9911796707
TMI Blog1982 (8) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... yanarayana. A deed of partnership was drawn up on April 7, 1970. According to this partnership deed, Vasappa was the partner, not in his individual capacity but, as the karta representing the aforementioned HUF, while Tikoji Rao and Satyanarayana were described as working partners. Their shares were fixed in the ratio of 2 : I : 1. Registration was applied for under s, 185 of the I.T. Act for the assessment year 1971-72 on the basis of the aforesaid partnership deed dated April 7, 1970. The ITO granted the registration, but when he came to the assessment of the HUF, he clubbed the share income of the three partners on the ground that there was no partition either complete or partial. The ITO further found that Sri Tikoji Rao and Sri Satyanarayana became partners in another firm called M/s. Subrahmanyeswara Financiers by investing monies withdrawn from their account of M/s. G. Vasappa & Sons (which came into existence with effect from April 1, 1970). Since the monies invested by them in M/s. Subrahmanyeswara Financiers belonged to the joint family of Sri G. Vasappa, he held that their investment in M/s. Subrahmanyeswara Financiers belongs to the joint family only and the share incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act, 1961, is sound in law ? and 3. Whether the order passed by a single member of the Appellate Tribunal in this case which involves no computation of total income within the meaning of section 255(3) of the Income-tax Act, 1961, is competent and valid ? " Now, coming to R. C. No. 23 of 1979, the question referred is " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the share incomes of Sri Tikoji Rao and Sri Satyanarayana are not includible for the assessment year 1972-73?" It is obvious that the answer to this question depends on our answer to be recorded to questions Nos. 1 and 2 in R.C. No. 44 of 1977. If it is held that the registration granted to the firm, M/s. G. Vasappa & Sons, is good, then it would follow that the question referred to in R. C. No. 23 of 1979 has to be answered in favour of the assessee and in case we answer the first two questions in R. C. No. 44 of 1977 in favour of the Department, the question referred in R.C. No. 23 of 1979 also has to be answered in favour of the Department. The principal question that falls for our consideration is whether partnership is permissible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual property into the partnership, which separate or individual property has been acquired by him without the aid of, and without any detriment to, the joint family property. It was observed that a member of a Hindu family can in law hold separate property of his own and his right to proper and full enjoyment of such property includes the freedom to enter into contractual relations with others including his family so long as it is represented in such transactions by a definite personality like it, karta. It was observed further that in such a case, such member retains the share and interest in the property of the family, while he simultaneously enjoys the benefit of his separate property and the fruits of its investment, and that for enabling him to do so, it is not necessary that he should separate himself from his family. It is really not necessary to notice the facts of this case, since the principle of the said decision as stated above represents the ratio of the decision relevant for our purposes. The principle enunciated by the Privy Council is clearly understandable on the basis that if the karta of an HUF is entitled to enter into a partnership with strangers, who br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, principle of Lachhman Das v. CIT [1948] 16 ITR 35 (PC), even to a case where the member of the HUF brings in his skill and labour instead of his separate and individual property. It is obvious that if this decision represents the correct position in law, the assessee has, to succeed in this reference. But before we record our answer, it is necessary to refer to the decisions, which have either disagreed with the Mysore High Court's view or have adopted an apparently different approach. We shall also refer to those decisions which have agreed with and taken the same view as the Mysore High Court. For this purpose, it is necessary to refer to the decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. CEPT [1956] 29 ITR 521, since it is the different understanding of that decision which seems to have led to differing opinions by different High Courts. The case in Firm Bhagat Ram Mohanlal v. CEPT [1956] 29 ITR 521 (SC), arose under the Excess Profits Tax Act, 1940. It is necessary to notice the facts of this case. The firm Bhagat Ram Mohanlal was constituted on 23rd August, 1940, and was registered under s. 26A of the Indian I.T. Act, 1922. The partners of the firm were : (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of the Act would become incompetent and unsustainable. When the above facts came to the knowledge of the Commissioner of Excess Profits Tax, he invoked his suo motu revisional powers and set aside the orders of the Excess Profits Tax Officer under s. 7, on the ground that there was a change in the persons carrying on the business on account of the reconstitution of the firm which took place on 17th October, 1944, consequent on the disruption of the joint Hindu family of one of the partners. He directed that the amount which was directed to be refunded to the assessee should be recollected from him. Against the orders of the Commissioner, a writ petition was filed in the High Court of Nagpur. Two questions were urged before the High Court and also before the Supreme Court when the matter was taken up to them. We are concerned herein only with the first of those two questions, which is: " Whether, by reason of the partition of the joint family and the reconstitution