9911796707
TMI Blog1978 (2) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... s as shown in the balance-sheet representing the amounts due to the sons in the capital account according to the panchayatdar's award. This amounted to Rs. 1,26,574 and Rs. 1,34,168, respectively, for the assessment years 1962-63 and 1963-64 in favour of the minor, Kandaswami, and Rs. 1,25,354 and Rs. 1,32,875, respectively, for the assessment years 1962-63 and 1963-64 in favour of the minor, Asokan. The profits in the various partnership firms received by the assessee for the assessment year 1962-63 was Rs. 9,86,258, for the assessment year 1963-64 Rs. 7,85,166 and for the assessment year 1964-65, Rs. 15,67,609. For the assessment years 1962-63 and 1963-64, the assessee filed revised returns contending that in the total wealth is included the share of profits from the partnership firms and since 2/3rds of the capital account in the firm belonged to his two minor sons by virtue of the partition their share in the profits should be excluded in the computation of his net wealth. The amount to be excluded was worked out at Rs. 6,57,506 for the assessment year 1962-63 and Rs. 5,23,442 for the assessment year 1963-64. For the assessment year 1964-65, the assessee submitted a return on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d an advantage in derogation of the rights of the minor sons in the capital account and by taking advantage of the position gained something exclusively for himself, he has a legal liability to share the profits under s. 90 of the Indian Trusts Act. On these findings the Tribunal was of the view that the profits, assets, accretions and investments made out of the profits from the partnership firms attributable to the minors' share can no longer be considered as the wealth of the assessee and consequently they have to be excluded in the computation of the net wealth of the assessee. At the instance of the revenue, the following questions of law have been referred under s. 27(1) of the W. T. Act, 1957: " 1. Whether, on the facts and in the circumstances of the case and having regard to the terms of the partition deed dated March 31, 1961, the right to share the future profits of the firms was held both by the assessee and his divided sons and was not vested in the assessee wholly and exclusively ? 2. Whether, on the facts and in the circumstances of the case, cl. 5 of the partition deed cannot override the legal rights and obligations created under the document and, therefore, it s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defeated even if there is a stipulation in the partnership deed that in spite of division of the capital account of the family in the various partnerhip firms, the profits in the firms exclusively belonged to the assessee. As already stated, the Tribunal took the view that in respect of the profits received by the assessee and referable to the capital of the minors, the assessee was under a legal liability to share the profits under s. 90 of the Indian Trusts Act. It is seen from the facts that originally the assessee as the karta of the HUF was a partner in the various partnership firms since the HUF as such could not be a partner. This was so because, as pointed out by the Privy Council in Pichappa Chettiar v. Chokalingam, AIR 1934 PC 192: " 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 partnersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim mesne profits as from that moment arises." It may be seen from these passages that the karta on and from the date of partition becomes liable to render an account of the profits and the liability to such account is as that of a trustee or agent. Thus, when there is no division by metes and bounds of the capital investments on partition, a change in the legal liability in respect of accounting takes place. The assessee who was holding the profits as karta before partition holds the same after partition as a trustee or agent. The Supreme Court considered a similar question in Charandas Haridas v. CIT [1960] 39 ITR 202 with reference to the effect of partition upon the position of the karta of a HUF who was a partner in a partnership. The Supreme Court held : " In our opinion, here there are three different branches of law to notice. There is the law of partnership, which takes no account of a Hindu undivided family. There is also the Hindu law, which permits a partition of the family and also a partial partition binding upon the family. There is then the income-tax law, under which a particular income may be treated as the income of the Hindu undivided family or as the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstituted by one of the members of the family which resulted in a compromise. The consent decree passed provided the shares of each of the members and further stated that the parties had twelve annas share in the firm which would remain joint and they would be entitled thereto according to the shares mentioned in the decree. When an application under s. 26A of the I.T. Act for registration of the firm was filed, it was refused by the ITO on the ground that as the joint family had come to an end it could not form a partnership with a stranger as such until and unless the separate members of the family along with the stranger formed themselves into a partnership and applied for registration. It was held that the fact that there was a disruption of the joint family had no effect at all on the constitution of the firm or the manager's status as a partner of the firm and, therefore, the partnership firm should be registered under s. 26A of the Indian I.T. Act. It was further held that on such partition only the nature of the liability of the manager vis-a-vis his coparceners was changed. In the words of the learned judges: " After the partition decree was passed, the Rai Bahadur would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, but it has nothing to do with the profits arising from the investments of joint family funds already made. The third sentence in para. 5 extracted above is in the nature of a residuary clause to the effect that whatever that is not dealt with under the partition shall belong to the assessee. We are unable to read anything in cl. 5 as suggesting that though the capital investment had been divided between the members of the joint family, the profits arising from them should exclusively belong to the assessee. We are of the view that cl. 5 does not in any way affect the legal right of the sons to the profits arising from the partnership firms and other investments. Accordingly, we hold that the share of future profits from the firms was held by the assessee and his two divided sons and was not vested in the assessee wholly and exclusively and cl. 5 of the partition deed did not in any way affect this right. Accordingly, the profits attributable to the interest of the assessee's two minor sons in the various partnership firms have to be treated as their wealth and consequently they have to be excluded in computing the net wealth of the assessee. Accordingly, we answer the three ques ..... X X X X Extracts X X X X X X X X Extracts X X X X
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