1970 (4) TMI 5 - SC - Income Tax

It was not open to the ITO to go behind the deed and find out for the purposes of registration under s. 26A - registration under s. 26A of the IT Act 1922 should not be refused to the appellant firm on the ground that the partnership in question violated the provisions of s. 4 f the Companies Act 1913 - Assessee s appeal is allowed

Issues Involved:

1. Whether registration under section 26A of the Indian Income-tax Act, 1922, was rightly refused to the appellant firm on the ground that the partnership violated the provisions of section 4 of the Indian Companies Act, 1913.

Issue-wise Detailed Analysis:

1. Registration Refusal under Section 26A of the Indian Income-tax Act, 1922:

The primary question for decision was whether the appellant firm's registration under section 26A of the Indian Income-tax Act, 1922, was rightly refused due to a violation of section 4 of the Indian Companies Act, 1913. The authorities under the Act and the High Court of Allahabad answered affirmatively, leading to the assessee's challenge.

The relevant assessment years were 1952-53, 1953-54, and 1954-55. The Income-tax Officer refused to register the appellant firm under section 26A for these years. The partnership deed executed on July 7, 1950, showed the firm consisted of 18 partners, appearing to be partners in their own right. However, the authorities concluded that some partners joined as kartas of their respective Hindu undivided families, making the partnership unlawful under section 4(3) of the Indian Companies Act, 1913.

2. Interpretation of Section 4 of the Indian Companies Act, 1913:

Section 4(2) of the Indian Companies Act, 1913, prohibits any company, association, or partnership consisting of more than twenty persons from being formed for business purposes unless registered as a company. Section 4(3) exempts joint families carrying on joint family trade or business, excluding minor members when computing the number of persons.

The authorities and the High Court opined that the adult members of the Hindu undivided families should be considered in determining the total number of partners, leading to the conclusion that the firm had more than twenty partners and was thus unlawful.

3. Legal Personality of Hindu Undivided Family in Partnerships:

Mr. Chagla, representing the assessee, argued that a Hindu joint family cannot join a partnership as it has no legal personality. When a karta of a Hindu undivided family joins a firm, other family members do not become partners ipso facto. The Income-tax Officer should only consider the requirements of section 26A and not investigate who is beneficially interested in the partnership.

Conversely, Mr. B. Sen, for the department, contended that the department could look beyond the partnership deed to determine if a partner joined in their own right or as a representative of a joint family. If a partner represented a joint family, the adult members of that family should be deemed partners, making the partnership unlawful if exceeding twenty partners.

4. Definition of "Person" and "Partnership":

Section 2(6B) of the Act aligns the definitions of "firm," "partner," and "partnership" with the Indian Partnership Act, 1932. Section 4 of the Partnership Act defines "partnership" as the relation between persons agreeing to share profits. Only "persons" can join as partners, and a Hindu undivided family is not a person within the meaning of the Partnership Act.

5. Judicial Precedents on Hindu Undivided Family in Partnerships:

Several judicial decisions, including those by the Privy Council and the Supreme Court, established that a Hindu undivided family cannot enter into a partnership. The partnership is between individual members, not the family as a unit.

6. Scope of Inquiry under Section 26A:

The scope of inquiry under section 26A is limited. The Income-tax Officer must verify if the application complies with section 26A and relevant rules. If the partnership is genuine and valid, the Income-tax Officer cannot refuse registration based on the beneficial interest of partners.

Conclusion:

The Supreme Court concluded that the persons shown in the partnership deed appeared to have joined in their individual capacity. The Income-tax Officer could not go behind the deed to determine if partners represented others. The partnership was validly formed, and the application complied with section 26A and relevant rules. Therefore, the Income-tax Officer was bound to register the partnership.

The appeals were allowed, the High Court's order was set aside, and the question referred to the High Court was answered in the negative and in favor of the assessee. The department was ordered to pay the costs of the assessee in both the Supreme Court and the High Court.

Appeals allowed.

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