Tribunal has referred the following questions for the decision of this court :
'1. Whether the aforesaid order of the Commissioner under section 33B cancelling the registration of the firm for the three years 1952-53, 1953-54 and 1954-55 is lawful ?
2. If the answer to the above question is in the affirmative, whether the firm is registrable under section 26A for the aforesaid assessment years ?'
The principal question that called for consideration in this case is whether a firm in which a Hindu undivided family owns an interest and is represented by one of its members in the partnership is liable to be refused registration solely for the reason that there is a disruption of the Hindu undivided family, though the totality of the interest of the divided members continues to be represented by one of its divided members. The Commissioner thought that besides the fact that the shares shown against the two members of the family did not accord with the actual facts of the case after partition, it was also possible that failure to include the other members of the family in the firm was a contravention of the provisions of the Companies Act. The Tribunal in considering this matter mainly relied upon Raju Chettiar & Bros. v. Commissioner of Income-tax and proceeded to hold :
'Once the share or corpus is divided, the income relating to that share automatically follows the division. On the other hand, if the share is kept intact, the income accrues on the share which is intact. If the income alone is divided, it does not affect the ownership of the share which continues to be intact. Because the corpus of annas ten is divided among seven individuals, the income relating to the said annas ten accrued to the seven individuals in their own right according to their shares. As income follows ownership and so far as the other partners are concerned, they are made to believe that Guruswami Naidu and Venkatasubba Naidu owned Rs. 0-7-6 and Rs. 0-2-6 shares, though in fact they owned only annas two and Rs. 0-1-4 respectively, the recital in the partnership deed regarding the ownership of the shares so far as these two individuals are concerned is clearly wrong.'
The Tribunal further relied upon Charandas Haridas v. Commissioner of Income-tax in holding against the assessee. The scope of this decision will be dealt with in due course.
The proposition that where the managing member of a joint family enters into a partnership with a stranger, the other members of the family do not become partners in the business is well accepted. In such a case, only such of the members of the family as enter into the contractual relationship with the stanger becomes partners of the partnership; the family as a unit does not become a partner. This proceeds on the principle that while membership of a joint family is one of status, that in a partnership is one created by contract. In the management of such a business, in which a member of a joint family representing the family is a partner, the other members of the family can play no part. The income earned from such partnership may no doubt be the income of the joint family and assessable in the character of income of a Hindu undivided family. Beyond that, and beyond a right to share in such profits as members of the joint family, with the right to call upon the managing member or members who entered into the contract of partnership, to account for the profits earned through such partnership, they can have no further rights directly in relation to the partnership. It follows from these principles, which are well accepted, that a share in the partnership in which a managing member or members of a joint family is represented as a partner is an asset of the joint family, the income from such partnership being the income of the joint family. While the rights of the other members of the joint family as against those members of the joint family who are members of the partnership may in proper cases extend to demanding an account of such income derived from the partnership, such other members have no right to claim any share in the partnership business so long as the family remains joint.
Before we deal with the position when the joint family becomes divided and its consequent effect upon the partnership, we may consider the case of a sub-partnership. In Commissioner of Income-tax v. Laxmi Trading Co., one of several partners in a partnership entered into an agreement to share the profits derived by him with a stranger. The question arose whether by reason of this arrangement a valid sub-partner was created entitling the latter to registration. The position in law that the creation of such a sub-partnership in no way affects the other members of the principal firm being granted, the learned judges held that the sub-partnership was valid in law and could not be denied registration under section 26A of the Act. A similar conclusion was reached in Commissioner of Income-tax v. Agardih Colliery Co. In that case, A and B were partners in a firm each owing an eight anna share. B subsequently entered into another deed of partnership with five other persons whereby the eight anna share of the profits of the firm was to be divided between them with retrospective effect from the date of the original partnership. A was not a party to this latter partnership. An application for registration of the firm consisting of A and B of the main partnership was rejected. On appeal both the Appellate Assistant Commissioner and the Appellate Tribunal held that the second partnership did not affect the first and that the firm of A and B was entitled to registration, a conclusion which was upheld by the High Court on reference. These two decisions clearly establish that a sub-partnership entered into by one of several partners in the main firm would not affect the registrability of either the firm or the sub-partnership.
