1970 (2) TMI 89 - HC - Income Tax

Partnership made between the undivided family and one of its coparceners the second assessee - entitlement to renewal of registration

Summary

Issues Involved:
1. Entitlement to renewal of registration for the year 1959-60.
2. Justification of assessment on the karta of the Hindu undivided family of the income of the business carried on in the name of Shah Prabhudas Gulabchand.

Detailed Analysis:

Issue 1: Entitlement to Renewal of Registration for the Year 1959-60
The primary issue was whether the firm, Messrs. Shah Prabhudas Gulabchand, was entitled to renewal of registration under section 26A of the Indian Income-tax Act, 1922, for the assessment year 1959-60. The firm had previously been granted registration, but the renewal application for 1959-60 was rejected by the Income-tax Officer. The rejection was based on the finding that the partnership between Bhikibai and Chandrakant was not genuine but was essentially a partnership within a Hindu undivided family (HUF), which is not permissible under the law.

The court examined the history of the business, which was initially carried on by Prabhudas Gulabchand and inherited by his four minor sons upon his death. Bhikibai, the widow, managed the business initially alone and later with Khushaldas Gangadas in a partnership. Upon Chandrakant attaining majority, a new partnership was formed between Bhikibai and Chandrakant.

The court referred to precedents, including Lachhman Das v. Commissioner of Income-tax and Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax, which established that a coparcener could enter into a partnership with the karta of a joint family only if the coparcener contributed separate and individual property to the partnership. In this case, Chandrakant had no separate property and did not contribute any capital to the business. The court concluded that the partnership was essentially an internal arrangement within the HUF and not a genuine partnership eligible for registration under section 26A.

Answer to Question 1: The court answered in the negative, denying the renewal of registration for the year 1959-60.

Issue 2: Justification of Assessment on the Karta of the Hindu Undivided Family
The second issue was whether the assessment made on Chandrakant Prabhudas, as the karta of the HUF, for the income of the business carried on in the name of Shah Prabhudas Gulabchand, was justified in law. The Income-tax Officer had assessed the business income as that of the HUF, not as individual income, based on the finding that the business was carried on for the benefit of the family.

The court analyzed the facts and found that the business assets and capital were inherited by the four minor sons of Prabhudas and managed by Bhikibai. The subsequent partnerships, first with Khushaldas and then with Chandrakant, were conducted using the capital belonging to the HUF. Chandrakant did not contribute any separate property to the business, and the profits and losses were managed within the family framework.

The court reiterated the legal principle that a coparcener could not become a partner in the family business unless he had separate property to contribute. Since Chandrakant did not have any separate property, the court held that the business income rightly belonged to the HUF and the assessment on Chandrakant as the karta was justified.

Answer to Question 2: The court answered in the affirmative, upholding the assessment on the karta of the HUF.

Conclusion:
The court concluded that the firm was not entitled to renewal of registration for the year 1959-60 and that the assessment on Chandrakant Prabhudas, as the karta of the HUF, was justified. The two assessees were ordered to pay costs.