1965 (2) TMI 127 - HC - Income Tax

Summary

Issues Involved:
1. Validity of partnership where partners represent a Hindu undivided family (HUF).
2. Impact of agreements made by a partner with third parties on the validity of the partnership.
3. Effect of non-disclosure of profits by partners in their returns on the validity of the partnership.
4. Compliance with Section 26A and the rules for registration of the firm.

Issue-wise Detailed Analysis:

1. Validity of partnership where partners represent a Hindu undivided family (HUF):

The primary question was whether the firm could be granted registration under Section 26A of the Indian Income-tax Act, 1922, given that Sir Hukumchand and his son Rajkumar Singh represented their HUF in the partnership. The Tribunal held that the partnership was valid, citing Mayne's Hindu Law and various judicial precedents, including Pichappa v. Chokalingam and Charandas Haridas v. Commissioner of Income-tax, which support the notion that members of an HUF can enter into a partnership with strangers. The Tribunal rejected the revenue's contention that the partnership was invalid due to the representation of the HUF by more than one coparcener. The High Court upheld this view, stating that the partnership was not invalidated merely because Sir Hukumchand and his son represented their HUF. The decision emphasized that while membership of a joint family is a matter of status, partnership is a matter of contract.

2. Impact of agreements made by a partner with third parties on the validity of the partnership:

The Tribunal found that Mannalal's agreements with five other persons, including Chunnilal Onkarmal Ltd., for sharing his profits did not invalidate the partnership. Mannalal continued to participate in the partnership business and performed the functions of a partner. The Tribunal held that the agreements did not entitle the other persons to participate in the conduct of the business, and thus, Mannalal remained a genuine partner. The High Court agreed, noting that a partner can enter into agreements for the sharing of his profits without affecting the validity of the partnership. The Court cited Lindley on Partnership and various judicial precedents, including Commissioner of Income-tax v. Laxmi Trading Co., to support this view.

3. Effect of non-disclosure of profits by partners in their returns on the validity of the partnership:

The revenue argued that the non-disclosure of profits by Sir Hukumchand and Rajkumar Singh in their returns indicated that they were not the actual partners, but rather the private limited company, Sir Sarupchand Hukumchand Ltd., was the partner. The Tribunal rejected this argument, stating that the shares of profits were credited to the individual accounts of Sir Hukumchand and Rajkumar Singh, and the privity of contract was between these individuals and the other partners. The High Court upheld this view, emphasizing that the question of to whom the profits ultimately belonged was relevant for assessment purposes but not for the question of registration.

4. Compliance with Section 26A and the rules for registration of the firm:

The revenue requested a supplementary statement of facts to ascertain whether the application for registration complied with the rules. The High Court denied this request, stating that the revenue could not raise new contentions that were not argued before the Tribunal. The Court emphasized that the facts relevant to the question of compliance with Section 26A and the rules had not been found or dealt with in the orders of the Tribunal or the lower authorities. The Court cited Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. and New Jehangir Vakil Mills Ltd. v. Commissioner of Income-tax to support its decision.

Conclusion:

The High Court concluded that the assessee-firm was entitled to registration under Section 26A for the assessment year 1954-55. The Tribunal's direction to the Income-tax Officer to register the firm was upheld. The Court awarded costs of the reference to the assessee-firm.