Commissioner of Income-Tax, Madhya
Pradesh, Nagpur Vs. Seth Govindram Sugar Mills Ltd.  INSC 82 (26 March
26/03/1965 SUBBARAO, K.
CITATION: 1966 AIR 24 1965 SCR (3) 488
Partnership Act (9 of 1932), ss. 31 and
42(c)-Scope of-Two joint Hindu families-Partnership between-When possibleIncome-tax
Act (11 of 1922), s. 164(1).
A joint Hindu family consisting of two
branches owned a sugar mill. After partition, the two kartas entered into a partnership
in 1943, to carry on the business of the sugar mill. The two partners
represented the respective joint families, and the partnership deed provided
that the death of any of the parties shall not dissolve the partnership and
either the legal heir or the nominee of the deceased partner should take his
place. One of the kartas died in 1945 leaving as members of his branch of the
family, three widows and two minor sons. The other partner continued the
business of the sugar mill in the firm name. For the assessment year 1950-51,
the assessee (respondent-firm) applied for registration on the basis of the
partnership agreement of 1943. The Income-tax Officer, Appellate Assistant
Commissioner and the Tribunal held that there was no partnership between the members
of the two families after the death of one of the kartas. On a reference to the
High Court, it was held that the partner-ship business was carried on by the
representatives of the two families after the dent), of one of the kartas.
In the appeal to this Court, on the question
as-, to whether during the assessment year 19-50-51, the assessee, was a firm
within the meaning of s. 16(1) of the Income-tax Act, 1922, or an association
HELD: The High Court was wrong in its
finding. But, as a result ,of the concession by the appellant, that there was a
partnership from 13th December 1949, when one of the minor sons had become a
major, the status of the assessee was that of a firm for the assessment year
1950-51. [498B] A joint Hindu family as such cannot be a partner of a firm, but
it may through its karta enter into a partnership with the karta of another
family. [495H] Kshetra Mohan Sanyasi Charan Sadhukhan v, Commissioner of Excess
Profits Tax, [19541 S.C.R. 268. followed.
A widow, though a member of a joint family,
cannot become its manager. [495B] Commissioner of Income-tax, C.P. & Berar
v. Seth Lakshmi Narayan Raghunathdas, (1948) 16 I.T.R. 313 and Pandurang Dakhe
v. Pandurang Gorle. I.L.R.  Nag. 299.
Therefore, in the instant case, when one of
the kartas died, the partnership had come to an end. There was no scope for
applying s. 42(c) of the Partnership Act, 1932, because, the section is
applicable only to a partnership with more than two partners. In such a case.
if one of them dies, the firm is dissolved, but if there is a contract to 488
489 the contrary, the surviving partners will continue the firm.
On the other hand, if there are only two
partners and one of them dies, the firm automatically comes to an end and, thereafter,
there is no partnership for a third party to be introduced. Section 31, which
deals with the validity of a contract between the partners to introduce a third
party into the partnership without the consent of all the existing partners,
presupposes the subsistence of a partnership and does not apply to a
partnership of two partners, which is dissolved by the death of one of them.
[492E-H] Hansraj Manot v. Messrs, Gorak Nath Pandey, (1961) 66 C.W.N 262,
Further, there was no evidence that the
representatives of the two families constituted a new partnership and carried
on the business of the sugar mill before 13th December 1949, when, it was
conceded a new partnership had come into existence.
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
38 and 39 of 1964.
Appeals from the judgment and order dated
April 10, 1961 of the Madhya Pradesh High Court in Miscellaneous Civil Case No.
63 of 1961.
C. K. Daphtary, Attorney-General, R.
Ganapathy Iyerand R. N. Sachthey, for the appellant (for both the appeals).
N. D. Karkhanis, Rameshwar Nath, S. N. Andley
and P. L.
Vohra, for the respondent (in both the
The Judgment of the Court was delivered by
Subba Rao, J. These two appeals by certificate arise out of the judgment of the
High Court of Madhya Pradesh, Jabalpur, in Miscellaneous Case No. 63 of 1961
from a reference under s. 66(2) of the Indian Income-tax Act, 1922, made by the
Income-tax Appellate Tribunal, Bombay.
