1967 (1) TMI 33 - HC - Income Tax

Kartas of HUF joining as partners and total number of persons including adult members of the families exceeding twenty - registration was rightly refused to the firm on the ground that it violated the provisions of section 4 of the Indian Companies Act, 1913

Issues Involved:
1. Whether the partnership firm violated section 4 of the Indian Companies Act, 1913.
2. Whether the firm could be registered under section 26A of the Income-tax Act, 1922.

Detailed Analysis:

Issue 1: Violation of Section 4 of the Indian Companies Act, 1913

Facts and Circumstances:
The assessee-firm was constituted in 1934, with a partnership deed dated July 7, 1950, listing 18 partners. The firm applied for registration under section 26A of the Income-tax Act for the assessment years 1952-53, 1953-54, and 1954-55. The Income-tax Officer refused registration, citing that the partnership consisted of more than 20 persons, violating section 4 of the Indian Companies Act, 1913.

Legal Provisions:
Section 4(2) of the Indian Companies Act, 1913, states that no company, association, or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any business unless it is registered as a company. Section 4(3) exempts joint families carrying on joint family trade or business, but in computing the number of persons, minor members are excluded.

Tribunal's Findings:
The Tribunal found that several partners were kartas of their respective Hindu undivided families. The Tribunal opined that the total number of adult members in such families should be considered while determining the number of partners, thus exceeding twenty persons.

Arguments:
The assessee argued that a Hindu undivided family cannot constitute a partnership firm as it is not a legal entity. However, it was acknowledged that the karta of a Hindu undivided family can enter into a partnership on behalf of the family, making the family liable for debts and entitled to profits.

Judgment Analysis:
The court held that section 4(3) of the Indian Companies Act applies when, in effect, two or more joint families form a partnership. The words "where two or more such joint families form a partnership" mean that the partnership would be subject to the provisions of section 4(3) even if the families are not recognized as legal partners under the Partnership Act.

Issue 2: Registration under Section 26A of the Income-tax Act, 1922

Facts and Circumstances:
The partnership deed did not explicitly state that the kartas entered into the partnership in their representative capacities. However, it was clear from the statement of the case and the Tribunal's order that the kartas represented their Hindu undivided families.

Arguments:
The assessee contended that only the kartas should be counted as partners, not the adult members of the Hindu undivided families. The department argued that the total number of adult members should be considered, making the partnership invalid under section 4(2) of the Companies Act.

Judgment Analysis:
The court held that for the purposes of section 4(3) of the Companies Act, all adult members of the joint families must be counted. Therefore, the partnership exceeded the permissible number of partners and could not be registered under section 26A of the Income-tax Act.

Separate Judgments:

M. H. Beg J.:
Beg J. disagreed with the majority view, arguing that the term "partnership" in legislative provisions must be understood in its legal sense. He opined that a partnership consisting of joint families as legal entities is not possible under the law. Therefore, the question of counting the members of joint families does not arise if only the kartas are partners.

J. N. Takru J.:
Takru J. agreed with the majority, stating that section 4(3) of the Companies Act creates an artificial body of persons for the limited purpose of calculating the total strength of the partnership. He concluded that the partnership was invalid under section 4(2) read with section 4(3) of the Companies Act.

Conclusion:
The question was answered in the affirmative, against the assessee and in favor of the department. The firm violated section 4 of the Indian Companies Act, 1913, and could not be registered under section 26A of the Income-tax Act, 1922. The court ordered the assessee to pay the costs of the department, assessed at Rs. 400.

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