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TMI Blog1967 (11) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... years. The assessee-firm was constituted in 1934. A deed of partnership was drawn up on January 24, 1936, but as some of the members died fresh partnership deeds were subsequently drawn up. The one with which we are concerned in this case is dated July 7, 1950, a copy whereof has been made a part of the statement of the case. According to this document, there were in all 18 partners. The assessee firm applied for registration under section 26A in all the three years. The Income-tax Officer refused registration every time on the finding that the partnership consisted of more than 20 persons which was violative of section 4 of the Indian Companies Act and for that reason could not be registered as a partnership. The orders passed in each year were affirmed on the assessee's appeals by the Appellate Assistant Commissioner and the Tribunal. It is clear from the statement of the case that some of the partners of the assessee-firm had joined it only in their representative capacity being kartas of their respective Hindu undivided families. The appellate order of the Tribunal has been made a part of the statement of the case and has been marked as annexure "E" in the referring order. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deaths and births in the two families. He has placed reliance upon the following cases : In re Ram Kumar Ramniwas of Nanpara [1952] 22 ITR 474, Kshetra Mohan-Sannyasi Charan Sadhukhan v. Commissioner of Excess Profits Tax [1953] 24 ITR 488(SC), Commissioner of Income-tax v. Kalu Babu Lal Chand [1959] 37 ITR 123; [1960] 1 SCR 320, Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax [1956] 29 ITR 521, 526; [1956] SCR 143, Commissioner of Income-tax v. Nandlal Ganialal [1960] 40 ITR 1; [1960] 3 SCR 620, Jitmal Bhuramal v. Commissioner of Income-tax [1962] 44 ITR 887 (SC), Commissioner of Income-tax v. Sivakasi Match Exporting Co. [1964] 53 ITR 204 (SC), Commissioner of Income-tax v. A. Abdul Rahim and Co. [1965] 55 ITR 651 (SC), Commissioner of Income-tax v. Bagyalakshmi and Co. [1965] 55 ITR 660 (SC) and Charandas Haridas v. Commissioner of Income-tax [1960] 39 ITR 202; [1960] 3 SCR 296. As a bald proposition of law and in strict technical sense it is true that a Hindu undivided family cannot constitute a partnership firm but it is well settled and fully recognized that, even though the partner may be the karta of a Hindu undivided family, the Hindu undivid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere two or more such joint families form a partnership". It is not possible to say that because under the Contract Act and the Partnership Act two or more joint families as such cannot form a partnership, therefore, the words mentioned above are surplusages. As pointed out earlier by me, those words clearly mean that, when two or more joint families, in effect, or as a fact (quite apart from the law) form a partnership, the consequences given in section 4 of the Companies Act would ensue. There is a difference between an actual state of affairs and the legal sanctity to those state of affairs. As a matter of fact, two or more Hindu undivided families, may constitute a partnership business but it will not be recognised by law of partnership. The purpose of sub-section (3) is to meet even those cases where, in effect, two or more joint families form a partnership though, in law, they should not or could not form such a partnership. It is a matter of common knowledge that even though in the technical and strict sense of the law when a karta enters into partnership on behalf of the Hindu undivided family in his representative capacity the members of the Hindu undivided family do not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me into existence. Mr. Jagdish Swarup also placed reliance upon Senaji Kapurchand's case (supra), and cited the following passage from that report for my consideration: "We think that under section 4, Companies Act, what we have to see is whether, where an association or partnership is formed for purposes of carrying on a business, each of the members will be liable individually upon contracts made and whether each would have rights accruing to him upon such contracts". This decision is of 1930 and cannot throw any light on the words that came into existence for the first time in 1936. Mr. Jagdish Swarup also placed reliance upon Commissioner of Income-tax v. Roopnarain Ramchandra [1966] 60 ITR 314 . He contends that this case is an authority so far as this court is concerned on the interpretation of section 4(3) of the Act. I have very carefully perused this judgment. Even though their Lordships have not accepted the Calcutta view expressed in Shyamlal Roy v. Madhusudan Roy AIR 1959 Cal. 380 , on which the Tribunal relied, they have not interpreted the provisions of section 4(3) of the Act. Besides, the facts in the case are very different from those before us. The question the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to be achieved by the partnership deed, the so called partnership would be struck by section 4(2) of the Act. The partnership deed which had to be interpreted, embodying the agreement of the partnership alleged to be between "joint families" and not between individuals, certainly does not mention that the joint families are partners at all. It does not assign any role to joint families or to any partners as representatives or delegates of joint families. The partnership deed is, prima facie, between individuals who are not even described as kartas or representatives of their respective Hindu joint families. However, the statement of the case makes the appellate order of the Tribunal a part of the statement. The appellate order says : "It is common ground that most, if not all, of them were kartas and represented their respective families in the partnership". But, can the partners, who admit that they are kartas representing their respective Hindu undivided families, make the Hindu undivided families "partners", as that term is understood in law, by such an admission ? This is the simple question of some difficulty which we have to answer. I find it very difficult to acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of gain by the company, association or partnership or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of an Act of Parliament or some other Act of the Governor-General in Council or of Royal Charter or Letters Patent. (3) This section shall not apply to a joint family carrying on joint family trade or business and where two or more such joint families form a partnership, in computing the number of persons for the purposes of this section, minor members of such families shall be excluded". It will be noticed that the object of section 4(2) is to limit the number of persons carrying on