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Petitioner: COMMISSIONER OF INCOME-TAX, MADHYA PRADESH VS Respondent: HUKUMCHAND MANNALAL & Co.Honorable Justice DIXITM. Adhikari,N. A. Palkhivala and K. A. Chitale
1966 P T D 115
1966 P T D 115
[Madhya Pradesh (India)]
Before P. V. Dixit, C. J. and V. R. Newaskar, J
COMMISSIONER OF INCOME‑TAX, MADHYA
PRADESH
versus
HUKUMCHAND MANNALAL & Co.
Miscellaneous Civil Case No. 112 of 1963, decided on 12th February 1965.
Firm‑Registration‑More than one coparcener representing Hindu undivided family in partnership‑Whether affects validity of firm‑Agreement for sharing profits of partner‑Firm whether entitled to registration‑Indian Income‑tax Act, 1922, S. 26‑A:
A partnership between more than one coparcener of a Hindu undivided family and strangers would be valid though the members may represent and receive their shares of profits on behalf of one and the same family.
Where registration was refused to a firm on the ground that it had no legal existence because (i) two of the partners were coparceners representing the interests of the same Hindu undivided f4mily, and (ii) one of the partners had entered into an agreement with certain other persons for the sharing of his profits:
Held, that the firm was not invalidated merely because two of the partners represented the interests of the same Hindu undivided family.
The agreement entered into by the partner for the division of his share did not give the persons any rights in the firm and the division of shares was subsequent to the accrual or receipt of profits by the partner. The agreement did not also invalidate the partnership.
Registration could not therefore be refused.
[Cases referred to].
M. Adhikari, Advocate‑General for the Commissioner.
N. A. Palkhivala and K. A. Chitale for the Assessee.
JUDGMENT
DIXIT, C. J.‑In this reference under section 66 (1) of the Indian Income‑tax Act, 1922, at the instance of the Commissioner of Income‑tax, Madhya Pradesh, Nagpur and Bhandara, the question referred for our decision is:
"Whether in the facts and circumstances of the case the firm Hukumchand Mannalal & Co., could be granted registra tion under section 26A of the Act?"
The material facts; as found by the Income‑tax Appellate Tribunal and set out in the 5taiement of the case submitted by the Tribunal, are that the assessee‑firm, Sir Hukumchand Mannalal & Co., Indore, was constituted on 16th July 1948, by a deed of partnership of that date for carrying on the business as managing and selling agents of the Hukumchand Mills Ltd., Indore (hereinafter. referred to as the mills). The five partners, according to this deed, were. Sir Hukumchand Sarupchand, Chunnilal Onkarmal Ltd., Rajkumarsingh Hukum chand, Ramkumar Morarka & Sons Ltd., and Mannalal Onkarmal. The share of each of the first three partners was four annas, and of the remaining two partners was two annas each. Before the formation of this partnership, the joint Hindu family of Sir Hukumchand was the managing and selling agents of the mills. It has been found by the Appellate Assistant Commissioner, as well as by the Tribunal, that in the partnership, which came into existence on 16th July 1948, Sir Hukumchand Sarupchand and his son Rajkumar Singh represented as partners in the firm the share and interest of their Hindu undivided family. On .or about 31st March 1950, a partition of the Hindu undivided family took place, and thereafter, the share and interest. of the family in the firm along with the family's other business were transferred to a private limited company styled as "Sir Sarupchand Hukumchand Ltd". The Tribunal has found that:
"The shares in this company were held by the members of the erstwhile Hindu undivided family. The share and interest in the names of Sir Hukumchand and that of his son Rajkumar Singhji were transferred to this new company. In other words, the share and interest of both the father and the son were held by them on behalf of the Hindu undivided family and hence, were made the subject of a partition on March 31, 1950. Sir Hukumchand and Rajkumar Singh became partners in the assessee‑firm on behalf of the Hindu undivided family and the share and interest in the firm held by them beneficially belonged to the Hindu undivided family."
