The Commissioner of Income-Tax, Bombay
City, Bombay Vs. Nandlal Gandalal [1960] INSC 84 (21 April 1960)
DAS, S.K.
KAPUR, J.L.
HIDAYATULLAH, M.
CITATION: 1960 AIR 1147 1960 SCR (3) 620
CITATOR INFO :
RF 1966 SC 719 (8) R 1970 SC1343 (16)
ACT:
Income-tax-Assessment-Hindu undivided family
carrying on business outside British india-Partnership entered into by
coparceners with strangers in British India financed by remittances received
from undivided family funds-Hindu undivided family, if resident in taxable
territories-Indian Income-tax Act, 1922 (XI of 1922), ss. 4A(b).
HEADNOTE:
N, a coparcener of the Hindu undivided family
of G, carrying on business in Kathiwar, then outside British India, entered
into a partnership with strangers in Bombay in 1944. A total sum of Rs.
1,,50,000 was remitted to N from the undivided family 621 funds and utilised as
capital in the partnership business.
N's brother joined the partnership in Bombay.
The partnership started another firm in Banaras and a third brother of N joined
the firm. For the year of assessment 1945-46 the Income-tax Officer held that
the Hindu undivided family of G was resident in the taxable territories and
included the said sum in the income of the family under s. 4(1)(b)(iii) of the
Indian Income-tax Act, 1922, as having been brought into or received in British
India in the relevant year and made the assessment on that basis. On appeal by
the assessee the Appellate Assistant Commissioner affirmed the assessment but
the Income-tax Appellate Tribunal holding that in the year of assessment the
family was not resident in the taxable territories deleted the said sum from
the assessed income. The decision of the Appellate Tribunal was upheld by the
High Court in a reference under s. 66(1) of the Act made at the instance of the
appellant:
Held (per S. K. Das and J. L. Kapur, jj.),
that the expression 'control and management' occurring in S. 4A(b) of the
Indian Income-tax Act means de facto control and management and the word "
affairs " means the affairs of the Hindu undivided family capable of being
controlled and managed by the said family as such.
It is well-settled that a Hindu undivided
family cannot exercise any controlling power of management of a partnership
entered into by a coparcener with strangers either under the Indian Partnership
Act, 1932, or under the Hindu law. The partnerships in the instant case could
not, therefore, constitute affairs of the Hindu undivided family within the
meaning of s. 4A(b) of the Act, although the incomes from the said partnerships
might belong to the said family, and could not determine its residence.
The place of accrual of income of a Hindu
undivided family and the place of its residence need not necessarily be the
same under the Indian Income-tax Act, 1922.
V.V. R. N. M. Subbayya Chettiar v.
Commissioner of Incometax, Madras, [1950] S.C.R. 961, Kshetra Mohan Sannyasi
Charan Sadhukhan v. Commissioner of Excess Profits Tax, West Bengal, [1953] 24
I.T.R. 488 and B. R. Naik v. Commissioner of Income. tax, [1946] 14 I.T.R. 324,
referred to.
Per Hidayatullah, J.-Under s. 4A(b) of the
Indian Income tax Act, what are really affairs of the Hindu undivided family
must be decided in the light of the Hindu law, and not the law of Partnership.
It is well settled that a coparcener of a
Hindu undivided family cannot claim any item of property or share of his own
and, consequently, where certain coparceners enter into partnerships with
strangers by investing capital from out of the undivided family funds, as in
the instant case, the income from the business must belong to the undivided
family. Where the Hindu undivided family enters into a business activity in the
taxable territories through its coparceners, invests money and earns income,
even though the partnership which results may not be an 81 622 " affair
" of the family, there is still a business activity resulting in the
partnership and the partnership is the evidence of that business activity. This
activity of a permanent character is sufficient for purposes of income-tax law
to constitute an ,,affair" of the family within the meaning of s. 4A(b) of
the Indian Income-tax Act.
Approvier v. Rama Subba Aiyan, [1866] 11
M.I.A. 75, Katama Natchiar v. Rajah of Shivaganga, [1864] 9 M.I.A. 539,
Mangalchand Mohanlal, Inre, [1952] 21 I.T.R. 164, Murugappa Chetty & Sons
v. Commissioner of Income-tax, [1952] 21 I.T.R. 311 and Kaniram Hazarimull v.
Commissioner of Incometax, [1955] 27 I.T.R. 294, referred to.
V.V. R. N. M. Subbayya Chettiar v.
Commissioner of Income-tax, Madras, [1950] S.C.R. 961, considered.