We may refer to another decision of the Calcutta High Court in Commissioner of Income-tax v. Dudwala & Co. In this case, the partners of the firm in question were the manager of a joint Hindu family representing the family and a stranger. The joint family became disrupted as a result of a partition suit and a compromise decree therein. An application for registration of the firm was refused by the Income-tax Officer on the ground that as the joint family had come to an end, it could not form a partnership with the stanger as such until and unless the separate members of the family along with the stranger formed themselves into the partnership and applied for registration. The learned judges held that the disruption of the joint family had no effect at all on the constitution of the firm or the managers status as a partner of the firm and that the partnership should be registered under section 26A. The importance of this decision consists in the facts that the learned judges dealt with the status of the managing members of the family in relating both to the members of the family and to the members of the partnership. They noticed :
'It cannot be contended that the firm was dissolved because the consent decree had been passed in the suit brought by one of the Nathanys in this court. The revenue authorities are really refusing to register the firm so as to exact higher tax on the basis that they were an unregistered firm. Only the nature of the liability of the Rai Bahadur vis-a-vis his coparceners was changed as a result of that decree in the partition suit. Before the disruption, he as karta was liable to account in a very limited sense. A coparcener seeking partition is not entitled to require the karta to account for his past dealings in the family property. All that he is entitled to is an account of the family property as it exists at the time he demands partition... 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... and as such the application was rightly made under section 26A...'
If it is conceded that a sub-partnership entered into by one of several partners in the main firm would not affect the registrability of either the firm or the sub-partnership, we have to consider how the position is altered where it is not a case of sub-partnership but a partition being affected among members of a joint family, one member of which family representing the joint family was a member of a partnership. The decision principally relied upon by the Department is Charandas Haridas v. Commissioner of Income-tax. Charandas Haridas as the karta of the joint family owned shares in several managing agency firms. The income from these firms was assessed as income of the Hindu undivided family. In the course of the assessment proceedings, it was claimed that a partial partition had taken place in respect of this asset of the family and that the share income from the managing agency firms ceased to be the income of the Hindu undivided family. The Tribunal held that Charandas Haridas continued to be a partner representing the Hindu undivided family and that no partition of this asset of the Hindu undivided family had in fact taken place, as alleged, and that the assessment of the income from this asset should be made on the Hindu undivided family as hitherto. This contention prevailed with the High Court, though the learned judges proceeded mainly on the ground that the document seeking to effect the partition of this asset did not bring about the necessary result which was intended by the framers of the document and that there were materials which would justify the Tribunal in coming to that conclusion. The contention of the assessee in that case was that the income did not come to the common chest of the Hindu undivided family and that there was consequently a conversion of the agency qua the property which produced the income and that the property became one of the tenancy-in-common. The learned judges were of the view that the coparceners were only dividing the commission and not the share which produced commission and that the asset which belonged to the joint Hindu family, being the share in the partnership which remained undivided, the nature of the partnership not being changed, the assessment of the income in the hands of the Hindu undivided family was justified. The Tribunal, in equating the facts of the present case with those in the decision above, proceeded to hold that the converse should be equally true. In the present case, the factum of partition and the assessability of Guruswami Naidu and Venkatasubba Naidu only on the income of their shares having been accepted by the Tribunal in other proceedings, the Tribunal held that there was a partition of the asset itself, viz., the share of the joint family in the partnership. That, in the opinion of the Tribunal, led to the conclusion that the statement of the shares of these two persons mentioned in the partnership deed was not consistent with the true facts. The question is whether this view is correct.