To appreciate the contention of the parties
the following genealogy will be useful:
Kalooram Todi :
Govindram Gangaprasad (d. in January 1943)
(d. in 1933) : :
: Bachhulal : :
: : :
Madanlal (predeceased his Nandlal Babulal
father) (d. 9-12-1945) (b. 25-1-1935) : :
Jankibai Banarsibai : :
Radheyshyam (predeceased Venkatlal his
father) (b. 13-12-1931) :
Vishwanath (adopted) (b. 13-4-1941) 490 After
the death of Kalooram Todi, his two sons by name Govindram and Gangaprasad
constituted a joint Hindu family which owned extensive property in Jaora State
and a sugar mill called "Seth Govindram Sugar Mills" at Mahidpur Road
in Holkar State. In the year 1942 Bachhulal filed a suit for partition against
Govindram and obtained a decree therein.
In due course the property was divided and a
final decree was made. We are concerned in these appeals only with the Sugar
Mills at Mahidpur Road. After the partition Govindram and Bachhulal jointly
worked the Sugar Mills at Mahidpur Road. After the death of Govindram in 1943,
Nandlal, the son of Govindram, and Bachhulal, as kartas of their respective
joint families, entered into a partnership on September 28, 1943 to carry on
the business of the said Sugar Mills. Nandlal died on December 9, 1945, leaving
behind him the members of his branch of the joint family, namely, the three
widows and the two minor sons shown in the genealogy. After the death of
Nandlal, Bachhulal carried on the business of the Sugar Mills in the name of
"Seth Govindram Sugar Mills". For the assessment year 1950-51, the
said firm applied for registration on the basis of the agreement of partnership
dated September 28, 1943. The Income-tax Officer refused to register the
partnership on the ground that after the death of Nandlal the partnership was
dissolved and thereafter Bachhulal and the minors could be treated only as an
association of persons. On that footing he made another order assessing the
income of the business of the firm as that of an association of persons.
Against the said orders, two appeals-one
being Appeal No. 21 of 1955-56 against the order refusing registration and the
other being Appeal No. 24 of 1955-56 against the order of assessment-were filed
to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner
dismissed both the appeals. In the appeal against the order of assessment, the
Appellate Assistant Commissioner exhaustively considered the question whether
there was any partnership between the members of the two families after the
death of Nandlal and came to the conclusion that in fact as well as in law such
partnership did not exist. Two separate appeals, being Income-tax Appeal No.
8328 of 195758 and Income-tax Appeal No. 8329 of 1957-58, preferred to the Income-tax
Appellate Tribunal against the orders of the Appellate Assistant Commissioner
were dismissed. The assessee made two applications to the Tribunal for
referring certain questions of law to the High Court, but they were dismissed.
Thereafter, at the instance of the assessee the High Court directed the
Tribunal to submit the following two questions for its decision and it
accordingly did so:
"(1) Whether on the facts and in the
circumstances of the case, the status of the assessee, "Seth Govindram Sugar
Mills, Mahidpur Road, Proprietor Nandlal Bachhulal, Jaora", is an
Association of Persons or a firm within the meaning of Section 16(1)(b) of the
Income-tax Act." 491 "(2) Whether the order of the Appellate Tribunal
is illegal on account of the Tribunal having committed an error of record and
having omitted to consider the relevant material in the case." The High
Court, for reasons given in its judgment, held on the first question that in
the assessment year 1949-50 the status of the assessee was that of a firm
within the meaning of s. 16(1),(b) of the Income-tax Act and on the second
question it held that the Tribunal misdirected itself in law in reaching the
conclusion that the parties could not be regarded as partners. The present two
appeals are preferred against the said order.
At the outset we must make it clear that the
question of registration could not be agitated in these appeals, as that
question was not referred to the High Court. We shall, therefore, only consider
the points raised by the questions referred to the High Court and held by the
High Court against the appellant. Indeed, the only effective question is
whether during the assessment year 1950-51 the assesee was a firm or an
association of persons.
