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Petitioner: RAMAKRISHNA TRANSPORTS VS Respondent: COMMISSIONER OF INCOME-TAX, A. P.Honorable Justice KUMARAYYAA. Siva Rao,C. Kondalah
1969 P T D 873
1969 P T D 873
[Andhra Pradesh (India)]
Before Kumarayya and Sharfuddin Ahmed, JJ
RAMAKRISHNA TRANSPORTS
versus
COMMISSIONER OF INCOME‑TAX, A. P.
Case Referred No. 45 of 1965, decided on 15th July 1966.
Firm‑Registration ‑Partnership between coparceners of Hindu undivided family representing the family with strangers- Validity‑Nature of such partnership‑Whether such partnership can be registered‑Indian Income‑tax Act, 1922, S. 26‑A Indian Income‑tax Rules, rr. 2 to 6‑B‑Indian Partnership Act, 1932, S. 5.
Two adult coparceners of a joint Hindu family, sons of the karta of the family, entered into partnership with two strangers, representing the family. Their share in the firm was treated as an asset of their Hindu undivided family and the share income from the firm was being assessed in the hands of the family as income of the joint family. For the assessment year 1959‑60, the Income‑tax Officer renewed registration of the firm. The Commissioner of Income‑tax acting under section 33‑B of the Income‑tax Act, 1922, cancelled the registration on the ground that two coparceners representing the family could not enter into a valid partnership with strangers. The Tribunal agreed with this order. On a reference to the High Court;
Held, that the karta or adult members of a joint family may enter into partnership with strangers on behalf of the family ; in such cases the family, as a unit, does not become ipso facto a partner. The karta or the member will in such cases bear a dual capacity, one as partner as between parties to the contract, and the other as trustee vis‑a‑vis the other members of the family and for purposes of registration, the provisions of three distinct laws have to be considered, viz. Partnership Act, Hindu Law and Income‑tax Act.
On facts, the partnership was valid in law and the department was wrong in refusing registration.
Distinction between Hindu undivided family and partnership explained.
Commissioner of Income‑tax v. Bagyalakshmi & Co. (1965) 55 I T R 660 S C applied.
Commissioner of Income‑tax v. Hukumchand Mannalal & Co. (1965) 57 I T R 213 fol.
Mullick (S C) & Sons In re : (1938) 6 I T R 99 and Pitamber das Bhikhabhal & Co. v. Commissioner of Income‑tax (1964) 53 I T R 341 distinguished.
Annamalai Chetty v. Murugesa Chetty I L R 26 Mad. 544 (P C); Bagyalakshmi & Co. v. Commissioner of Income‑tax (1961) 42 I T R 727; Charandas Hardidas v. Commissioner of Income‑tax (1960) 39 I T R 202; Commissioner of Income‑tax v. Ganesh Norayan Onkarmal ((. T. Ref. No. 11 of 1947‑16‑3‑1948); Commissioner of Income‑tax v. Nandlal Gandalul (1960) 40 I T R 1; Firm Bh‑7gat Ram Mohanlal v. Commissioner of Excess Profits Tax (1956) 29 I T R 521; Lachman Day v. Commissioner of Income‑tax (1948) 16 I T R 35 (P C); Pichappa Chettiar v. Chockalingam Pillal A I R 1934 P C 192; Ramkumar Ramniwas of Nanpara, In re : (1952) 22 I T R 474 and Sundar Singh Majithia v. Commissioner 'of Income‑tax (1942) 10 I T R 457 (P C) ref.
A. Siva Rao for the Assessee.
C. Kondalah for the Commissioner.
JUDGMENT
KUMARAYYA, J.‑This is a reference under section 66(1) of the Indian Income‑tax Act, 1922. The question referred for decision is in the following terms:
"Whether, on the facts and in the circumstances of the case, the firm of Ramkrishna Transports Kalahasthi, was entitled to registration under section 26‑A of the Act?"
The dispute relates to the assessment year 1959‑60, the relevant accounting year being the year ending on March 31, 1959.