Control and management, in the case of a
Hindu undivided family, can be exercised by one or more of its coparceners,
even though partly, and if such coparceners reside in the taxable territories
and manage its affairs, the family must be treated as resident in such
territory.
CIVIL APPELLATE, JURISDICTION: Civil Appeal
No. 788 of 1957.
Appeal by special leave from the judgment and
order dated February 16, 1955, of the Bombay High Court in Income-tax Reference
No. 38/x of 1954.
C. K. Daphtary, Solicitor-General of India,
R. Ganapathy Iyer and D. Gupta, for the appellant.
R.J. Kolah, S. N. Andley, J. B. Dadachanji,
Rameshwar Nath and P. L. Vohra, for the respondent.
1960. April 21. The Judgment of S. K. Das and
Kapur, JJ., was delivered by S. K. Das, J. Hidayatullah, J., delivered a
separate Judgment.
S.K. DAS, J.-This is an appeal by special
leave from the judgment and orders of the High Court of Bombay dated February
16, 1955, in a reference under section 66(1) of the Indian Income-tax Act,
1922, hereinafter called the Act.
The reference was made in the following
circumstances :
The Hindu undivided family of one Gandalal
carried on business in cloth in Wadhwan in Kathiawar, which at the relevant
time was outside British India. The family consisted of Gandalal and his four
sons, (1) Girdharlal, (2) Hansraj, (3) Nandlal and (4) Ramniklal. In 1944
Nandlal came to Bombay and started a cloth business in partnership with other
persons, the partnership being known as Amulakh Amichand & Co.
623 Nandlal's share in the partnership was
ten annas and that of his three partners, who belonged to the family of Amulakh
Amichand, six annas. It was stated that the family of Amulakh Amichand which
was a well known business family of Bombay, did not supply any capital to the
partnership and Nandlal alone was the financing partner. On April 13, 1944,
Nandlal received a sum of Rs. 50,000 from the Hindu undivided family of which
he was a member, and a further sum of Rs. 50,000 on April 27, 1944. Two other
sums aggregating to Rs. 50,000 were also received from the Hindu undivided
family on June 8, 1944, and June 29, 1944. The case of the assessee was that a
sum of Rs. 1,00,000 was given to each son by the father and the sums of money
received on June 8, 1944, and June 29, 1944, were a loan by the Hindu undivided
family to Nandlal. Therefore, the case of the assessee was that Nandlal became
the partner of the firm of Amulakh Amichand in his individual capacity.
The case of the Department, however, was that
the total sum of Rs. 1,50,000 sent to Nandlal by the Hindu undivided family was
utilised as capital in the cloth business of the partnership known as Amulakh
Amichand & Co. Subsequently, Girdharlal, another brother of Nandlal, came
to Bombay and joined the firm. Out of the share of ten annas of Nandlal,
Girdharlal was given a share of five annas. The partnership firm of Ainulakh
Amichand & Co. then started a cloth business at Banaras, and the partners
of the firm at Banaras were the partners of the Bombay firm of Amulakh Amichand
& Co. and an outsider from Banaras. A third brother of Nandlal also joined
the Banaras firm, but he did not bring any capital.
For the assessment year 1945-46 the
Income-tax Officer held that the Hindu undivided family of Gandalal was
resident in the taxable territories (namely, British India), and hence he
included the sum of Rs. 1,50,000 in the income of the family under s. 4(1) (b)(iii)
of the Act as having been brought into or received in British India in the
relevant year and made an assessment on that basis. The assessee appealed to
the Appellate Assistant Commissioner, Bombay, but without success. Then, there
"-as an, 624 appeal to the Income-tax Appellate Tribunal, Bombay. Two
questions were raised before the Tribunal:
" (1) Whether Nandlal represented the
Hindu undivided family of Gandalal of Wadhwan now in Saurashtra, in the firm
Amulakh Amichand & Co., Bombay, and later on in the firms Amulakh Amichand
& Co., Bombay and Banaras.
(2)Whether the Hindu undivided family of
Gandalal was resident in the taxable territories in the relevant years of
account." The Tribunal held on the first question that Nandlal and later
Girdharlal joined the Bombay firm and also the Banaras firm of Amulakh Amichand
& Co. as representing the Hindu undivided family of Gandalal and the money
for starting the Bombay business came from the Hindu undivided family.