Under certain agreements concluded in 1950 between Mannalal Onkarmal and five other parties, including Chunnilal Onkarmal Ltd., Mannalal agreed to share his two‑annas share in the assessee‑firm with them, and in this division of Mannalal's profits in the assessee‑firm Chunnilal Onkarmal Ltd., which had already four annas share ‑in the assessee‑firm, was given twenty‑seven per cent of Mannalal's two‑annas share in the assessee‑firm.
The assessee‑firm's application for renewal of registration under section 26A for the. assessment year 1954‑55, of which the accounting year ended on 31st March 1954, was rejected by the Income‑tax Officer, Indore, on several grounds. The assessee then preferred an appeal before the Appellate Assistant Commissioner of Income‑tax, Indore, who, while not accepting any of the grounds given by the Income‑tax Officer for refusal of registration, upheld the rejection of the renewal application on the ground that Sir Hukumchand Sarupchand and Rajkumar Singh partners in the firm, were initially members of a Hindu undivided family whose interest they represented; that more than one co‑partner could not represent a Hindu undivided family in the same partnership for the reason that a partnership involved a contract inter se between the partners; and that consequently, there would be a contract of partnership between two coparcener partners in respect of the property beneficially held by the Hindu undivided family, and this would be inconsistent with their position as coparceners of the Hindu undivided family.
On appeal by the assessee‑firm, the Tribunal held that the Appellate Assistant Commissioner was wrong in refusing registration to the firm on the ground that there was no valid partnership as both Sir Hukumchand and his son Rajkumar Singh, represented the int rest of their Hindu undivided family in the assessee‑firm. On the authority of the statement of law contained in paragraph 308 of Mayne's Hindu Law (11th edition), which was quoted with approval by the Privy Council in Pichappa v. Chokalingam (A I R 1934 P C 192) and by the Supreme Court in Charandas Haridas v. Commissioner of Income‑tax ((1960) 39 1 T R 202), and on the unreported decision of the Bombay High Court in Commissioner of Income‑tax v. Ganeshndrayan Onkarmal I. T. Ref. No. 11 ‑of 1947, decided on 16th March 1948, the Tribunal held that two or more coparcendrs of a joint Hindu family representing the joint family could enter into a partner ship with a stranger. Before the Tribunal, the Revenue reiterated the contention, which had been rejected by the Appel late Assistant Commissioner, namely, that the assessee‑firm shown in the document presented for registration had no legal existence inasmuch as Mannalal, one of the partners, had entered into agreements with five other persons including Chunnilal Onkarmal Ltd., in respect of his share. The Tribunal negatived this contention holding that Mannalal actually participated in the partnership business and exercised the rights and performed the functions of a partner as such; that under the agreements concluded by him with five other persons, those persons were not entitled to participate or interfere in the conduct of the business of the assessee‑firm; and that, therefore, the fact that Mannalal entered into agree ments with .others in respect of his share did not detract from the validity of the partnership or from Mannalal's position as "the genuine partner of the assessee‑firm". The Tribunal also rejected the Department's objection that as Chunnilal Onkarmal Ltd., received twenty‑seven per cent of Mannalal's share of profits . over and above their own four‑annas shares in the partnership, the allocation of shares of the partnership was otherwise than in conformity with the terms of the partner ship deed and, therefore, registration of the firm could not be granted. The Tribunal took the view that the extra share of 0‑94 annas, which Chunnilal Onkarmal Ltd., received from Mannalal, was not in their capacity as a partner of the firm but under a separate agreement with Mannalal, which was not a part of the partnership. agreement; and consequently, the registration of the firm could not be refused on the ground that the share of the profits was allotted otherwise than in accordance with the terms of the partnership deed.