The assessee is a partnership firm constituted under an instrument of partnership dated March 27, 1955. It carries on business in bus transport. Two of the partners in this firm, (1) Sri Venugopala Reddy and (2) Ramakrishna Reddy, holding 3 annas share each are the coparceners of a Hindu Undivided family, the karta being Shri A. Balarama Reddy, The only other two partners, Sri Venku Reddy and Sri M. Veerabliadrayya, holding 5 annas share each are strangers. The firm was duly registered under section 26‑A of the Income‑tax Act. The share income of Sri Venugopala Reddy and Ramkrishna Reddy were being offered for assessment as the income of the Hindu undivided family and assessed by the Income‑tax Officer accord ingly. Some years later the assessee came with the contention that there was a family partition, as a result of which the two partners of the family became separated with effect from April 1, 1958, and that, thereafter, these two families held their shares on behalf of their respective branches of the family to which they belong. This case, advanced for the first time for the assessment year 1959‑60, did not find favour with the department. The assessee went in appeal, but without success, up to the stage of the Appellate Tribunal. The two partners of the firm were recognised as before only as coparceners of Hindu undivided family. The Income‑tax Officer, Tirupati, renewed the registration of the firm in the year 1959‑60, by his order dated October 30, 1960. Thereupon, the Commissioner of Income‑tax took except ion, as he was of the view that two coparceners representing the Hindu undivided family cannot enter into a valid partnership with strangers. He served a notice under section 33‑B of the Indian Income‑tax Act on October 12, 1962. Then after hearing the assessee, he cancelled the registration b., his order dated October 29, 1962. Aggrieved by this order, the assessee went in appeal before the Income‑tax Appellate Tribunal. On failure to get a favourable decision, he moved the Appellate Tribunal under section 66(1) of the Income‑tax Act to state the case. That is how the matter has come before us for decision.
The controversy turns mainly on the question of registration under section 26‑A of the Indian Income‑tax Act. The question of registration is of vital importance to an assessee in view of certain special benefits accruing a therefrom. An unregistered firm is invariably charged as a unit. But registration makes all the difference, for in that event the tax is levied on each individual partner in respect of his share in the firm's profits. The gain to the assessee thereby is not inconsiderable, In order to be entitled to this privilege it is, however, essential that a firm should con form to the conditions prescribed by section 26‑A and rules 2 to 6‑B made under section 59 of the Act. Further, the authority concerned should be satisfied that the partnership is not only genuine but also a valid one. It is settled law that if a partner ship is a genuine and valid one and the provisions of section 26‑A and Rules connected therewith are complied with, the income‑tax authority shall have no power to reject its registration. We are in this proceeding concerned with the question of the validity alone, for it is only on that basis that the registration of the firm has been cancelled. Partnership being purely a creature of contract, the validity and legality must of course depend upon a number of factors. A partnership would be illegal and invalid if its object is forbidden by law or is opposed to public policy. The same would be the consequence if a partnership when permitted would defeat any provision of law. There are other grounds rendering the validity of a partnership open to question. It is unnecessary for us to consider all these grounds, for on the facts and circumstances of the present case we are concerned with the limited question whether more than one coparcener representing a Hindu undivided family can enter into a valid partnership with strangers. The question involving, as it does, a consideration of the principles of Hindu Law and also the Partnership Act steering clear of all possible conflict must necessarily present considerable difficulty. The coparceners of a Hindu undivided family are not partners within the meaning of that term in the Partnership Act. Partnership, according to the Partnership Act, is the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all. The persons who have thus entered into the contract are called individually partners and collectively, a firm.
The relationship between coparceners in connection with the joint family business is not based on contract but on status and is created by operation of law. That is why section 5 of the Partnership Act excludes the members of a Hindu undivided family carrying on family business as such from the description of the partners. The members of a Hindu undivided family carrying on family business are, therefore, not partners. Nor is the joint Hindu family a firm within the meaning of the Partner ship Act, though that terminology may be used loosely in relation thereto. A joint Hindu family is a unit to which no outsider can be admitted by agreement; it is a status which can only be acquired by birth or adoption. Then again it must, as a unit, act through some person and the only person who can act is the karta or manager, who may be single individual or several adult members. In relation to the family business in the nature of trade, the rights and liabilities of coparceners constituting the family‑firm are, therefore, not to be determined by exclusive reference to the Partnership Act. So long as the trade is being carried on by them and no strangers are associated with them in any manner, its incidents must be regulated essentially by Hindu Law. These incidents must vary substantially from those of a partnership. Whereas the death of a coparcener or the managing member does not dissolve the joint family firm and property passes by survivorship, the partnership under the Partnership Act is dissolved ordinarily to the death of a partner. A coparcener cannot ask for an account of past profits or losses. But it is otherwise in a partnership. In a joint family firm, ordinarily it is only the managing member who can act on behalf the family and bind his coparceners by his acts; but sometimes for the convenience of trade or business, by arrangement amongst the members not only one manager but several persons with equal powers are entrusted with the duty of managership. In such a case, the act of any one will bind all the coparceners. The manager or managers of the joint family firm have implied authority to contract debts and pledge the properties and credit of the family for the ordinary purposes of family business. No other person has such authority. But in partnership each is the agent of the other. There is also difference as to the extent of liabilities for debts contracted. These and other differences create considerable difficulty when the case on its particular facts and circumstances attracts the provisions of both the Hindu Law and the law of partnership.