Accordingly, the Tribunal held that Nandlal
was properly assessed in the status of a Hindu undivided family. On the second
question the Tribunal held in favour of the assessee and came to the following
conclusion:
" The business at Bombay and later on
the business at Banaras cannot, in our opinion, be considered to be the affairs
of the Hindu undivided family of Gandalal. These two businesses belonged to two
separate entities, namely, the Bombay firm of Amulakh Amichand & Co., and
the Banaras firm of Amulakh Amichand & Co. True, the Hindu undivided family
would in due course of time receive a share of profit from these two firms, but
all the same we do not think that it could be said that the firms of Bombay and
Banaras constituted the affairs of the Hindu undivided family. The businesses
in Bombay and Banaras, according to the Partnership Act, belonged to Nandlal
and others. We are, therefore, of opinion that for assessment years 1945-46 ...
the Hindu undivided family was not resident
in the taxable territories." The actual relief which the Tribunal gave to
the assessee was expressed in the following words:
" For the assessment year 1945-46, the
assessee's status would be Hindu undivided family but non-resident. In so far
as the assessed income is concerned the sum of Rs. 1,50,000 which was included
under section 4(1)(b)(iii) has to be deleted. The rest of the 625 income
accrued to the Hindu undivided family in the taxable territories." At the
instance of the Commissioner of Incometax, Bombay, who is the appellant before
us, the Tribunal stated a case and referred the following question of law to
the High Court of Bombay for its decision under s. 66(1) of the Act. The
question was in these terms :
"Whether the Hindu undivided family of
Gandalal represented by Nandlal in the firm of Amulakh Amichand & Co. of
Bombay was resident in the taxable territories in the year of account relevant
for the assessment year 1945-46." The answer to the question depended on
the true scope and effect of s. 4A(b) of the Act. The High Court held that the
expression " the affairs of the Hindu undivided family " in s. 4A(b)
did not have reference to the private or domestic affairs of the family, but
referred to affairs concerned with income and taxation thereon. It said:
" We might put the matter in this way
that when a coparcener carries on business in partnership on behalf of the
Hindu undivided family, the affair is of the coparcener and not of the family,
but when the business is carried on by the family itself then it is the affair
of the family and not of the coparceners." "The result is that we
must agree with the view taken by the Tribunal and we must answer the question
submitted to us in the negative." After the decision of the High Court the
appellant obtained special leave and has come to us in pursuance of special
leave granted by this Court.
We must make it clear at the very outset that
the first question raised before the Tribunal and decided by it against the
assessee does not now fall for consideration.
Whatever income Nandlal and Girdharlal
received from the two businesses at Bombay and Banaras was income in their
hands of the Hindu undivided family. With that income we are not now concerned.
We are concerned with the second question, namely, whether the Hindu undivided
family of Gandalal was resident in the taxable territories in the 626 relevant
year so as to make the sum of Rs. 1,50,000 taxable under s. 4 (1) (b) (iii) of
the Act on the basis of such residence. Clearly enough, if the Hindu undivided
family of Gandalal was not resident in the taxable territories in the relevant
year, the sum of Rs. 1,50,000 would not be taxable under s. 4 (1) (b) (iii) of
the Act. We must, therefore, keep in mind the narrow scope of the question
before us, which is whether the Hindu undivided family of Gandalal could be
said to be resident in the taxable territories (i.
e., British India) in the relevant year under
the provisions of s. 4A(b) of the Act, even though the family carried on its
own cloth business wholly outside the taxable territories.
It is necessary as well as convenient to read
s. 4A(b) at this stage :
"4A. For the purposes of this Act(b)a
Hindu undivided family, firm or other association of persons is resident in the
taxable territories unless the control and management of its affairs is
situated wholly without the taxable territories." In V. V. R. N. M.
Subbayya Chettiar v. Commissioner of Income-tax, Madras(1) this Court held that
the test for deciding the residence of a Hindu undivided family laid down in s.
4A (b) of the Act was based very largely on the rule which had been applied in
England to cases of corporations, and though normally a Hindu undivided family
would be taken to be resident in British India, such presumption would not
apply if the case could be brought under the second part of the provision. It
was also observed therein that the word " affairs " must mean affairs
which are relevant for the purpose of the Income-tax Act and which have some
relation to income ; it was stated that in order to bring the case under the exception,
the court has to ask whether the seat of the direction and control of the
affairs of the family is inside or outside British India, and the word "
wholly " suggests that a Hindu undivided family may have more than one
"residence" in the same way as a corporation may have.
The position in Hindu law with regard to a
coparcener, even when he is the Karta, entering into partnership (1) [1950]
S.C.R. 961.
