Commissioner of Income-Tax, Madras Vs.
Bhagya Lakshmi & Co., Udamalpet  INSC 247 (4 November 1964)
04/11/1964 SUBBARAO, K.
CITATION: 1965 AIR 1708 1965 SCR (2) 22
R 1966 SC1490 (9) R 1970 SC1343 (17) R 1971
SC 383 (5)
Income Tax-Registration of firm-Members of
Hindu undivided family representing it as partners in firm-Partition of Hindu
undivided family Variance between the interests of the members as shown in
partnership deed and as shown in partition deed-Partnership otherwise
genuine-Whether register able-Indian Income-tax Act, 1922 (11 of 1922), s. 26A.
G and his son V belonged to a Hindu undivided
family, and as representatives of the family were partners in the asseseefirm
holding therein shares of 71 as. and 2 1/2 as.
respectively. The family thus held through
them, an interest of 10 as. in the assessee-firm. On August 24, 1950, there was
a partition in the family, and according to the partition-deed the 10 as.
interest of the family in the assessee-firm was divided in such a way between
seven members that the shares allotted to G and V came to 2 as.
and 1 anna 4 pies respectively. On November
30, 1950, a new partnership-deed was drawn up by the partners of the assessee-firm
and the shares allotted to G and V therein were again 7 1/2 as. and 21 as.
respectively. The claim of the assessee-firm for Registration under s. 26-A of
the Indian Income-tax Act, 1922, on the basis of the new deed, for the years
1952-53, 1953-54 and 1954-55 was accepted by the Income-tax authorities. G and
V were duly assessed on their respective shares as shown in the partnership
But they contended that in respect of the
first two years they were liable to pay tax only in respect of their respective
shares as shown in the partition-deed of their erstwhile undivided family.
Their contention was accepted by the Income-tax Appellate Tribunal. Whereupon,
the Commissioner of Income-tax acting under s. 33B of the aforesaid Act
cancelled the registration of the partnership for the three years on the ground
that the partnership-deed did not show the correct shares of the partners in
the partnership. The Tribunal, in appeal, upheld the Commissioner's action. At
the assessee's instance, a reference was then made to the High Court of
Judicature at Allahabad, the questions referred being whether the
Commissioner's action under s. 33B was lawful, and if so, whether the firm was
registerable under s. 26A for the assessment years in question. The High Court
decided both the questions in favour of the assesee and against the Revenue.
The Commissioner of Income-tax appealed to this court.
It was contended on behalf of the Revenue
that as the partnership-deed did not specify the correct shares of G and V in that
while they were entitled only to 2 as. and 1 anna 4 pies share in accordance,
with the partition-deed, they were shown in the partnership-deed as holding 7
1/2 as. and 2 1/2 as. shares respectively, and therefore, the Tribunal had
rightly held that the said partnership could not be registered under s. 26A of
HELD : 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 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 23 the partnership he functions in his personal capacity; qua the third
parties, in his representative capacity. Third parties, whom one of the partner
represents, cannot enforce their rights against the other partners nor can the
other partners do so against the said third parties. Their right is only to a
share in the profits of their partnerrepresentative in accordance with law or
in accordance with the terms of the agreement, as the case may be. [26 E-G] The
law of partnership and Hindu law functions in different fields. A divided
member or some of the divided members of an erstwhile joint family can
certainly enter into a partnership with third parties under some arrangement
among the members of the divided family. Their shares in the partnership depend
on the terms of the partnership; the shares of the members of the divided
family in the interest of their representative in the partnership depend upon
the terms of the partition deed. [28 D-E] The High Court had given correct
answers to the questions propounded. As the partnership-deed was genuine, the
shares given to G and V in the said partnership were correct in accordance with
the terms of the partnership deed. [28 F] Commissioner of Income-tax, Ahmedabad
v. M/s. A.. Abdul Rahim & Co.  2 S.C.R. 12, referred to.
Charandas Haridas v. Commissioner of
Income-tax, Bombay,  3 S.C.R. 296, relied on.
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 1099-1101 of 1963.
Appeals by special leave from the judgment
dated January 24, 1961 of the Madras High Court in R.C. No. 143 of 1956.
C. K. Daphtary, Attorney-General, N. D.
Karkhanis and R. N. Sachthey, for the appellant.
S. Sivaminathan and R. Gopalakrishnan, for
The Judgment of the Court was delivered by
Subba Rao, J. These appeals raise, though not the same but a similar question
on which we have given a decision in The Com missioner of Income-tax, Ahmedabad
v. M/s. A. Abdul Rahim & Co.(5). The assessee-firm was the Managing Agents
of Palani Andavar Mills Ltd., Udamalpet. It was originally constituted by a
deed of partnership, dated June 1, 1934.
