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TMI Blog1966 (7) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... strangers. The firm was duly registered under section 26A of the Income-tax Act. The share income of Sri Venugopala Reddy and Ramakrishna Reddy were being offered for assessment as the income of the Hindu undivided family and assessed by the Income-tax Officer accordingly. Some years later the assessee came with the contention that there was a family partition, as a result of which the two partners of the family became separated with effect from April 1, 1958, and that, thereafter, these two families held their shares on behalf of their respective branches of the family to which they belong. This case, advanced for the first time for the assessment year 1959-60, did not find favour with the department. The assessee went in appeal, but without success, up to the stage of the Appellate Tribunal. The two partners of the firm were recognised as before only as coparceners of Hindu undivided family. The Income-tax Officer, Tirupati, renewed the registration of the firm in the year 1959-60, by his order dated October 30. 1960. Thereupon, the Commissioner of Income-tax took exception, as he was of the view that two coparceners representing the Hindu undivided family cannot enter into a va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lving, as it does, a consideration of the principles of Hindu law and also the Partnership Act steering clear of all possible conflict must necessarily present considerable difficulty. The coparceners of a Hindu undivided family are not partners within the meaning of that term in the Partnership Act. Partnership, according to the Partnership Act, is the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all. The persons who have thus entered into the contract are called individually partners and, collectively, a firm. The relationship between coparceners in connection with the joint family business is not based on contract but on status and is created by operation of law. That is why section 5 of the Partnership Act excludes the members of a Hindu undivided family carrying on family business as such from the description of the partners. The members of a Hindu undivided family carrying on family business are, therefore, not partners. Nor is the joint Hindu family a firm within the meaning of the Partnership Act, though that terminology may be used loosely in relation thereto. A joint Hindu family is a unit to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mily. It is settled law that it is competent to the manager of joint family business acting on behalf of the family to enter into a partnership with strangers. The manager, by doing so, does not introduce the members of the undivided family into that partnership. Such members alone as have entered into partnership with the Strangers are partners. The manager and such of these members are accountable to the family. The law on this subject has been stated by Mayne in page 398 of his book, Mayne on Hindu Law and Usage, 9th edition, in the following terms : " 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, and the partnership will be governed by the Act. " This statement of law has been approved of by the Privy Council in P. K. P. S. Pichappa Chettiar v. Chockalingam Pillai and also accepted by the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Except where there is a specific provision of the Income-tax Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the karta of a joint Hindu family ; he may be a trustee ; he may enter into a sub-partnership with others ; he may, under an agreement, express or implied, be the representative of a group of persons ; he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity ; qua the third parties in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their rights against the other partners nor the other partners can do so against the said third parties. Their right is only to a share in the profits of their partner-representative in accordance with law or in accordance with the terms of the agreement, as the case may be." These ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or several persons) on behalf of the family to enter into partnership with strangers. In that case, only the person or persons entering into contract will be partners qua the strangers who are the contracting parties. The other members though beneficially interested in the profits of the shares of the managing members are not the partners. That such partners acting on behalf of the undivided family can be more than one is not open to doubt in view of the statement of law by Mayne and the pronouncement of the Privy Council and the Supreme Court in the cases cited above. There may also be cases where the members, not as coparceners or members of the family but in their personal character, not with the aid of or detriment to the joint family funds but with their own separate funds, enter into contract with the karta who represents the family. It is well settled that individual members qua their separate property can enter into a valid partnership with a karta representing the Hindu undivided family. In Lachhman Das v. Commissioner of Income-tax, it was observed that when it is open to a managing member of a joint Hindu family to enter into partnership with a stranger, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or individual capacity can quoad their separate property enter into partnership with the karta of the joint family who represents the joint family. So far, the law is well settled. Even so, there arises a third question which in substance seeks to demand a further clarification of the above propositions in view of the basic rule of Hindu law that persons cannot at the same time be members of a joint Hindu family and be also members of the firm, of which such property forms the asset. As already noticed, section 5 of the Partnership Act clearly lays down that the members of a Hindu undivided family carrying on family business as such are not partners in such business. The question for consideration is where some of the joint family members become partners (within the meaning of the term in the Partnership Act) in a partnership firm can they become so only in their individual character qua their separate property or they can as well become such partners, by reason of their contract with the strangers, representing the joint family by themselves or in conjunction with the karta. It is difficult to accede to the contention that the only way for the members of the joint family to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mar Ramniwas of Nanpara, In re, expressed the view that the adult members of the family acting within their rights under the Hindu law may be able to enter into partnership and make the entire joint family liable for the debts of the partnership and be entitled to the benefits thereof. The Madras High Court in Bagyalakshmi Co. v. Commissioner of Income-tax, approved of the principle of some members of joint family representing the family entering into a partnership with a stranger. The Bombay High Court also has in an unreported case, Commissioner of Income-tax v. Ganesh Narayan Onkarmal, accepted the principle that two or more members of an undivided Hindu family can enter into a partnership with strangers rendering themselves accountable for their individual shares to the joint family. In Commissioner of Income-tax v. Hukumchand Mannalal Co., the Madhya Pradesh High Court has referred to this case. It was a case where the instrument of partnership showed that there were ten persons representing the four branches with different shares so as to give each branch quarter share in the profits and loss of the business. It was contended that, while the karta of a Hindu undivided fam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmittee that the karta of a joint Hindu family could enter into partnership with an individual member of the coparcenary quoad his separate property. It was also held by the Privy Council in Sunday Singh Majithia v. Commissioner of Income-tax, that there was nothing in the Income-tax Act to prohibit the members of a joint Hindu family from dividing some properties, while electing to retain their joint status, and carrying on business as partners in respect of those properties treating them as its capital. But in the present case, the basis of the partnership agreement of 1940 is that the family was joint and that Mohanlal was its karta and that he entered into the partnership as karta on behalf of the joint family. It is difficult to reconcile this position with that of Chotalal and Bansilal being also partners in the firm in their individual capacity, which can only be in respect of their separate or divided property. If members of a coparcenary are to be regarded as having become partners in a firm with strangers, they would also become under the partnership law partners inter se and it would cut at the very root of the notion of a joint undivided family to hold that with refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same time be both coparceners and partners in their individual capacity as distinct from their capacities as representatives of the joint family. We find ourselves in respectful agreement with these observations. In Pitamberdas Bhikhabhai Co. v. Commissioner of Income-tax, the Gujarat High Court had to deal with a case where the father Pitamberdas, purported to make a gift of Rs. 10,001 to each of his sons, Ramanlal and Jayantilal. The purported gift was made by debiting a sum of Rs. 20,002 in the books of the business to Pitamberdas Bhikhabhai and crediting a sum of Rs. 10,001 to Ramanlal Pitamberdas and a sum of Rs. 10,001 to Jayantilal Pitamberdas. Pitamberdas then took Ramanlal and Jayantilal as partners in the business executing a deed of partnership showing, that he was the absolute owner of the assets of the business and that there was no ancestral business that he got. This stand taken by him in the deed of partnership was not true. The business did not belong to him absolutely but was an asset of the Hindu undivided family consisting of Pitamberdas, his wife and his sons and daughters. Even the sum of Rs. 10,001 a piece, purported to have been gifted by Pitamberdas to ..... 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