627 with others in carrying on a business is
equally well settled. The partnership that is created is a contractual
partnership and will be governed by the pro . visions of the Indian Partnership
Act, 1932. The partnership is not between the family and the other partners; it
is a partnership between the coparcener individually and his other partners
(see Kshetra Mohan Sannyasi Charan Sadhukhan v. Commissioner of Excess Profits
Tax, West Bengal) (1).
The coparcener is undoubtedly accountable to
the family for the income received, but the partnership is exclusively one
between the contracting members, including the individual coparceners and the
strangers to the family. On the death of the coparcener the surviving members
of the family cannot claim to continue as partners with strangers nor can they
institute a suit for dissolution of partnership ; nor can the stranger partners
sue the surviving members as partners for the coparcener's share of the loss.
Therefore, so far as the partnership is concerned, both under Partnership law
and under Hindu law, the control and management is in the hands of the
individual coparcener who is the partner and not in the family.
Now, it is undisputed that but for -the
partnership business at Bombay or Banaras the Hindu undivided family of
Gandalal was not resident in the taxable territories in the relevant year. The
point for decision, therefore, is does the existence of the said partnership
establish the residence of the family ? This raises two questions before us:
firstly, whether the firm of Amulakh Amichand & Co. is one of the affairs
of the Hindu undivided family of Gandalal because that is the only affair which
has relation to the income sought to be taxed and on which the appellant relies
for determining the residence of the family; secondly, where the control and
management of the said affair, looked at from the point of view of the Hindu
undivided family, is situate. We think that in the context of the facts found
in the case, these two questions are interlinked. The expression " control
and management " under s. 4A(b) signifies controlling and directive power,
"the head and brain" 628 as it is sometimes called. Furthermore, it
is settled, we think, that the expression control and management " means
de facto control and management and not merely the right or power to control
and manage (see B. R. Naik v. Commissioner of Income-tax (1)). It is also
-quite clear, we think, that if a coparcener becomes a partner (on behalf of
the joint family) with strangers in a firm which carries on business in the
taxable territories, that by itself will not determine the residence of the
family unless the control and management of the firm is at least, in part, in
the Hindu undivided family. On the facts of this case, the Hindu undivided
family or for that matter, the Karta of that family, that is Gandalal, could
exercise no power of controlling management over the partnership firm, either
under Partnership law or under Hindu law. It seems to us that the word "
affairs " in s. 4A(b) must mean affairs of a Hindu undivided family which
are capable of being controlled and managed by the said Hindu undivided family
as such.
Where a coparcener enters into partnership
with strangers, the Hindu undivided family exercises no controlling -power of
management over the partnership firm. In that view of the matter the
partnership firm cannot be an " affair " of the Hindu undivided
family capable of being controlled and managed by the Hindu undivided family as
such. It may be here observed that the decision in V. V. R. N. M. Subbayya
Chettiar v. Commissioner of Income-tax, Madras (2) proceeded on the basis of
onus only and as was specifically stated therein, it was confined to the year
of assessment to which the case related and it was left open to the appellant
of that case to show in future years by proper evidence that the seat of
control and management of the affairs of the family was wholly outside British
India. In the case before us the Tribunal no doubt found on the first question
raised before it that Nandlal and Girdharlal joined the Bombay and Banaras
firms as coparceners of the Hindu undivided family and the money for starting
the business came from the Hindu undivided family. That finding by itself
however does not determine the residence of the (1) [1946]4 1.T.R. 324.
(2) [1950] S.C.R. 961.
629 Hindu undivided family of Gandalal. Both
under Hindu law and Partnership law the Hindu undivided family as such could
exercise no control and management over the two businesses at Bombay and
Banaras. These businesses belonged to the partners and on the facts found in
this case, it cannot be said that the businesses were the affairs of the Hindu
undivided family of Gandalal within the meaning of s. 4A(b) of the Act. We
agree with the High Court that the position would be different if the Hindu
undivided family itself carried on the business as its own business. In that
case the business would be an affair of the family, because the family would be
in control and management of the business.
At first sight it may appear paradoxical that
the income from the two businesses at Bombay and Banaras in the hands of
Nandlal and Girdharlal should be treated as income of the Hindu undivided
family and at the same time it should be hold that the two businesses were not
the affairs of the Hindu undivided family within the meaning of s. 4A(b) of the
Act. There is really no paradox because the place of accrual of income of such
family and the place of its residence need not necessarily be the same under
the Act.
Residence under s. 4A(b) of a Hindu undivided
family is determined by the seat of control and management of its affairs, and
in the matter of partnership business in British India the Hindu undivided
family as such had no connexion whatsoever with its control and management. If
the seat of control is divided, the family may have more than one place of
residence; and unless it is wholly outside the taxable territories, the family
will be taken to be resident in such territories for the purposes of the Act.