Another contention advanced on behalf of the Department, which had been rejected by the Appellate Assistant Commis sioner and which was rejected by the Tribunal also, was that the shares of profits of Sir Hukumchand and Rajkumar Singh were not disclosed in their returns of income but were actually included in the total income of Sarupchand Hukumchand Ltd., and that this showed that Sir Hukumchand and Rajkumar Singh were not the actual partner in the assessee‑firm but the company, Sarupchand Hukumchand Ltd., was the partner. While holding that this contention was unsustainable, the
"The Appellate Assistant Commissioner, however, found that as far as the assessee‑firm was concerned, the partners were the two individuals, Hukumchand and Rajkumar Singh. The shares of profits were credited to their individual accounts and the privity of contract of partnership was between the two individuals, and the other partners of the assessee‑firm. The limited liability company had no locus standi so far as the assessee‑firm was concerned. Hukumchand and Rajkumar Singh had become partners in the assessee‑firm prior to the formation of the company Sarupchand Hukumchand Ltd. As far as the assessee‑firm is concerned, it is Hukumchand and Rajkumar Singh who had both the rights and status of partners and, in fact, functioned as such. Qua the firm it was only Hukumchand and Rajkumar Singh who were the partners. The fact that the shares of profits earned by them were ultimately received by the limited company would not detract from the genuineness of the claim that Hukumchand and Rajkumar Singh were the partners.
On the facts found by the Tribunal and the arguments presented before us by the learned Advocate‑General, appear ing for the Commissioner of Income‑tax, and Shri Palkhivala, learned counsel for the assessee‑firm, the first question that arises for consideration is whether by reason of Sir Hukumchand and his son, Rajkumar Singh, becoming partners in the assessee firm not on their own account but as representing their joint Hindu family in the partnership business, the assessee‑firm constituted by the deed of partnership of 16th July 1948, and reconstituted by an identical deed of 16th January 1950, became an invalid partnership so as to disentitle it to registration. Learned Advocate‑General, while not disputing that the state ment contained in Mayne's Hindu Law (11th edition‑para graph 308), relied upon by the Tribunal, lent support to the proposition that there could be a valid partnership between a stranger on the one hand and the karta as well as adult copar ceners of the family representing it on the other, urged that the passage in Mayne's Hindu Law, on which the Tribunal relied, was not to be found in editions earlier than the 9th edition of the book; and that it was quoted with approval by the Privy Council in Pichappa v. Chokalingam and by the Supreme Court in Charandas Haridas v. Commissioner of Income‑tax in connection with a matter which was entirely different from the question arising in this reference. Learned Advocate‑General said that the present ‑case was governed by the observations of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Income‑tax ((1956) 29 I T R 521, 526) namely:
"If members of coparcenary are to be regarded as having become partners. in a firm with strangers, they would also become under the partnership law partners inter se, and it would cut at the very root of the notion of a joint un divided family to hold that with reference to coparcenary properties the members can at the same time be both coparceners and partners."
He also referred to In re: S. C. Mullick & Sons ((1938) 6 I T R 99), where the Allahabad High Court held that persons cannot at one and the same time be members of a joint Hindu family in respect of a joint family property and be also members of a firm of which such property forms assets.