of the firm under the deed dated 17th October, 1944, there was a change in the persons carrying on business within section 8(1) of the Act ? " On this question the contention of the appellant, i.e., Firm Bhagat Ram M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncile this position with that of Chhotelal 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 reference to coparcenary properties the members can at the same time be both coparceners and partners." It is necessary to point out that the above observations ought to be understood in the light of the facts of that case. The main and the only contention urged before the Supreme Court was that when the karta became a partner in Firm Bhagat Ram Mohanlal, the other members of the HUF also, in effect, became partners and hence there was no change in the person by virtue of the deed dated 17th October, 1944. It was this argument which was rejected as unsustainable in law and while doing that the Supreme Court also observed that with reference to the coparcenary properties, the members of an HUF cannot simultaneously be both coparceners and par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that by the partnership deed which was entered into on 18th November, 1956, the father, B, sought to give to his two undivided sons, interest as partners in the business which was coparcenary property, with the result that to the extent of the eight annas share in the business held by the father as the karta, the said two sons, E and F, would have an interest as members of the HUF and that they would also be entitled to four annas share each in their own right as partners. It was pointed out that the sons would be both coparceners as well as partners simultaneously, in what was essentially a joint family business. It was held that such a situation was held not permissible, by the Supreme Court, in the above decision. It was also pointed out that such an arrangement would also prejudice the other members of the HUF who were not taken in as partners since their shares in the joint family business would be correspondingly reduced. It is necessary to point out that this was not a case like the one before the Mysore High Court or one before us. In other words, it was not a case where the partnership was entered into between an HUF represented by its karta and the members of the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the Bombay Court's case are entirely different. The Bombay High Court's case was not a case where the partnership was sought to be entered into between the karta of an HUF and the other members who were contributing their labour and skill. But it was a case where, with respect to the very same joint family property, the karta and the members were sought to be treated as partners, without effecting a division. Such simultaneous dual character was held impermissible in law. similar view was taken by the Bombay High Court again in Manilal Dharamchand v. CIT [1970] 78 ITR 96. We may also mention that the Gujarat High Court in Shah Purshottamdas Ghelabhai v. CIT [1974] 96 ITR 442 has reaffirmed the principle of the decision in Pitamberdas Bhikhabhai & Co. v. CIT [1964] 53 ITR 341 (Guj). On the other hand, the Madhya Pradesh High Court in Ramchand Nawalrai v. CIT [1981] 130 ITR 826 and the Allahabad High Court in CIT v. Gupta Brothers [1981] 131 ITR 492, have agreed with and applied the same view as taken by the Mysore High Court in I. P. Munavalli v. CIT [1969] 74 ITR 529. We do not think it necessary to burden this decision with the facts of those cases, since we are of the opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare each in all the assets of the partnership firm. This is obviously a misapprehension in law. Section 48 of the Indian Partnership Act says that : " In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed:-... (b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:-... (iii) in paying to each partner rateably what is due to him on account of capital ; and... " In the partnership before us, it is not stated that on dissolution all the assets shall be divided between the three partners in the ratio of 2 : 1 : 1. In the absence of any such specific agreement, the assets will be divided, on the dissolution of the firm, in proportion to the capital contributed by each partner, which means that on the dissolution of the present firm, the two sons will not be entitled to any part of the capital of the firm. That will go only to the HUF. Another argument advanced by the Commissioner is that inasmuch as, according to the Partnership Act, each partner is bound to contribute his best including his skill an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm, which is said to have come into existence with effect from April 1, 1970, under the said deed, is a bogus one. Had any such finding been recorded, that would have been a finding of fact obviating all this discussion. In this case the Commissioner has set aside the registration only on the finding that such a partnership as was entered into under the deed dated April 7, 1970, is not permissible in law and since we have held that such a partnership is permissible in law, we have to uphold the Tribunal's view. Now remains the third question referred to us, which we way deal with briefly. The appeal before the Tribunal was disposed of by a single member. The Department asked him to make a reference to the court, which was declined, whereupon the Department approached this court under s. 256(2) of the I.T. Act, 1961, and this court directed the Tribunal to refer the three aforesaid questions for the opinion of this court, which the Tribunal accordingly did. The question pertains to the competency of a single member to dispose of the appeal. Sub-sections (1), (2) and (3) of s. 255 of the I.T. Act are relevant for this purpose and may be set out : " 255. Procedure of Appellate Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