The decision of the Bombay High Court in Charandas Haridas v. Commissioner of Income-tax was reversed by the Supreme Court in Charandas Haridas v. Commissioner of Income-tax. After dealing with the position of the joint family of which the managing member or other member is a partner in a partnership, their Lordships observed :
'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 d, 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 the 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 division 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 con otherwise be secured according to the shares of the members.'
Further on, their Lordships said :
'The document was fully effective between the members of the family, and there was actually no Hindu undivided family in respect of these particular assets. The assets at all times stood in the name of Charandas Haridas, and looked at from the point of view of the law of partnership, the family had no standing. The assets still are in the name of Charandas Haridas, and looked again from the same viewpoint the division has no different signification. What has altered is the status of the family. While it was joint, the Department could treat the income as that of the family; but after partition, the Department could not say that it was still the income of the Hindu undivided family, when there was none. In the face of the finding that this was a genuine document and not a sham, and that it effectually divided the income and, in the circumstances, the assets, the question answers itself in the negative, that is to say, that there were no materials to justify the finding that the income in the share of the commission agency of the mills was the income of the Hindu undivided family.'
We may refer to another decision of the Bombay High Court in Seth Motilal Manekchand v. Commissioner of Income-tax. In this case, a father and son who were members of a joint Hindu family owned a managing agency. In a partition, the managing agency was divided and it was provided in the partition deed that the father and the son would be entitled to the managing agency remuneration in equal shares, but that each of them should pay to the mother 2 annas 8 pies out of their respective 8 annas share. The question arose whether each of the partners should be assessed on the income derived from his 8 annas share. The Tribunal took the view that it was merely a case of appropriation of profits subsequent to the accrual or receipt of such profit and that the partners were assessable on the full income of their respective shares. The learned judges of the Bombay High Court held that in the circumstances of the case that portion of the managing agency commission payable to the mother was diverted even before it became the income of A and B and was not merely a case of application of the income of A and B. The result was that the amount payable to the mother was deductible before ascertaining the taxable incomes of A and B.
These decisions and principally the decision of the Supreme Court in Charandas Haridas v. Commissioner of Income-tax would establish it beyond doubt that in interpreting the relevant provisions of the income-tax law relating to the registration of a partnership, the Department is not entitled to ignore other considerations which are equally valid and relevant in relation to the law relating to partnerships or to the Hindu law. It is abundantly clear that a member of a partnership can enter into a valid sub-partnership, whereby his share in the main partnership becomes divided between himself and others; notwithstanding that his real interest in the main partnership is reduced thereby, the genuineness of the main partnership cannot be questioned. Vis-a-vis that partnership that partner continues to be the member entitled to the stipulated share therein. It would not be open to the main partnership to contend that by reason of the sub-partnership that member had become entitled to a lesser share. Equally, it would not be open to the members of the sub-partnership to demand that the main partnership should deal directly with them to the extend of the interest created in them by the sub-partnership. Both in law and in fact, so far as the main partnership is concerned, the member continues to possess the same interest as before and he would be only accoutable to the members of the sub-partnership with regard to the income derived from the share in the main partnership. The position of a joint family which is represented in a partnership by either its karta or a member thereof is no different. Though the partition among the members of the jointly family may bring about a division of the interest owned by the joint family in the partnership, the tenancy-in-common so created does not amount to a sub-partnership but in so far as the main partnership is concerned, it remains intact in the sense that it treats only that erstwhile member of the joint family as the member of the partnership. Just as in the case of the sub-partnership no member thereof can claim any direct relationship with the main partnership, even so no member of the divided family can treat directly with the partnership. The member of the joint family while the family was joint was accountable in a particular manner as envisaged by the Hindu law to the members of his family in so far as the income from the partnership was concerned. After the partition, the status of the member vis-a-vis the other members of his family changed and his accountability was that of a tenant-in-common; nevertheless, the partnership itself and its relations with the member remained unchanged.