The first question raised by the learned
Attorney General is that on the death of Nandlal the firm of Seth Govindram
Sugar Mills was dissolved and thereafter the income of the said business could
only be assessed as that of an association of persons.
To appreciate this contention some more necessary
facts may be stated. The deed of partnership dated September 28, 1943, was
executed between Nandlal and Bachhulal. It is not disputed that each of the
said two partners entered into that partnership as representing their
respect;,-joint families. Under cl. (3) of the partnership deed, "The
death of any of the parties shall not dissolve the partnership and either the
legal heir or the nominee of the deceased partner shall take his place in the
provisions of the partnership" The question is whether on the death of
Nandlal his heirs, i.e., the members of his branch of the family, automatically
became to partners of the said firm. The answer to the question turns upon s.
42 of the Indian Partnership Act, 1932 (Act 9 of 1932). the material,part of which
"Subject to contract between the
partners a firm is dissolved by the death of a partner." While for the
appellant the leaned Attorney General contended that s. 42 applied only to a
partnership consisting of more than two partners, for the respondent Mr. Karkhanis
argued that the section did not impose any such limitation and that on its
terms it equally applied to a partnership comprising only two partners. It was
argued that the contract mentioned in the over-riding clause was a contract
between the partners and that, if the parties to the contract agreed that in
the event of death of either of them his successor would be inducted in his
place, the said contract would be binding 492 on the surviving member. On the
death of one of the partners, it was said, his heir would be automatically
inducted into the partnership, though after such entry he might opt to get out
of it. This conclusion the argument proceeded was also supported by s. 31 of
the Partnership Act. Section 31 of the Partnership Act reads:
"(1) Subject to contract between the
partners and to the provisions of section 30, no person shall be introduced as
a partner into a firm without the consent of all the existing partners."
Converting the negative into positive, under s. 31 of the Partnership Act if
there as a contract between the partners, a person other than the partners
could be introduced as a partner of the firm without the consent of all the
existing partners. A combined reading of ss. 42 and 31 of the Partnership Act,
according to the learned counsel, would lead to the only conclusion that two
partners of a firm could by agreement induct a third person into the
partnership after the death of one of them.
There is a fallacy in this argument.
Partnership, under s. 4 of the Partnership Act, is the relation between persons
who have agreed to share the profits of a business carried on by all or any of
them acting for all. Section 5 of the said Act says that the relation of
partnership arises from contract and not from status. The fundamental principle
of partnership, therefore, is that the relation of partnership arises out of
contract and not out of status. To accept the argument of the learned counsel
is to, negative the basic principle of law of partnership. Section 42 can be interpreted
without doing violence either to the language used or to the said basic
principle. Section 42(c) of the Partnership Act can appropriately be applied to
a' partnership where there are more than two partners. If one of them dies, the
firm is dissolved; but if there is a contract to the contrary, the surviving
partners will continue the firm. On the other hand, if one of the two partners
of a firm dies, the firm automatically comes to an end and, thereafter, there
is no partnership for a third party to be introduced therein and, therefore,
there is no scope for applying cl. (c) of s. 42 to such a situation. It may be
that pursuant to the wishes of the directions of the deceased partner the
surviving partner may enter into a new partnership with the heir of the
deceased partner, but that would constitute a new partnership. In this light s.
31 of the Partnership Act falls in line with s. 42 thereof. That section only
recognizes the validity of a contract between the partners to introduce a third
party without the consent of all the existing partners: it presupposes the
subsistence of a partnership; it does not apply to a partnership of two
partners which is dissolved by the death of one of them, for in that event
there is no partnership at all for any new partner to be inducted into it
without the consent of others.
There is a conflict of judicial decisions on
The decision of the Allahabad High Court in
Lal Ram Kumar v. 493 Kishori Lal(1) is not of any practical help to decide the
present case,. There. from the conduct of the surviving partner and the heirs
of the deceased partner after the death of the said partner, the contract
between the original partners that the partnership should not be dissolved on
the death of any of them was inferred. Though the partnership there was only
between two partners, the question of the inapplicability of s. 42(c) of the
Partnership Act to such a partnership was neither raised nor decided therein.