The instant case obviously is not one where the manager is carrying on family business with the family funds without being associated with any stranger. It is in fact a case where two of the coparceners representing the family have entered into partner ship with strangers in a business, the capital of which, to the extent of their share agreed upon, is derived from the property of the joint family. It is settled law that it is competent to the manager of joint family business acting on behalf of the family to enter into a partnership with strangers. The manager, by doing so, does not introduce the members of the undivided family into that partnership. Such members alone as have entered into partnership with the strangers are partners. The manager and such of these members are accountable to the family. The law on this subject has been stated by Mayne on page 398 of his book, Mayne on Hindu Law and Usage, 9th edition, in the following terms:
"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 Partnership 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, and the partnership will be governed by the Act."
This statement of law has been approved of by the Privy Council in P. K, P. S. Nichappa Chettiar v. Chockalingam Pillai (AIR 1934 P C 192) and also accepted by the Supreme Court in Charan Das Haridas v. Commissioner of Income‑tae ((1960) 39 I T R 202). It is plain from the language used that the karta or the adult members of a joint Hindu family, where it is a trading family, may enter into a partnership with a stranger or strangers representing the joint Hindu family. The family as a unit on that account does not become a partner, but only such members as in fact enter into a contractual relation with the stranger, and the partnership will be governed by the Act. In the management of that business, therefore, the other members of the family have no part to play. The only right that they have against the manager or the karta or the other members who entered into partnership representing the family is to call upon him or them to give an account of the business that they have done with the joint family funds. The income and profits which the managing member or members have learned from such partnership would belong to the joint family and the other coparceners would have a right to share such profits with these members of the joint family as a joint family asset. The position of the manager or the managing members in this way, as pointed out by the Privy Council in Annomalai Chetty v. Murugesa Chetty (I L R 26 Mad. 544 (P C)) is analogous to that of a trustee. He or they in such cases occupy a dual position. As between the parties to the contract they are partners and their relationship is regulated by the Partnership Act. They as a rule are personally liable for all the obligations under the contract as against the partners/ strangers. In relation to the family members they have a duty to account for the profits that they made. For purpose of income -tax the income derived is assessed to tax as the income of the Hindu undivided family. Thus, the provisions of three distinct laws are attracted in view of the role that they occupy. In Commissioner of Income‑tax v. Bagyalakshmi & Co. ((1965) 55 I T R 660 (S C)) the Supreme Court stressed on the necessity of always in such cases keeping in view the principles of the three laws. Their Lordships observed thus:
"If the distinction between the three concepts is borne in mind much of the confusion disappears. A partnership is a creature of contract. Under Hindu Law a joint family is one of status and right to partition is one of its incidents. The income‑tax law gives the Income‑tax Officer a power to assess the income of a person in the manner provided by the Act. Except where there is a specific provision of the Income‑tax Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the karta of a joint Hindu family; he may be a trustee; he may enter into a sub‑partnership with others; he may, under, an agreement, express or implied, be the representative of a group of persons; he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, be functions in his personal capacity; qua the third parties in his representative capacity. The third parties, Whom one of the partners represents, cannot enforce their rights against the other partners nor the other partners can do so against the said third parties. Their right is only to a share in the profits of their partner‑representative in accordance with law or in accordance with the terms of the agreement, as the case may be."
These observations were made in connection with the question of genuineness of partnership where it was said that two of the partners, who were the members of a Hindu undivided family purporting to hold 7 annas and 2 annas share each by reason of the agreement with their family members, were in fact beneficially interested in much lesser share. That is not exactly the question here. But the principle enunciated is alike applicable while judging the validity of the partnership. The distinct relationship under the Partnership Act and under the Hindu Law has to be necessarily kept in view. In this connection we may also refer to the observations of Hidayatullah, J., in his minority judgment in Commissioner of Income‑tax v. Nandlal Gandalal ((1960) 40 I T R I), which are to the following effect:
"Now, it is settled law that a Hindu undivided family cannot be a partner under the law of partnership. Such of the coparceners who join the partnership are regarded quoad the other partners, as individuals in their own names and rights. Yet, the benefits that arise to them from the partnership belong to the family, and their ri0hts are the asset of the family. We have recently held in Charandas Haridas v. Commissioner of income‑tax (1960) 39 I T R. 202 (Civil Appeal No. 108 of 1957 decided on March IS, 1960) that in such a situation the matter has to be looked at in the light of three separate and indepen dent branches of law. They are the law of partnership, the Hindu Law and the law relating to income‑tax. The implications of a coparcener joining as partner with strangers are different when one views the matter from the angle of the law of partnership or from the angle of the Hindu Law or the law of income‑tax. In so far as the law of partnership is concerned, the coparcenary has no place in the partnership, and the coparcener‑partner is everything. But, viewed from the angle of Hindu law, the position is entirely different."
The question before his Lordship in that case was different from what is posed now; but the principle laid down as to the method of approached applies with all its vigour to our case here.