But whereas in this case in respect of the partnership
business, the family as such has nothing to do with its control and management,
we fail to see how the existence of such a partnership will determine residence
of the family within the meaning of s. 4A(b), Therefore, we are of the opinion
that the High Court correctly answered the question, The appeal fails and is
dismissed with costs, 82 630 HlDAYATULLAH, J.-The Commissioner of Income tax,
Bombay City, has filed this appeal, after obtaining special leave from this
Court, against the judgment and order of the High Court of Bombay dated
February 16, 1955, in a Reference under s.
66(1) of the Indian Income-tax Act. By the
judgment under appeal, the High Court (in agreement with the decision of the
Income-tax Appellate Tribunal, Bombay, given earlier) answered in the negative
the following question:
" Whether the Hindu undivided family of
Gandalal represented by Nandlal in the firm of Amulakh Amichand & Co. of
Bombay was resident in the taxable territories in the year of account relevant
for the assessment year 1945-46. " The facts briefly stated are as
follows: There was in Wadhwan State in Kathiawar a Hindu undivided family
consisting of Gandalal and his four sons, Girdharlal, Hangraj, Nandlal and
Ramniklal. This family was doing business in cloth. In 1944 Nandlal went to
Bombay and started on April 25, 1944, a cloth business in partnership with
three strangers, known as Amulakh Amichand & Co. Nandlal's s`are was ten
annas, and that of his three partners, six annas. All the capital of the new
firm was supplied by Nand lal, and for this purpose he received two remittances
of Rs. 50,000 each on April 13 and 27 in the year 1944 and two other
remittances aggregating to Rs. 50,000 on June 8 and 29 in the same year. Thus,
a total sum of Rs. 1,50,000 was sent from Wadhwan to Bombay.
Subsequently, Girdharlal also went to Bombay
and joined Amulakh Amichand & Co. and he was given five annas' share out of
Nandlal's share of ten annas. In 1946 Amulakh Amichand & Co. started
another firm at Banaras under the same name. The partners of the Banaras firm
were the partners of the firm at Bombay, an outsider from Banaras and a third
brother of Nandlal. He did not bring any capital, and presumably received a
share along with his other two brothers.
For the assessment year 1945-46 the
Income-tax Officer treated the Hindu undivided family as resident in British
India under s. 4A(b) of the Indian Income tax Act, and assessed the family
after adding the sum of Rs. 1,50,000 to the income from the firm of 631 Amulakh
Amichand & Co., Bombay. The appeal to the Appellate Assistant Commissioner
failed. On further appeal, the Appellate Tribunal, Bombay, held that Nandlal
was still a coparcener and not a separated member, because the partition which
was set up by him was not meant to be acted upon. The Tribunal, however, held
that the decision of the Income-tax Officer and the Appellate Assistant
Commissioner that the Hindu undivided family was resident in British India in
the relevant account year was not sound. The Appellate Tribunal therefore,
ordered that the sum of Rs. 1,50,000 included under s. 4(1)(b) (iii) of the
Income-tax Act could not be included and must be deleted. According to the
Tribunal, the business at Bombay and later the business at Banaras could not be
considered to be I the affairs of the Hindu undivided family of Gandalal', so
as to bring the matter within s. 4A(b) of the Act. The Appellate Tribunal held
that these two businesses belonged to 'different entities', namely, the Bombay
and Banaras firms, and that these firms could not be said to be " the
affairs of the Hindu undivided family " but the affairs of Nandlal and his
brothers under the law of Partnership. At the instance of the assessee, the
Tribunal referred the above question for the opinion of the High Court.
The Bombay High Court referred to the
decision of this Court in V. V. N. M. Subbayya Chettiar v. Commissioner of
Incometax, Madras (1), and pointed out that by the expression " the
affairs of the Hindu undivided family " was meant not the private or
domestic affairs of the family but some affairs, which had some reference to
the Income-tax Act.
The word " affairs " must, it was
held, be construed in relation to taxation. The learned Judges then referred to
the position of a coparcener entering into partnership with strangers, and
observed that when a coparcener carried on such business in partnership on
behalf of the Hindu family, " the affair " was of the coparcener and
not of the family, but when the business was carried on by the family itself, then
it was " the affair " of the family and not of the coparcener or
coparceners. They pointed out that in the cited case Fazl Ali, J., seemed to
have held that even though a partnership (1) [1950] S.C.R. 961.