The same criticism applies to the decision of the Nagpur High Court in
Chainkarcin Sidhakaran Oswal v Radhakisan Vishwnath Dixit(2). This question was
directly raised and clearly answered by a Division Bench of the Allahabad High
Court in Mt. Sughra v. Babu(3) against the legality of such a term of a
contract of partnership consisting of only two partners. Agarwala, J., neatly
stated the principle thus:
"In the case of a partnership consisting
of only two partners, no partnership remains on the death of one of them and,
therefore, it is a contradiction in terms to say that there can be a contract
between two partners to the effect that on the death of one of them the
partnership will not be dissolved but will continue ....... Partnership is not
a matter of status, it is a matter of contract. No heir can be said to become a
partner with another person without his own consent, express or implied."
This view accords with that expressed by us earlier. In Narayanan v. Umayal(4).
Ramachandra lyer J., as he then was, said
much to the same effect when he observed thus:
".............. if one of the partners
died, there will not be any partnership existing to which the legal
representatives of the deceased partner could be taken in. In such a case the
partnership would come to an end by the death of one of the two partners, and
if the legal representatives of the deceased partner joins in the business
later, it should be referable to a new partnership between therein." But
Chatterjee J., in Hansraj Manot v. Messrs.
Gorak Nath Pandey(5) struck a different note.
His reasons for the contrary view are
"Here the contract that has been
referred to s the contract between the two partners Gorak Nath and Champalal
Therefore, it cannot be said that the contract ceased to have effect because a
partner died. The contract was there. There was no new contract (1) A.T.R. 1946
All. 259. (2) A.T.R.1956 nag.
46 (3) A.I.R. 1952 All. 506, 507. (4) A.I.R,
1959 Mad. 283,284.
(5)  66 C.W.N. 262, 264.
(N)4SCI-5 494 with the heirs and there was no
question of a new contract with the heirs because of the original contract, and
by virtue of the original contract the heirs become partners as soon as one of
the partners died.................. As soon as there is the death, the heirs
become the partners automatically without any agreement between the original
Partners by virtue of the original agreement between the Partners while they
were surviving. there is no question of interregnums. As soon as the death
occurs the right of somebody else occurs. The question of interregnums does not
arise. The heirs become partners not because of a contract between the heirs on
the one hand and the other partners on the other but because of the contract
between the original partners of the firm." With great respect to the
learned Judge, we find it difficult to appreciate the said reasons. The learned
Judge seems to suggest that by reason of the contract between the original
partners, the heirs of the deceased partner enter the field simultaneously with
the removal by death of the other partner from the partnership. This implies
that the personality of the deceased partner projects into that of his heirs,
with the result that there is a continuity of the partnership without any
interregnums. There is no support either on authority or on principle for such
a legal position. In law and in fact there is an interregnums between the death
of one and the succession to him. We accept the view of the Allahabad and
Madras High Courts and reject the view expressed by Nagpur and Calcutta High
Courts, The result of the discussion is that the partnership between Nandlal
and Bachhulal came to an end on the death of Nandlal on December 9, 1945.
The next question is whether after the death
of Nandlal a new partnership was entered into between the representatives of
the two branches of the families, i.e., Nandlal's and Bachhulal's. Before we
consider this question it is as well that we advert to incidental questions of
law that were raised. One is whether the widow of Nandlal could under Hindu law
be a karta of the joint Hindu family consisting of three widows and two minors.
There is conflict of view on this question. The Nagpur High Court held that a
widow could be a karta: see Commissioner of Income-tax, C. P. & Berar v.
Seth Laxmi Narayan Raghunathdas(1); Pandurang Dahke v. Pandurang Gorle(2), The
Calcutta High Court expressed the view that where the male members are minors
and their natural guardian is the mother, the mother can represent the Hindu
undivided family for the purpose of assessment and recovery of taxes under the
Income-tax Act: see Sushila Devi Rampurla v. Income-tax Officer(2); and (3)
(1959) 38 I.T.R. 316.
