1962 (10) TMI 60 - HC - Income Tax

Summary

Issues Involved:
1. Validity of partnership between Pitamberdas Bhikhabhai as karta of a Hindu undivided family (HUF) and his two adult sons in their individual capacities.
2. Taxability of the whole income from the business in the hands of the HUF or only a part thereof.

Detailed Analysis:

1. Validity of Partnership:
The primary issue was whether a valid partnership could be formed between Pitamberdas Bhikhabhai, in his capacity as karta of the HUF, and his two adult sons, Ramanlal and Jayantilal, in their individual capacities. The Tribunal and the High Court examined whether such a partnership was legally permissible under the Indian Income-tax Act, 1922, and relevant case law.

The business in question was originally part of a larger HUF and was later taken over by Pitamberdas and Amritlal after a separation. When Amritlal retired in 1956, the business was taken over by Pitamberdas, and it was common ground that the business belonged to the HUF consisting of Pitamberdas, his seven sons, and other family members.

Pitamberdas purported to form a partnership with his two major sons, Ramanlal and Jayantilal, by executing a partnership deed on November 18, 1956. The shares were divided as 1/2 for Pitamberdas and 1/4 each for Ramanlal and Jayantilal. However, the Tribunal rejected the registration of this partnership under section 26A of the Income-tax Act, 1922, citing that no valid partnership was formed as per the Supreme Court decision in Bhagat Ram Mohanlal.

The High Court upheld this view, stating that the business was an asset of the HUF, and any attempt to form a partnership with coparceners in their individual capacities without bringing in separate property was not permissible. The Court referred to the Privy Council decision in Lachhman Das v. Commissioner of Income-tax, which allowed partnerships between a karta and a coparcener only if the coparcener brought in separate property. Since Ramanlal and Jayantilal did not bring in separate property, the partnership was invalid.

2. Taxability of Income:
The second issue was whether the entire income from the business should be taxed in the hands of the HUF or only a part of it. The Income-tax Officer had taxed the whole income in the hands of the HUF, which was upheld by the Tribunal. The Appellate Assistant Commissioner had initially set aside this assessment, suggesting that the business belonged to an association of persons consisting of Pitamberdas and his two sons.

The High Court concluded that since no valid partnership was formed, the business continued to belong to the HUF. Consequently, the entire income from the business was taxable in the hands of the HUF, not just a part of it. The Court relied on the Supreme Court's observation in Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax, which stated that members of a HUF could not simultaneously be partners in their individual capacities in respect of joint family property.

Conclusion:
The High Court answered both questions in the negative:
1. Ramanlal and Jayantilal could not enter into a valid partnership with Pitamberdas in his representative capacity as karta of the HUF.
2. The whole of the income from the business was properly taxable in the hands of the HUF of Pitamberdas Bhikhabhai.

The assessees were directed to pay costs of Rs. 400 to the Commissioner.