business as a company, association, or partnership to twenty unless the company, association or partnership is registered under the Act. The object of section 4(3), which was added by Act XXII of 1936, was to exempt a joint family carrying on joint family trade or business from the restriction contained in section 4(2) itself. But, as soon as "two or more such joint families form a partnership" the restriction becomes operative again. The term "partnership" when used in a legislative provision must necessarily be given its legal c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idewind", create a new kind of partnership not recognised by law. It may be mentioned here that, according to section 30 of the Partnership Act, a minor cannot be a partner although he may be admitted to the benefits of a partnership. Therefore, the object of the inartistically worded section 4(3) of the Companies Act may well be to make it clear that minors thus admitted to the benefits of a partnership, simply because they happen to be members of joint Hindu families carrying on business through coparceners, will not be counted as partners when the number of partners is determined for the purposes of section 4(2) of the Act. In my opinion, the provisions of section 4(3) must be read in the context of and in harmony with sections 4 and 30 of the Partnership Act. It may also be mentioned that section 6 of the Partnership Act lays down the mode of determining whether a group of persons does or does not form a partnership firm. It enables the authority which has to determine the question to go behind the deed of partnership. In the present case, the department tried to make out that, as the partners mentioned in the deed were not the real partners but the real partners were the Hin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of section 4(3) of the Companies Act. Another case relied upon on behalf of the department was Banares Cloth Dealers Syndicate v. Income-tax Officer, Banares [1964] 51 ITR 507, 511. Here, the provisions of section 4 of the Indian Companies Act were held to have been contravened by the partnership found in the case. The question whether there was a partnership between certain individuals and certain joint families and certain firms was determined on an interpretation of the deed and on the facts of that particular case. In the course of his judgment, Desai C. J., keeping in view the provisions of section 4 of the Indian Companies Act, observed : "There would have been no sense in prohibiting a Hindu undivided family's being a partner if there was no such thing as distinct from its karta 's being a partner, i.e., if its being a partner were the same as its karta 's being a partner. In Lachhman Das v. Commissioner of Income-tax [1948] 16 ITR 35 (PC) the Supreme Court held that there can be a partnership between a karta and a coparcener and did not consider the validity of a partnership between a Hindu undivided family and a coparcener. A partnership between a karta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be a partner at all. In such cases another jural relationship, governed by the personal law applicable to the karta and members of the joint family, inter se, exists in addition to the vinculum juris or the legal bond which is embodied in the contract of partnership. On the other hand, in those cases where the karta is merely a vehicle for the assertion of the wills of the members of the joint family, it may be said that his position as a partner is an attempt to import members of the whole group as partners. Such a partnership would be a most unusual and extraordinary kind of partnership. In cases where the karta karta functions purely as an individual with a will and mind of his own, unaffected by any obligation to consider the views of other members of the joint family, I do not think the members of the joint family can be deemed to be partners even in what may be regarded as the " popular " sense of the term partnership. It appears to me that the findings recorded by the Tribunal in the case before us amount only to making out two sets of jural relationships, one between partners as individuals who are the only partners in the eye of law, and, another, which the partners w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip then quoted the following passage from Mayne on Hindu Law and Usage: "Where a managing member of a joint family enters into a partnership with a stranger, the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Partnership Act. In such a case, the family as a unit does not become a partner, but only such of its members as in fact enter into a contractual relation with the stranger ; the partnership will be governed by the Act". In the above-mentioned case a Division Bench of this court expressed dissent from the view taken by the Calcutta High Court in Shyamlal Roy's case (supra) . The Tribunal, in rejecting the assessee's appeal, has purported to rely upon the view taken by the Calcutta High Court. As I find myself, very respectfully, in complete agreement with the view taken by Desai C.J. in Roopnarain Ramchandra's case (supra), I do not think it is necessary to embark on a discussion of the Calcutta case relied upon by the Tribunal; I consider myself bound by the ratio decidendi of Roopnarain Ramchandra's case (supra). If I had held a contrary view I wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the joint family properties into the partnership, make other coparceners automatically partners. The question of counting the number of the whole body of members of an undivided family could only arise where the whole body is sought to be included among the partners. Otherwise, the question of counting the members of the joint family would not arise at all. In Kshetra Mohan-Sannyasi Charan Sadhukhan's case (supra), it was clearly held as follows by their Lordships of the Supreme Court : "When two kartas of two Hindu undivided families enter into a partnership agreement the partnership is popularly described as one between the two Hindu undivided families but in the eye of the law it is a partnership between the two kartas and the other members of the families do not ipso facto become partners. There is, however, nothing to prevent the individual members of one Hindu undivided family from entering into a partnership with the individual members of another Hindu undivided family and in such a case it is a partnership between the individual members and it is wholly inappropriate to describe such a partnership as one between two Hindu undivided families". I find it very difficult to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as between himself and other coparceners, his undivided Hindu family, does not make the other members of the coparcenary body partners automatically. If the other members of a joint family are not partners at all the question of counting their