632 business might be an 'activity' of the Hindu
family, it would not be " the affair " of the Hindu family in the
sense in which the expression was used in the Indian Income-tax Act. They,
however, held that it did not follow that every activity of a coparcener or of
a Karta, even if the activity resulted in profit, became " the affair
" of the Hindu undivided family. Thus, treating the business of Amulakh
Amichand & Co. as " the affair " of the coparceners concerned and
not of the Hindu undivided family, the High Court in agreement with the opinion
of the Appellate Tribunal, answered the question in the negative.
Before dealing with the arguments addressed
in the case and the interpretation of the relevant provision, it will be useful
to summarise the findings. It is found that the Hindu undivided family did riot
disrupt and partition the assets. Nandlal and Girdharlal continued to be
coparceners, and the sum of Rs. 1,50,000 represented the funds of the Hindu
undivided family. There is no finding that besides the entering into
partnership by some of the coparceners with outsiders, there was, in the
taxable territories, any other business. There is also no finding by the
Tribunal that no part of the control and management was exercised in British
India, though the High Court did find this to be so.
We are concerned in this case with the
application of s. 4A(b), which deals with 'residence' in the taxable
territories, of Hindu undivided family, firm or other association of persons.
Before the present amendment, the section read as follows:
4A. For the purposes of this Act...........................
(b)a Hindu undivided family , firm or other
association of persons is resident in British India unless the control and
management of its affairs is situated wholly without British India.
The words " British India " have
now been replaced by the words " taxable territories " ; but the
reasoning applicable to them is the same. The section was plain in so far as
its intent and purpose was concerned. It made a Hindu undivided family resident
in British India, unless the control and management of its affairs 633 was
situated wholly without British India. If the control and management was wholly
or partly situated in British India, then the family was treated as a resident.
The words " wholly without British India " showed that even if a part
of the control and management, be it ever so small a part, was exercised in
British India, the provision was satisfied.
So far, there is no dispute, and it is
further clear that the St affairs " of the Hindu undivided family refer to
something connected with the law of Income-tax. The section does not refer to
the domestic or private affairs of the Hindu undivided family. It refers to an
activity resulting in the making of income. Parties are agreed and I think
rightly-that this aspect of the law is clear and unambiguous. It is also
settled after the decision of this Court in Subbayya Chettiar's case (1).
Parties are, however, at variance, when one comes to the interpretation of the
words " its affairs " in the section, and tries to find the situs of
the control and management. In cases where the Hindu undivided family itself or
through its Karta controls and manages business in the taxable territories, no
difficulty arises; but where, as here, the Hindu undivided family is represented
by one of its coparceners as a partner in a firm, one faces some difficulties.
Two questions then arise, which are:
(a)Is there any " affair" of the
Hindu undivided family in the taxable territories in such circumstances;....and
(b)Is the fact that the coparcener controls and manages the partnership, wholly
or partly, sufficient to enable one to say that the control and management of
the family is located in the taxable territories ? Now, it is settled law that
a Hindu undivided family cannot be a partner under the law of Partnership. Such
of the coparceners who join the partnership are regarded quoad the other
partners, as individuals in their own names and rights. Yet, the benefits that
arise to them from the partnership belong to the family, and their rights are
the asset of the family. We have recently held in Charandas Haridas V.
com-missioner of Income-tax, Bombay (2) that in such a situation the matter has
to be looked at in the light of three (1) [1950] S.C.R. 961.
(2) [196O] 3 S.C.R. 296.
634 separate and independent branches of law.
They are the law of Partnership, the Hindu law and the law relating to
Income-tax. The implications of a coparcener joining as partner with strangers
are different when one views the matter from the angle of the law of
Partnership or from the angle of the Hindu law or the law of Income-tax. In so
far as the law of Partnership is concerned, the coparcenary has no place in the
partnership, and the coparcener-partner is everything. But, viewed from the
angle of Hindu law, the position is entirely different. In this connection, we
have to bear in mind two principles of the law relating to a coparcenary, which
are well-settled. The first is contained in a well-known passage in the
judgment of Lord Westbury in Appovier v. Rama Subba Aiyan which reads:
" According to the true notion of an
undivided family in Hindu law, no individual member of that family, whilst it
remains undivided, can predicate of the joint and undivided property, that he,
that particular member, has a certain definite share... . The proceeds of
undivided property must be brought, according to the theory of an undivided
family, to the common chest or purse, and then dealt with according to the
modes of enjoyment by the members of an undivided family." The second is
equally well-known, and is found stated in the judgment of Turner, L. J., in
Katama Natchiar v. Rajah of Shivaganga (2) in the following words:
" There is community of interest and
unity of possession between all the members of the family, and upon the death
of any one of them the others may well take by survivorship that in which they
had during the deceased's life-time a common interest and a common
possession." No doubt, there are other principles also which qualify those
quoted, as, for example, the right of a coparcener to claim a partition, or,
where such usage obtains, to alienate his interest, which give rise to the
expression that the coparcener has a share. In point of Hindu law, however, a
coparcener cannot claim (1) [1866] 11 M.I.A. 75, 89.
