1966 (7) TMI 14 - HC - Income Tax

Summary

Issues Involved:

1. Entitlement of the partnership firm to registration under section 26A of the Indian Income-tax Act, 1922.
2. Validity of a partnership involving coparceners of a Hindu undivided family and strangers.
3. Compliance with the provisions of section 26A and related rules.

Issue-wise Detailed Analysis:

1. Entitlement of the partnership firm to registration under section 26A of the Indian Income-tax Act, 1922:

The primary question referred for decision was whether the firm of Ramakrishna Transports, Kalahasthi, was entitled to registration under section 26A of the Act for the assessment year 1959-60. The firm was initially registered under section 26A, but the registration was later canceled by the Commissioner of Income-tax. The court emphasized that for a firm to be entitled to registration, it must conform to the conditions prescribed by section 26A and rules 2 to 6B made under section 59 of the Act. The partnership must be genuine and valid, and if these conditions are met, the income-tax authority has no power to reject its registration. The court concluded that the cancellation of the registration was not justified in law because the partnership was genuine and complied with the provisions of section 26A and the related rules.

2. Validity of a partnership involving coparceners of a Hindu undivided family and strangers:

The court examined whether more than one coparcener representing a Hindu undivided family can enter into a valid partnership with strangers. It was established that the coparceners of a Hindu undivided family are not partners within the meaning of the Partnership Act, as their relationship is based on status and created by operation of law. However, it is competent for the manager of a joint family business to enter into a partnership with strangers. The court cited the principle that when a managing member of a joint family enters into a partnership with a stranger, the other members of the family do not automatically become partners. The family as a unit does not become a partner, only the members who enter into the contractual relation with the stranger are considered partners. The court also referred to various precedents, including decisions by the Privy Council and the Supreme Court, affirming that adult members of a joint family can enter into a partnership with strangers in a representative capacity.

3. Compliance with the provisions of section 26A and related rules:

The court noted that the only ground for the cancellation of the registration by the Commissioner was the belief that the case was hit by the observations of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax. However, the court clarified that the observations of the Supreme Court did not apply to the present case, as the partnership involved adult coparceners representing the family entering into a partnership with strangers. The court emphasized that the partnership was genuine and complied with the provisions of section 26A and the related rules. Therefore, the cancellation of the registration was not justified.

Conclusion:

The court answered the question in the affirmative, stating that the firm of Ramakrishna Transports, Kalahasthi, was entitled to registration under section 26A of the Indian Income-tax Act, 1922. The department was directed to pay the costs of the assessee, with the advocate's fee fixed at Rs. 100.