In our judgment, the Tribunal was right in holding that the assessee‑firm was in no way invalidated merely because Sir Hukumchand and his son, Rajkumar Singh, both as partners represented the interest of their Hindu undivided family. The decision of the Privy Council in Pichappa v. Chokalingam enunciates the principle that when the managing member of a joint Hindu family enters into a partnership with a stranger, the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Contract Act, 1872, and that in such a case the family as a unit does not become a partner but only such of its members as in fact enter into a contractual relation with the stranger; the partnership will be governed by the Contract Act. The Privy Council laid down this proposition by quoting with approval the statement contained in paragraph 308 of Mayne's Hindu Law. This proposition clearly envisages that not only the managing member of the' joint family but also the other members of the family can enter into a contractual relationship with a stranger and become partners with him in a partnership business. It proceeds on the principle that while membership of a joint family is one of status, the relation of partnership arises from a contract and not from status. The managing member of an undivided family, though he has the ‑ power of representing the interest of other members, is not their agent in the strict sense of the term so as to, clothe the other members of the family with all the rights of principal in ‑respect of contracts entered into by their agent. His position is, as pointed out by the Privy Council in Innamalai Chetty v. Murugasa Chetty ((1903) L R 30A 220), more analogous to that of a trustee. When the managing member of a joint Hindu family and/or other adult members of it representing the family enter into a partnership with a stranger, the other members of the family play no part. The only right they have is against their karta and the coparcener partners, if any, to call upon them to give account with reference to any business that they might do with joint family funds. The income and profits which the karta and the coparcener partner may earn from such partnership would no doubt belong to the joint family; the other coparceners would no doubt have a right to share such profits as members of the joint family and also a right to call upon the managing member or members who entered into partnership to account for all profits earned through such a partnership. But they cannot have any right directly in relation to the partnership in which the managing member or members of a joint family are individual partners, albeit not on their own account but as joint family represen tatives. On principle or authority, there is no justification for the contention that whereas it is open to the karta of a joint Hindu family to enter into a partnership with outsiders, it is not open to two or more adult coparceners of the family in their individual capacity to enter into a partnership with outsiders.
In Pichappa v. Chokalingam, the question that the Privy Council considered was whether one Virappa Pillai, who was the karta of a joint family, having become a partner in a firm, the partnership was on his own account or as managing member of the joint Hindu family, or whether the result of his joining the partnership was that other members of his family also became the partners. Their Lordships observed that the law on the point was correctly stated in Mayne's Hindu Law, (9th edition‑at page 398) as follows:
"Where a managing member of a joint family enters into a partnership with a stranger, the other members of the family do not ipso facto become partners in. the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Contract Act. In such a case the family‑as a unit‑ does not become a partner, but only such of its members as in fact enter into a contractual relation with the stranger: the partnership will be governed by the Act."
The reference in the above passage to the provisions of the Contract Act is to the provisions which have been repealed and are now to tie found in the Indian Partnership Act, 1932. The Privy Council held that Virappa Pillai's enter ing into partnership with the Chetties would not ipso facto make the other members of the family partners of the firm and that it would be a question of evidence and proof whether other members of the family entered into a contractual relationship with the Chetties making them partners. On the evidence in that case, the Privy Council held that of the two members of the joint family, who were sought to be made liable as partners, one was minor and there could be no possible ground for holding him to be a partner. As regards the other, it was held that there was no evidence to show that he ever agreed with the Chetties to become a partner or that the Chetties on their, side ever agreed to take him as a partner. The Privy Council's decision in Pichappa's case is clearly an authority for the proposition that when the managing member of a joint family enters into a partnership with a stranger, the other members do not ipso facto become in law partners of the firm, but that they can enter into a contractual relation ship with the stranger and become partners of the partnership.
The law, as stated by Mayne and approved by the Privy Council in Pichappa's case was accepted by the Supreme Court in Charandas Haridas v. Commissioner of Income‑tax ((1960) 39 I T R 202, 208). In that case, Charandas as karta of a joint family owned. shares in several managing agency firms. In the course of assessment proceedings, he 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 Bombay High Court held that the coparceners only divided the com mission and, not the source which produced the commission and that the asset, which belonged to the joint Hindu family, being the share in a partnership which remained undivided, the nature of the partnership not being changed, the assess ment of the income in the hands of the Hindu undivided family was justified. The Supreme Court reversed the decision of the Bombay High Court, and held that when the members of the joint family divided the commission, there was an effective division of the source itself for the purposes of income tax law, and assessment could not be made upon the Hindu undivided family. While dealing with this question, the Supreme Court referred to the passage in Mayne's Hindu Law and pointed out the effect of the law of partnership, Hindu law and income‑tax law on the matter before it, and observed
"The fact of a partition in the Hindu law may have no effect upon the position of the partner, in so far as the law of partnership is concerned, but it has full effect upon the family in so far as the Hindu law is concerned. Just as the fact of a karta becoming a partner does not introduce the members of the undivided family into the partnership, the division of the family does not change the position of the partner vis‑a‑vis other partner or partners. The income tax law before the partition takes note, factually, of 'the position of the karta, and assesses not him qua partner but as representing the Hindu undivided family. In doing so, the income‑tax law looks not to the provisions of the Partnership Act, but to the provisions of Hindu law. When once the family has disrupted, the position under the part nership 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."