The following 6 persons were the partners :
(1) G. Venkataswami Naidu As. 2 (2) G. T.
Narayanaswamy Naidu As. 2 (3) G. T. Krishnaswamy Naidu As. 2 (4) M. A.
Palaniappa Chettiar As. 5 (5) R. Guruswamy Naidu As. 2 1/2 (6) K. Venkatasubba
Naidu As. 21 By subsequent transactions the share of G. Venkataswami Naidu (1)
24 was transferred to his son Vidyasagar and
the share of M. A. Palaniappa Chettiar was purchased by R. Guruswamy Naidu.
With the result that the 5th partner, G.
Guruswamy, had 7 1/2 annas share in the partnership instead of 2 1/2 annas
share which he held earlier. Guruswamy Naidu and Venkatasubba Naidu, the 5th
and 6th partners, belonged to a Hindu undivided family and the beneficial
interest of their shares belonged to that family; indeed, during the previous
years the joint family was assessed in respect of the income pertaining to the said
shares. On August 24, 1950, the said Hindu undivided family was divided and a
partition deed was executed between the members thereof. Under the deed the ten
annas share held by the family was divided as follows :
(1) R. Guruswamy Naidu As.2 (2) Rudrappa
(Minor son of No. 1) Anna 1 (3) Venkataramana (Minor son of No. 1) Anna 1 (4)
Subba Naidu As. 2 (5) Venkatasubba Naidu As. 1-4 (6) Rudrappa Naidu As. 1-4 (7)
Jagannatha Naidu As. 1-4 After the said partition, on November 30, 1950, a new
pertner-ship deed was executed between the partners of the assessee-firm. Under
the said partnership deed the following shares were allotted to each of the
(1) R. Guruswamy Naidu As. 71 (2) R.
Venkatasubba Naidu As. 21 (3) G. T. Narayanaswamy Naidu As. 2 (4) G. T.
Krishnaswamy Naidu As. 2 (5) Vidyasagar As. 2 The point to be noticed is that
the beneficial interest in 10 annas share originally belonged to the Hindu
undivided family of which Guruswamy Naidu and Venkatasubba Naidu were members.
But before and after the partition of the joint family the said two persons,
namely, Guruswamy Naidu and Venkatasubba Naidu, were partners of the firm;
before the partition the beneficial interest in the 10 annas share was in the
undivided family, but after partition the beneficial interest in the
partnership was in the divided members of the family including the said two
partners. The assesseefirm presented the deed of partnership, dated November
30, 1950, before the Income-tax Officer for registration for the assessment years
1952-53, 1953-54 and 1954-55 and was duly registered under s. 26A of the Indian
Income-tax Act, 1922, here25 in after called the Act. In due course Guruswamy
Naidu and Venkatasubba Naidu were assessed as partners of the assessee-firm on
their respective shares as shown in the partnership deed. But the Income-tax
Appellate Tribunal, in respect of two of the assessments made on them, accepted
their contention and held that they were liable only to pay tax in respect of
the shares shown in the partition deed.
After the decision of the Tribunal, the
Commissioner of Income-tax acting under s. 33B of the Act cancelled the
registration of the partnership on the ground that the partnership deed did not
show the correct shares of the partners in the partnership. On appeal, the
Appellate Tribunal confirmed the order of the Commissioner in respect of the 3
assessment years. At the instance of the assesseefirm the following questions
of law were referred to the High Court.
(1) Whether the aforesaid order of the
Commissioner under s. 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 s. 26-A for the
aforesaid assessment years.
A Division Bench of the Madras High Court,
which heard the reference, came to the conclusion that the partnership was a
genuine one, that the partition in the joint Hindu family allotting specific
shares to the members of the family might have affected the accountability of
the two partners of the firm to the other members of the family, but qua the
partnership their relationship with the other partners had not in any way been
affected and, therefore, the Tribunal went wrong in holding that the
registration of the said partnership was rightly refused. In the result, it
answered the first question in the negative and the second question in the
affirmative. Hence the appeals.
Learned Attorney-General, appearing for the
Revenue, contended that as the partnership deed did not specify the correct
shares of Guruswamy Naidu and Venkatasubba Naidu in that while they were
entitled only to 2 annas and 1 anna 4 pies share in accordance with the
partition deed, they were shown in the partnership deed as holding 71 annas and
2 1/2 annas shares respectively and, therefore, the Tribunal rightly held that
the said partnership could not be registered under s. 26A of the Act.