number does not arise. In Nandlal Gandalal's case (supra) it was again held by the Supreme Court: "The position in Hindu law with regard to a coparcener, even when he is the karta, entering into partnership with others in carrying on a business is equally well settled. The partnership that is created is a contractual partnership and will be governed by the provisions of the Indian Partnership Act, 1932. The partnership is not between the family and the other partners; it is a partnership between the coparcener individually and his other partners (see Kshetra Mohan-Sannyasi Charan Sadhukhan v. Commissioner of Excess Profits Tax [1953] 24 ITR 488 (SC). The coparcener is undoubtedly accountable to the family for the income received, but the parnership is exclusively one between the contracting members, including the individual coparcener and the strangers to the family. On the death of the coparcener the surviving members of the family cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpreting section 4(3) of the Companies Act of 1913, in the above-mentioned case. Therefore, expressions used by it in describing the factual position in the case could not, in my opinion, be used for the purpose of finding out the legislative intent and meaning of a provision which was not under consideration before the Supreme Court at all. The above-mentioned cases make it clear that a joint Hindu family cannot be conceived of as a legal entity capable of functioning as a partner in the eye of law. It follows that where a statutory provision speaks of a partnership formed of two or more joint families the reference must he to individual members of joint families forming a partnership and not to joint families as partners or legal entities or persons acting through kartas. Section 4(3) of the Companies Act does not appear to me to deal with cases in which partners will be fictitiously deemed to be joint families even though this is not possible either in fact or under the law as it stands today. It appears to me to denote what is an actual partnership of individuals capable of being recognised by law as a partnership. I, therefore, very respectfully, dissent from the view ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the total number of persons including the members of the aforesaid joint families was more than 20. As the answer to the question depends primarily upon the interpretation of section 4 of the Indian Companies Act, 1913, it is necessary to quote the relevant parts of it at this very stage. Thus stated, the section reads as follows: "4. (1) ............... (2) No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any other business that has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of an Act of Parliament of the United Kingdom or some other Indian Law or Royal Charter or Letters Patent. (3) This section shall not apply to a joint family carrying on joint family trade or business and where two or more such joint families form a partner ship, in computing the number of persons for the purposes of this section, minor members of such families shall be excluded. . .". Sri Jagdish Swarup, the learned counsel for the assesee-firm, conceded as I thought he w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other members of the joint family also, partners in the partnership. Their lordships observed that the law on these questions was correctly stated in Mayne's Hindu Law, edition 9, at page 398, as follows : "Where a managing member of a joint family enters into a partnership with a stranger the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Contract Act. In such a case the family as a unit does not become a partner, but only such of its members as in fact enter into a contractual relation with the stranger ; the partnership will be governed by the Act". The aforesaid view was also taken by the Supreme Court in Firm Bhagat Ram Mohanlal's case (supra). Nandlal Gandalal's case (supra), and last of all in Bajrang Lal Tantai and others v. Smt. Gomti Devi and others4. In the last case the Supreme Court observed thus : "It is true that when a karta enters into a partnership contract he is merely one of the persons constituting the total number of partners. Behind his back there may be a joint Hindu family or he may be acting in his personal capacity; but as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bring anything to that effect to my notice. The result, therefore, is that section 4(3) must be held to have created an artificial body of persons, who are to be regarded, in a loose sense, as partners for the limited purpose indicated in that section, i.e., for the purpose of calculating the total strength of the partnership constituted of two or more joint families. That section, however, does not profess to confer on such adult members the legal status of partners qua the partnership concerned, and for that, as also for all other purposes, those partnerships remain subject to the Indian Partnership Act and the law as laid down in the authorities cited above. Thus interpreted section 4(3) presents no diffculty in the way of partnership constituted of two or more joint families, getting itself registered under section 26A of the Indian Income-tax Act, and an application which is signed only by the kartas and which specifies their shares only, i.e., the shares of the joint families represented by them only, cannot be refused registration under that section for want of the signatures, and the details of the shares, of all the adult members of those joint families. Thus, the second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made in a case in which a duly authorised agent of the partners had signed the application for the registration of the partnership firm on behalf of the principals and as under the relevant rule framed under the Income-tax Act only an application signed by the partners can be entertained, the question arose as to whether the rule of common law which allows a person to act through a duly authorised agent could be invoked to validate the application. It was in this connection that the Supreme Court after observing, as follows : "The Indian Income-tax Act is a self-contained code exhaustive of the matters dealt with therein, and its provisions show an intention to depart from the common rule qui facit per alium facit per se. Its intention again is that a firm should be given the benefit of section 23(5)(a), only if it is registered under section 26A in accordance with the conditions laid down in that section and the Rules framed thereunder. And as the word 'personally' in rule 6 requires the application to be signed by the partners in person, the signature by an agent on his behalf is ' invalid'". made the observation relied upon by Sri Gupta. It will therefore be seen that the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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