(2) [1864] 9 M. I. A. 539, 61 1.
635 any item of property or even a share of
it as his own, and his dealings with the assets are, in so far as he is
concerned, for the benefit of the family. The law of Income-tax makes the sole
test for purpose of residence of a Hindu undivided family, the existence of an
a affair' and its control and management even partly in the taxable
territories. For this purpose, one may look at the actual facts, and an
inference from facts in the light of Hindu law is equally open.
It is thus plain that whilst in the eye of
the law of Partnership the coparcener who is a co-partner is everything, in the
eye of Hindu law he is no more than a member of a body of owners. In attempting
to find out if there is any 'affair' of the Hindu undivided family, we can
consider the matter from the point of view of Hindu law. If this is the true
position of a coparcener in Hindu law, it is difficult to accept the view of
the High Court and of the Tribunal that there was no 'affair' of the family in
British India. The High Court, with respect, posed the wrong question when it
asked itself, " was Amulakh Amichand & Co., an affair of the family
?". That question is self-evident, and the answer is 'no' from the point
of view of the law of Partnership. The proper question to ask was, as I have
framed it, viz., " was there an affair of the Hindu undivided family in
British India?". To search and find this 'affair', it is not necessary to
look for it within the partnership any more than to look for it in the affairs
of a bank where the family keeps its money with which it does business. That
this was not a mere 'activity' but an activity involving expenditure of family
funds in British India and resulting in the earning of money is admitted on all
hands. The income received from the partnership belonged to the family, as is
wellsettled. See Mangalchand Mohanlal, In re (1), Murugappa Chetty & Sons
v. Commissioner of Income-tax (2) and Kaniram Hazarimull v. Commissioner of
Incometax (3 ) and the numerous cases cited there. The affair, if any, which we
have to find, is not to be found within the four corners of the partnership but
outside (1) [1952] 21 I.T.R. 164. (2) [1952] 21 I.T.R. 311.
(3) [1955] 27 I.T.R. 294.
636 it. The partnership was only the result
of the business activity of the family and evidence of it. The affair we have
to find must be regulated by Hindu law and not by the law of Partnership,
because a partnership is regulated by the two laws considered the other way
round.
The section we have to interpret speaks of
the affairs of the Hindu undivided family whatever shape it may take, and the
enquiry is thus limited to what is the dictate of Hindu law. It is an error to
think that one can ignore a palpable conclusion of that law, and go to find the
answer from the law of Partnership. Nor do I think that the decision of this
Court in Subbayya Chettiar's case (1) laid down any contrary proposition.
There, the karta who visited India for a short period dealt with some matters
including the starting of certain businesses. The Hindu undivided family was
all the time in Ceylon, and it was held that his actions could be described as
' activities'. Indeed, the matter was not decided as to whether the "
affair', if there was one, was of the family or of the coparceners, and the
case went against the assessee on the burden of proof which he had failed to
discharge, to bring his case within the exception.
If the karta had lived in India or some other
coparcener or coparceners had stayed on permanently to manage the ' affairs',
then the question would have been considered, perhaps, differently.
In this case, we are not concerned with the
'affairs', of the firm of Amulakh Amichand & Co., but with the ' affairs'
of the Hindu undivided family. The coparceners who became partners could not
say that they were not concerned with the Hindu undivided family to which they
belonged and an undivided asset of which they owned in common with others.
Their investing moneys, becoming partners and
running the partnership, starting other partnerships were, from the view point
of the coparcenary according to Hindu law, as much the affair of the rest of
the family as their own. In view of what I have said, the first of the two
questions posed earlier must be answered in the affirmative, that is to say,
that there was an (1) [1950] S.C R. 961.
637 'affair' of the Hindu undivided family in
the taxable territories (then British India) in the circumstances of this case.