While considering whether the partnership as entered into is against law or is invalid, we cannot but bear in mind the principle of law relating to coparcenary and see whether it has been violated to any extent.
We have noticed that under Hindu Law it is open to the karta (whether one individual or several persons) on behalf of the family to enter into partnership with strangers. In that case, only the person or persons entering into contract will be partners qua the strangers who are the contracting parties. The other members though beneficially interested in the profits of the shares of the managing members are not the partners. That such partners acting on behalf of the undivided family can be more than one is not open to doubt in view of the statement of law by Mayne and the pronouncement of the Privy Council and the Supreme Court in the cases cited above.
There may also be cases where the members not as copar ceners are members of the family but in their personal character, not with the aid of or detriment to the joint family funds but with their own separate funds, enter into contract with the karta who represents the family. It is well settled that individual members qua their separate property can enter. into a valid partnership with a karta representing the Hindu undivided family. In Lachhman Das v. Commissioner of Income‑tax ((1948) 16I T R 35 (P C)). it was observed that when it is open to a managing member of a joint Hindu family to enter into partnership with a stranger, there is no reason why a coparcener could not in his individual V capacity enter into partnership with the karta of the joint family. It is apt to quote here the words of their Lordships:
" . . . on general principles they (their Lordships) cannot find any sound reason to distinguish the case of a stranger from that of a coparcener who puts into that partnership what is admittedly his separate property held in his individual capacity and unconnected with family funds. Whatever the View of a Hindu joint family and its property might have been at the early stages of its development, their Lordships think that it is now firmly established that an individual coparcener, while remaining joint, can possess, enjoy and utilise, in any way he likes, property which was his individual property, not acquired with the aid of or with any detriment to the joint family property. It follows from this, that to be able to utilise this property at his will, he must be accorded the freedom to enter into contractual relations with others, including his family, so long as it is represented in such transactions by a definite personality like its manager. In such a case, he retains his share and interests in the property of the family, while he simultaneously enjoys the benefit of his separate property and the fruits of its investments. To be able to do this, it is not necessary for him to separate himself from his family.
In this view of the Hindu Law, it is clear that if a stranger can enter into partnership, with reference to his own property, with a joint Hindu family through its karta, there is no sound reason in their Lordships' view to withhold such opportunity from a coparcener in respect of his separate and individual property."
In view of the above discussion, two things may be laid down as well recognised general principles. The first is, as stated by Mayne, where a managing member of a joint Hindu family enters into partnership with a stranger in relation to a business whose capital in whole or in part is derived from the property or funds of the joint family, the family as a unit or the entire body or the family members do not ipso facto become partners in that partnership business. The partnership will be confined to the strangers and such of the members of the family who have actually entered into the partnership with them. Secondly, the members of the family in their personal or individual capacity can quoad their separate property enter into partnership with the karta of the joint family who represents the joint family.
So far, the law is well settled. Even so, there arises a third question which in substance seeks to demand a further clari fication of .the above proposition in view of the basic rule of Hindu Law that persons cannot at the same time be members of a joint Hindu family and be also members of the firm, of which such property forms the asset. As already noticed, section 5 of the Partnership Act clearly lays down that the members of a Hindu undivided family carrying on family business as such are not partners in such business. The question for consideration is where some of the joint family members become partners {within the meaning of the term in the Partnership Act) in a partnership firm can they become so only in their individual character qua their separate property or they can as well become such partners, by reason of their contract with the strangers, representing the joint family by themselves or in conjunction with the karta. It is difficult to accede to the contention that the only way for the members of the‑joint family to become partners is to enter into contract in their individual or personal character. Of course, they can do so qua their separate property. In that case vis‑a‑vis the karta representing the family they will take the same place as the strangers would occupy by any contract with him. But when it is open to the adult members acting within the authority conferred on them, whether express or implied, to represent the family, there is no reason why they along with the karta, if he is there, should not vis‑a‑vis the strangers figure as partners. The statement of law by Mayne as approved by the Privy Council and the Supreme Court does permit such a. contingency. The contracting members alone will be partners and they are respon sible to the joint family in relation to the profits they make. They are in fact the representatives of the family and though their shares in the partnership are fixed as they should be even for purposes of section 26‑A the beneficial interest therein is of the joint family. Their actual shares may be much less. As representatives they are one body for purposes of Hindu Law. As partners under the Partnership Act vis‑a‑vis the strangers and other partners, they may be distinct. Whatever the rights and liabilities vis‑a‑vis the other partners, they have a common ground with the family members in the coparcenary qua partner ship, their relations are determined by the Partnership Act and qua coparcenary their relationship is governed by the Hindu Law. The income‑tax law for purposes of registration etc. cannot ignore the considerations which are relevant under the Partner ship Act and the Hindu Law. Thus, each branch of law would have its…
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