Mr. Swaminathan, learned counsel for the
respondent contended that the partition of the family's beneficial interest in
the Sup./653 26 partnership business has no relevance to the question of
registration of the partnership under the Act, for, according to him, the
authorities are only concerned with the validity and genuineness of the
partnership deed executed by the partners thereof and not with the dealings of
any one of the partners in respect of his share with third parties.
We have held in The Commissioner of
Income-tax, Ahmedabad v. M/s. A. Abdul Rahim & Co., Baroda(1) that the
Income-tax Officer can reject the registration of a firm if it is not genuine
or valid and if. the application for registration has not complied with the
rules made under the Act. Here we have admittedly a genuine partnership. It
cannot even be suggested that it is invalid. The only objection is that
Guruswamy Naidu and Venkatasubba Naidu have less shares in the partition deed
than those shown in the partnership deed.
If the distinction between three concepts is
borne in mind much of the confusion disappears. A partnership is a creature of
contract. Under Hindu law a joint family is one of status and right to
partition is one of its incidents.
The Income-tax law gives the Income-tax
Officer a power to assess the income of. a person in the manner provided by the
Act. Except where there is a specific provision of the Income-tax Act which
derogates from any other statutory law or personal law, the provisions win 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 pat-ties. 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. If that be so, Guruswamy Naidu could have validly entered into a
genuine partnership with others taking a 10 annas share in the business, though
in fact as between the members of the family he has only a 2 annas share
therein. He would have been answerable for the profits per(1) 2 S.C.R.
27 taining to his share to the divided
members of the family, but it would not have affected the validity or
genuineness of the partnership. So much is conceded by the learned
Attorney-General. If so, we do not see why a different result should flow if
instead of one member of the divided family two members thereof under some
arrangement between the said members of the family took 10 annas share in the
partnership. If the contention of the Revenue was of no avail in the case of
representation by a single member, it could not also have any validity in the
case where two members represented the divided members of the family in the
partnership. As the partnership deed was genuine, it must be held that the
shares given to Guruswamy Naidu and Venkatasubba Naidu in the said partnership
are correct in accordance with the terms of the partnership deed.
This Court in Charandas Haridas v.
Commissioner of Incometax, Bombay(1) had to consider a converse position. There
a karta of a Hindu undivided family was a partner in 6 managing agency firms
and the share of the managing agency commission received by him as such partner
being assessed as the income of the family. Thereafter, there was a partial
partition in the family by which he gave his daughter a one pie share of the
commission from each of two of the managing agencies and the balance in those
agencies and the commission in the other four managing agencies were divided
into five equal shares between himself, his wife and three minor sons. The
memorandum of partition recited that the parties had decided that commission
which accrued from January 1, 1946, ceased to the joint family property and
that each became absolute owner of his share.
Notwithstanding the partition, the Income-tax
authorities assessed the said total income as the income of the joint family.
The Bombay High Court agreed with that view. But this Court held that as the
partition document was a genuine one, it was fully effective between the
members of the family and therefore the income in respect of the divided
property was not the income of the Hindu joint family. In that context
Hidayatullah J., speaking for the Court, made the following observations :
"The fact of a partition in the Hindu
law may have no effect upon the position of the partner, insofar as the law of
partnership is concerned, but it has fall effect upon the family insofar as the
Hindu law is concerned.
Just as the fact of a karta becoming a
partner does not introduce the members of the undivided family into the
partnership, the division of the family does not change (1)  3 S.C.R.
28 the position of the partner vis-a-vis the
other partner or partners. The Income-tax law before the partition takes note,
factually, of the position of the karta, and assesses not him qua partner but
as representing the Hindu undivided family. In doing so, the Income-tax law
looks not to the provisions of the Partnership Act, but to the provisions of
Hindu law. When once the family has disrupted, the position under the
partnership continues as before, but the position under the Hindu law changes.
There is then no Hindu undivided family as a unit of assessment in point of
fact, and the income which accrues cannot be said to be of a Hindu undivided
family. There is nothing in the Indian Income-tax law or the law of partnership
which prevents the members of a Hindu joint family from dividing any
asset." These observations support the conclusion we have arrived at. The
division in the joint family does not change the position of the karta as a
partner vis-a-vis the other partner or partners in a preexisting partnership,
because the law of partnership and Hindu law function in different fields. If
so, on the same principle a divided member or some of the divided members of an
erstwhile joint family can certainly enter into a partnership with third
parties under some arrangement among the members of the divided family.
Their shares in the partnership depends upon
the terms of the partnership; the shares of the members of the divided family
in the interest of their representative in the partnership depends upon the
terms of the partition deed.
For the aforesaid reasons, we hold that the
High Court has given correct answers to the question propounded.
In the result, the appeals fail and are
dismissed with costs. One hearing fee.