Those observations, when read in the context of the reference made by the Supreme Court to the passage in Mayne's Hindu Law,. only recognise the position that membership of a joint family is one of status and that in a partnership it is one created by a contract, and when the karta or any other copar cener representing the joint family enters into a partnership with a stranger, then so long as the asset of the joint family, namely, the share in the partnership, is not partitioned, the assessment on the karta and/for coparcener, partner is not qua partner but as re presenting the Hindu undivided family.
In Commissioner of Income‑tax v. Ganeshnarayan Onkarmal I T Ref. No. 11 of 1947, decided on 16th March 1948 the Bombay High Court, while considering a question very similar to the one before us, laid down that it is open not only to a karta of a joint family but also to two or more members of the joint family in their individual capacity to enter into a partnership with outsiders. That was a case where one Sontram Devidutta had four sons, Surajmal, Ramanand, Mitanand and Rampratap. Their joint family disrupted in 1926‑27 and the four sons became divided but the branch of each son continued joint. Some of the members of each branch started doing partnership business and in August 1933, a firm was constituted so as to consist of ten persons all of whom were members of the four branches. The instrument of partnership showed the partners to be ten persons representing the four branches with different shares but so as to give each branch quarter share in the profits and loss of the business. The assessee applied for registration under section 26A of the Act, which was refused by the Income‑tax Officer. The Appellate Tribunal, however, held that the partnership should be registered under section 26A. The Bombay High Court upheld the view of the Tribunal. On behalf of the Commissioner of Income tax it was contended that while the karta of a Hindu undivided family could enter into a partnership with a stranger, two or more members of the joint family could not in their individual capacity enter into a partnership with outsiders. Rejecting this contention, Chagla, C. J., said:
"Now it is to be noted that the Tribunal has found it as a fact that the profits accruing to the shares of the ten persons consti tuting the partnership under the partnership deed, dated the 23rd June 1941, was credited to their accounts in the firm's books. It has also been found as a fact that the partner ship was carried on with the funds of joint families con stituted by the four branches and the Tribunal has rightly found that although the members of each branch entered into a contractual partnership with the others they were liable to account to their own representative joint families. I do not see what is. there opposed to principle or opposed to authority which would or should prevent two or three members of a joint family individually contracting with outsiders and entering into partnership. As far as their individual shares are concerned they would be accountable to their joint family. The profits which they would earn `in respect of their individual shares would ultimately ‑ belong to the joint family but so far as the partnership with the outsiders is concerned they would be individual partners with their individual shares."
Tendolkar, J. in a concurring judgment observed:
"Sir Jamshedji op behalf of the Income‑tax Commissioner has contended before us thats the partnership should not be registered because then ten persons who have taken shares under the said deed of partnership did not take any individual shares for themselves. He contends that the shares taken by the c.o‑partners belonged not to the individuals but are the shares held by them for the benefit of their branch of the family which is still joint and that they therefore together form only one share in the partnership. In other words, there are really and truly four partners in the partnership, viz., the four branches of the joint family which has separated. To my mind this argument i~ based upon a misconception of the position of the coparceners ,qua the partners. It is now well established that a member of a joint Hindu family can enter into a partnership with an outsider, may be that in such a partnership he represents the joint family of which he is a member and if so, he is accountable to the joint family for the profits of such business and cannot retain those profits for himself, but qua‑ the partnership he is certainly a partner. The position is not any different when instead of one coparcener of the joint family two or more coparceners of that joint family enter into…
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