The question then is: where was the control
and management of the Hindu undivided family located ? If it was wholly located
without the taxable territories (then British India), then the family would be
nonresident. The burden was on the assessee to establish this, and we were not
shown any evidence in this behalf. The question can be decided here also on the
burden of proof alone, as was done in Subbayya Chettiar's case (1). It need
not, however, be decided on that narrow issue for reasons' which will presently
appear. Section 4A deals with residence of an individual at one end and of a
corporation like the company at the other. It also deals with the residence of
three entities, viz., Hindu undivided family, firm and association of persons
in the remaining part. The tests for these three categories are different.
Special tests have been provided for individuals, based on residence for a
certain number of days. Two alternative tests have been provided for companies,
the first being that the control and management of their affairs must be
situated wholly within the taxable territories. Where the control is without, a
company can still be taxed if its income within the taxable territories in the
year of account (omitting, capital gains) is greater than its income without
the taxable territories, with the same omission. The first provision is
necessary, because a company can have more than one residence, its residence
being where it ' keeps house and does business'.
The test is reversed for a Hindu undivided
family, which is non-resident only if the whole of its control and management
is situate without the taxable territories. The residence of the members of the
coparcenary is not a relevant factor, but if control and management is
exercised by them within the taxable territory, the family as a whole is treated
as resident. In Subbayya Chettiar's case (1), this Court observed that '
situated' implies functioning somewhat permanently, though the management and
control may be exercised (1) [1950] S.C.R. 961.
83 638 in more than one place. To prove that
management and control is within the taxable territories, something more than a
casual 'activity' is needed. The same tests also apply to a firm and an
association of persons.
The words 'control and management' have been
figuratively described as ' the head and brain'. In the case of an individual,
the test is not necessary, because his residence for a certain period is
enough, it being clear that within the taxable territories be would necessarily
bring his ' head and brain' with him. The ' head and brain' of a company is the
Board of Directors, and if the Board of Directors exercised complete local
control, then the company is also deemed to be resident. In the case of firms,
association of persons and Hindu undivided family, the control and management
can be exercised by one or more of the group. So long as this control and
management (even partly) is found, and it must be so when some coparceners
reside in British India and manage the affair, the family must be treated as
resident.
The necessity for the test is thus obvious.
The Income-tax law anticipated that control and management of the affairs of
Hindu undivided families (firms and association of persons), might easily be in
two or more places, one or more coparceners being within the taxable
territories and the other or others, without. To prevent the escape of tax and
to get at the income of such families having multiple places of control and
management, it was provided that the whole of the control and management must
be without the taxable territories to avoid the implication of residence.
Otherwise, different coparceners can manage
different businesses in the taxable territories and the family cannot be
regarded as resident if the karta lived outside, an anomaly which does not
really arise. In the present case, can one say that the control and management
was wholly without the taxable territories (then, British India,) ? If one goes
by the case set up by the assessee, one finds that the clam was that there was
a partition in the family and that Nandlal came to 639 Bombay as a separated
member. This claim involves the admission that the affairs, such as they were,
were not controlled from Wadhwan. Since, however, the case of partition pleaded
by the assessee was not accepted, it might be held that the family at Wadhwan
was, perhaps, also in control. But it is equally clear that a part of the
control of the affairs of the family was done in British India by those
coparceners, who became partners in the business and through whom and not
directly from Wadhwan the partnership business at Bombay was run to the benefit
of the family.
Those partners who -were also coparceners of
the family arranged to start this business at Bombay and stayed on and managed
it; they started a fresh business at Banaras, admitted a stranger as partner at
the new place and presumably supplied capital from the Bombay firm or from the
family' coffers. There is no claim at all that they supplied their own separate
funds. All these actions were acts of control and management. They were not casual
but permanent in character. Thus,the control and management of family affairs
vis a vis the partnership was being done by them. The coparceners who Januslike
face two ways, cannot shelter behind the law of Partnership, and claim that
their action had no reference to the 'affairs' of the family, which was at
their back. I am not equating the affairs of the partnership with the affairs
of the family. But the entire business involved a family undertaking, and those
affairs were being managed in British India. This control and management of the
businesses was, in fact, and for purposes of the law of Income-tax, control and
management of the ' affairs' of the Hindu undivided family within British
India, and the family must, therefore, be regarded as resident in the
accounting year within British India.
In my judgment, the decision of the Bombay
High Court, with respect, was erroneous. The answer to the question ought to
have been in the affirmative. I would, therefore, dissolve the answer given by
the Bombay High Court, and instead, would answer the question in the
affirmative. I would also order that 640 the respondent bear his own costs and
pay those of the appellant here and throughout.
ORDER OF COURT.
In accordance with the majority judgment of
the Court, the appeal is dismissed with costs.
Appeal dismissed.
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