Learned counsel for the Department appears to contend that notwithstand the above decisions in so far as the registration of a partnership is concerned, a partition such as in the present case will still affect the partnership. We can find no warrant for this view and no support for it in the decided cases. The learned counsel contends that as a consequence of the registration of a firm, the income of the firm is assessable in the hands of the partners and the liability of the firm is transferred to its members. He accordingly claims that the process of assessment and recovery would be rendered extremely difficult if notwithstanding a partition in the family of a particular partner, it should still be deemed that the partnership was entitled to registration. He argues that the particular partner is no longer the real owner of the share in the partnership, the other members of the family having become entitled to a share by reason of the partition. It seems to us that these arguments cannot prevail in the light of the interpretation so clearly set out in the Supreme Court decision referred to above. The learned counsels reliance upon Raju Chettiar and Bros. v. Commissioner of Income-tax in the light of the above interpretation appears to be not tenable at all. While it is true that in the above decision it was laid down that the registration of firms under the Income-tax Act is not a general or common law right but is a privilege given to the firms in order to get the benefit of lower rates of assessment and that if a firm desires to have this privilege, it must conform strictly and rigidly to the requirements provided by the law, we cannot at the present time interpret this decision as laying down that the creation of a sub-partnership with respect to a share of a member in a partnership or a partition in the family of a member of that partnership destroys the effectiveness and validity of the partnership to the extent of rendering it ineligible for registration. The real principle of this decision is to our minds that where the partition arrangement is a make-believe affair with a view to avoid the incident of heavier taxation, the Department is entitled to look at the real state of things. For instance, if in a partnership composed of A, B and C it is found as a fact that B and C are mere name lenders and that A alone is the real owner of the shares nominally shown against B and C, it would obviously be only a device to avoid the incident of heavier taxation. In such a case, there would actually be no partnership in existence. In other cases of a similar nature, it might turn out that one member is entitled to a larger share than what he is shown to possess. If this decision is to be interpreted in the extreme fashion, as urged by the learned counsel for the Department, the mere circumstance that a partition has taken place in the joint family which was hitherto represented by one of its members as partnership altogether. The Income-tax Department is not entitled to say that each and every one of the members of the erstwhile joint family becomes, by the mere fact of partition, a member of the partnership. That would clearly be opposed to the law relating to partnership. If the Department could validly put forth such an argument, in the event of there being a large number of members in the joint family entitled to fractional shares, it is possible that such a partnership may become invalid in law. We are firmly of the opinion that it could never have been the intention of the income-tax law that such a result flow from a partition which is a normal and lawful incident of a joint family.
We are not also satisfied that the argument advanced by the learned counsel for the Department that there would be considerable difficulty in the realisation of the income-tax dues can affect the principle involved; if the decisions lay down that it is the real income of a person that can be assessed and not his notional income as represented by the share in a firm, and if both the share and the income owned by a member in a partnership can validly be the subject-matter of a sub-partnership or a partition, in so far as the income derived by that member is concerned, the Department must realise the tax due in the light of other transactions to which that share and income are validly and lawfully subject.
It was further argued that in the present case the partition was antecedent to the creation of the partnership and that being so, in putting forward Guruswami Naidu and Venkatasubba Naidu as entitled to 7 1/2 and 2 1/2 annas shares respectively in the partnership, the partnership deed did not set out the real state of things. We are not satisfied that this makes any real difference to the validity of the partnership and its registrability. It would be remembered that these members of the joint family had been members of the partnership even from 1934 and the partition deed itself indicated that though there had been a division in the family, these two members should continue as members of the partnership in respect of the ten annas share hitherto owned by the family. The facts in the present case are no different from the facts dealt with in Charandas Haridas v. Commissioner of Income-tax by the Supreme Court and we are not satisfied that the circumstance that the partitioner was antecedent to the partnership makes any difference.
In the result, the first question is answered in the negative; that is to say, the order of the Commissioner cancelling the registration of the firm for the three assessment years is erroneous, and the second question, that the firm is entitled to registration for those years. The assesee will be entitled to its costs from the Department. Counsels fee Rs. 250.
Reference answered accordingly.