495 Sm. Champa Kumari Singhi v. Additional
Member, Board of Revenue, West Bengal(1) The said two decisions did not
recognize the widow as a karta of the family, but treated her as the guardian
of the minors for the purpose of incometax assessment. The said. decisions,
therefore, do not touch the question now raised. The Madras and Orissa High
Courts held that coparcenership is a necessary qualification for the
managership of a joint Hindu family and as a widow is not admittedly a
copartner, she has no legal qualifications to become the manager of a joint
Hindu family. The decision of the Orissa High Court in Budhi Jena v. Dhobai
Naik(2) followed the decision of the Madras High Court in V.M.N. Radha Ammal v.
Commissioner of Income-tax, Madras(2) wherein Satyanarayana Rao J., observed:
"The right to become a manager depends
upon the fundamental fact that the person on whom the right devolved was a
copartner of the joint family Further, the right is confined to the male
members of the family as the female members were not treated as copartner
though they may be members of the joint family." Viswanatha Sastri J.,
"The managership of a joint Hindu family
is a creature of law and in certain circumstances, could be created by an
agreement among the copartner of the joint family. Coparcenership is a
necessary qualification for managership of a joint Hindu family."
Thereafter, the learned Judge proceeded to state:
"It will be revolutionary of all
accepted principles of Hindu law to suppose that the senior most female member
of a joint Hindu family, even though she has adult sons who are entitled as
copartner to the absolute ownership of the property, could be the manager of
the family .....................
She would be the guardian of her minor sons
till the eldest of them attains majority but she would not be the manager of
the joint family for she is not a copartner." The view expressed by the
Madras High Court is in accordance with well settled principles of Hindu law,
while that expressed by the Nagpur High Court is in direct conflict with them.
We are clearly of the opinion that the Madras view is correct.
Another principle which is also equally well
settled may be noticed. A joint Hindu family as such cannot be a partner in a
firm, but it may, through its karta enter into a valid partnership with a
stranger or with the karta of another family. This Court in Kshetra (1) (1961)
46 T.T.R. 81 (2) A.I.R. 1956 Orissa 6.
(3) (1950) 18 I.T.R. 225, 230, 232, 233.
496 Mohan Sanyasi Charan Sadhukhan v.
C.E.P.T.(1) pointed out that when two kartas of different families constituted
a partnership the other members of the families did not become partners, though
the karta might be accountable to them.
The question, therefore, is whether after the
death of Nandlal the representatives of the two families constituted a new
partnership and carried on the business of the Sugar Mills. Admittedly no fresh
partnership deed was executed between Banarsibai, acting as the guardian of the
minors in Nandlal's branch of the family and Bachhulal. It is not disputed that
partnership between the representatives of two families can be inferred from
conduct. Doubtless the accounts produced before the income-tax authorities
disclosed that Bachhulal was carrying on the business of "Seth Govindram
Sugar Mills Ltd." in the same manner as it was conducted before the death
of Nandlal. Therein Kalooram Govindram and Gangaprasad Bachhulal were shown as
partners, Govindram having 10 annas share and Bachhulal having 6 annas share.
There were separate current accounts for the two parties. The Appellate
Assistant Commissioner, who examined the accounts with care, gave the following
details from the accounts as on November 1, 1948:
Joint capital account of Kalooram Govindram
and Gangaprasad Bachhulal in the ratio of 10 : 6 Rs. Credit balance 10,78,660
Current Accounts:Gangaprasad Bachhulal Do. 10,46,797 Kalooram Govindram Do.
8,30,348 Profit & Loss Account Debit balance 14,01,669 No profit or loss
was adjusted to the current account of the parties. Thereafter the accounts
were closed as on 31-31950, when the capital account was squared up by
transferring that much loss from the profit and loss account and balance in the
profit and loss account was transferred in the ratio of 10:6 to the current
accounts of the two parties.
Thus the profit and loss account showed Net
debit balance including current Rs. year's loss 17,51,992 Loss set off against
capital account 10,78,666 .................
