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TMI Blog1961 (1) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... for and obtained registration for 1952-53. Renewal of registration was also granted by the Income-tax Officer for the assessment years 1953-54 and 1954-55. In the exercise of his re visional powers under section 33B of the Act, the Commissioner of Income-tax commenced proceedings. Now, it would appear that both Guruswami Naidu and Venkatasubba Naidu were members of a Hindu undivided family and the income derived from this firm in respect of the ten annas share owned by these two persons was treated for income-tax purposes as that of a Hindu undivided family. The Hindu undivided family underwent partition. According to this partition deed executed on August 24, 1950, the ten annas share owned by the Hindu undivided family in the firm was divided among the members of the family in various proportions. Notwithstanding this partition, the share of the family in the firm continued to be represented in the partnership arrangement in the same manner as previously. It would further appear that on the assessment of Guruswami Naidu and Venkatasubba Naidu on their 7½ and 2½ annas share respectively, these two persons contended that their real income from the partnership relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 66(1) of the Act, the Tribunal has referred the following questions for the decision of this court : "1.Whether the aforesaid order of the Commissioner under section 33B cancelling the registration of the firm for the three years 1952-53, 1953-54 and 1954-55 is lawful? 2.If the answer to the above question is in the affirmative, whether the firm is registrable under section 26A for the aforesaid assessment years?" The principal question that called for consideration in this case is whether a firm in which a Hindu undivided family owns an interest and is represented by one of its members in the partnership is liable to be refused registration solely for the reason that there is a disruption of the Hindu undivided family, though the totality of the interest of the divided members continues to be represented by one of its divided members. The Commissioner thought that besides the fact that the shares shown against the two members of the family did not accord with the actual facts of the case after partition, it was also possible that failure to include the other members of the family in the firm was a contravention of the provisions of the Companies Act. The Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly in relation to the partnership. It follows from these principles, which are well accepted, that a share in the partnership in which a managing member or members of a joint family is represented as a partner is an asset of the joint family, the income from such partnership being the income of the joint family. While the rights of the other members of the joint family as against those members of the joint family who are members of the partnership may in proper cases extend to demanding an account of such income derived from the partnership, such other members have no right to claim any share in the partnership business so long as the family remains joint. Before we deal with the position when the joint family becomes divided and its consequent effect upon the partnership, we may consider the case of a sub-partnership. In Commissioner of Income-tax v. Laxmi Trading Co [1953] 24 ITR 173 , one of several partners in a partnership entered into an agreement to share the profits derived by him with a stranger. The question arose whether by reason of this arrangement a valid sub-partnership was created entitling the latter to registration. The position in law that the creation of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership. They noticed : "It cannot be contended that the firm was dissolved because the consent decree had been passed in the suit brought by one of the Nathanys in this court. The revenue authorities are really refusing to register the firm so as to exact higher tax on the basis that they were an unregistered firm. It is not really their case that Dudwala and Co. ceased to be a firm. Only the nature of the liability of the Rai Bahadur vis-a-vis his coparceners was changed as a result of that decree in the partition suit. Before the disruption, he as karta was liable to account in a very limited sense, A coparcener seeking partition is not entitled to require the karta to account for his past dealings in the family property. All that he is entitled to is an account of the family property as it exists at the time he demands partition… After the partition decree was passed, the Rai Bahadur would be liable to render account in respect of the twelve annas share on a different basis. But still he would continue to be a member of that firm and the partnership would not be in any way affected by the passing of that decree in the partition suit vis-a-vis the members of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et which belonged to the joint Hindu family, being the share in the partnership which remained undivided, the nature of the partnership not being changed, the assessment of the income in the hands of the Hindu undivided family was justified. The Tribunal, in equating the facts of the present case with those in the decision above, proceeded to hold that the converse should be equally true. In the present case, the factum of partition and the assess-ability of Guruswami Naidu and Venkatasubba Naidu only on the income of their shares having been accepted by the Tribunal in other proceedings, the Tribunal held that there was a partition of the asset itself, viz., the share of the joint family in the partnership. That, in the opinion of the Tribunal, led to the conclusion that the statement of the shares of these two persons mentioned in the partnership deed was not consistent with the true facts. The question is whether this view is correct. The decision of the Bombay High Court in Charandas Haridas case (supra) was reversed by the Supreme Court in Charandas Haridas v. Commissioner of Income-tax [1966] 39 ITR 202. After dealing with the position of the joint family of which the managi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y had no standing. The assets still are in the name of Charandas Haridas, and looked again from the same viewpoint the division has no different signification. What has altered is the status of the family. While it was joint, the Department could treat the income as that of the family; but after partition, the Department could not say that it was still the income of the Hindu undivided family, when there was none. In the face of the finding that this was a genuine document and not a sham, and that it effectually divided the income and, in the circumstances, the assets, the question answers itself in the negative, that is to say, that there were no materials to justify the finding that the income in the share of the commission agency of the mills was the income of the Hindu undivided family." (p 209) We may refer to another decision of the Bombay High Court in Seth Motilal Manekchand v. Commissioner of Income-tax [1957] 31 ITR 735 . In this case, a father and son who were members of a joint Hindu family owned a managing agency. In a partition, the managing agency was divided and it was provided in the partition deed that the father and the son would be entitled to the managing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt family which is represented in a partnership by either its karta or a member thereof is no different. Though the partition among the members of the joint family may bring about a division of the interest owned by the joint family in the partnership, the tenancy-in-common so created does not amount to a sub-partnership but in so far as the main partnership is concerned, it remains intact in the sense that it treats only that erstwhile member of the joint family as the member of the partnership. Just as in the case of the sub-partnership no member thereof can claim; any direct relationship with the main partnership, even so no member of the divided family can treat directly with the partnership. The member of the joint family while the family was joint was accountable in a particular manner as envisaged by the Hindu law to the members of his family in so far as the income from the partnership was concerned. After the partition, the status of the member vis-a-vis the other members of his family changed and his accountability was that of a tenant-in-common; nevertheless, the partnership itself and its relations with the member remained unchanged. Learned counsel for the Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst B and C, it would obviously be only a device to avoid the incident of heavier taxation. In such a case, there would actually be no partnership in existence. In other cases of a similar nature, it might turn out that one member is entitled to a larger share than what he is shown to possess. If this decision is to be interpreted in the extreme fashion, as urged by the learned counsel for the Department, the mere circumstance that a partition has taken place in the joint family which was hitherto represented by one of its members as partner might in certain cases lead to the dissolution of the partnership altogether. The Income-tax Department is not entitled to say that each and every one of the members of the erstwhile joint family becomes, by the mere fact of partition, a member of the partnership. That would clearly be opposed to the law relating to partnership. If the Department could validly put forth such an argument, in the event of there being a large number of members in the joint family entitled to fractional shares, it is possible that such a partnership may become invalid in law. We are firmly of the opinion that it could never have been the intention of the income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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