Rs. 6,73,326 Transferred to partners'
accounts:Messrs. Kalooram Govindram 4,20,829 Messrs. Gangaprasad Bachhulal
2,52,497 6,73,326 .....................
Balance Nil (1) S.C.R.
497 The accounts only establish that
Bachhulal was doing the business of Govindram Sugar Mills Ltd. But Banarsibai's
name was not found in the accounts. If she was a partner, her name should have
found a place in the accounts. Not a single document has been produced on
behalf of the assessee which supports the assertion that Banarsibai acted as a
partner or was treated by the customers of the firm as a partner. There is not
a little of evidence of conduct of Bachhulal, Banarsibai or even of third
parties who had dealings with the firm to sustain the plea that Banarsibai was
a partner of the firm. Indeed, the conduct of the parties was inconsistent with
any such partnership between Banarsibai and Bachhulal. After the death of
Nandlal, Banarsibai and Shantibai applied to Jaora District Court for the
appointment of guardians to look after the properties and the persons of the
two minors; and on January 21, 1946, four persons other than these two widows
were appointed as guardians of the minors. If Banarsibai was acting as a
guardian of the minors representing the family in the business, she would not
have applied for the appointment of others as guardians. On October 4, 1952, a
partnership deed was drawn up between Bachhulal on the one hand and the minors
represented by the said four guardians on the other.
If Banarsibai was the representative of the
family in the business, this document would not have come into being Banarsibai
also had no place in another partnership deed which was executed on March 27,
1953, between Venkatlal represented by the aforesaid guardians and Bachhulal.
The evidence, therefore, demonstrates beyond any reasonable doubt that
Banarsibai was nowhere in the picture and that Bachhulal carried on the
business of the Sugar mills on behalf of the two families. Nor is there any
evidence to show that from 1943 till the assessment year the guardians of the
minors appointed by the District and Sessions Judge, Jaora, in 1946
representing the minors entered into a partnership with Bachhulal. The
partnership deeds of 1952 and 1953 were subsequent to the order of assessment
and they contain only self-serving statements and they cannot, in the absence
of any evidence, sustain the plea of earlier partnership. Indeed, the guardians
were only appointed for the properties situated within the jurisdiction of the
District Judge, Jaora, and they could not act as guardians in respect of the
properties outside the said jurisdiction.
If they were acting as partners with
Bachhulal, their names would have been mentioned either in the accounts or in
the relevant documents pertaining to the business. The conflicting version
given by the assessee in regard to person or persons who actually represented
the family in the partnership in itself indicates the falsity of the present
version. It must, therefore, be held that the Court guardians did not enter
into a partnership with Bachhulal.
But, Venkatlal became a major on December 13,
1949, i.e., during the accounting year 1949-50. On October 17, 1951, an
application for registration was received by the Income-tax Officer 498 signed
by Venkatlal and Bachulal who are shown as partners representing their
respective joint families. The return of income submitted along with the
application for registration was signed by Venkatlal on August 29, 1951. After
Venkatlal became a major, there was no obstacle in his representing his branch
of the family, in the partnership. Indeed, it was conceded in the High Court
that there was a partnership from December 13, 1949, when Venkatlal, attained
Having regard to the said circumstances and
the concession, we must hold that from December 13, 1949, the business was
carried on in partnership between Venkatlal, representing his branch of the
family, and Bachhulal, representing his branch of the family.
In the result we set aside that part of the
finding of the High Court holding that the partnership business was carried on
by the representatives of the two families after the death of Nandlal, but
confirm the finding to the extent that such a partnership came into existence
only after December 13, 1949. In this view, we answer the two questions
referred to the High Court as under:
(1)For the assessment year 1950-51 the status
of the, assessee was that of a firm within the meaning of s. 16 (1)(b) of the
Income-tax Act, 1922.
(2)The Tribunal misdirected itself in law in
reaching the conclusion that the parties could not be regarded as partners.
In the result the appeals are dismissed. But
as the respondent failed in its main contentions, the parties will bear their
own costs in this Court.