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PETITIONER: CHARANDAS HARIDAS AND ANOTHER

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX,BOMBAY NORTH, KUTCH, SAURASHT

DATE OF JUDGMENT: 15/03/1960

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. DAS, S.K. KAPUR, J.L.

CITATION:  1960 AIR  910            1960 SCR  (3) 296  CITATOR INFO :  E          1960 SC1147  (19)  R          1965 SC1708  (5)  RF         1966 SC 719  (8)  F          1967 SC 383  (12)  RF         1967 SC 617  (33)  R          1971 SC 383  (4)  D          1982 SC 760  (25)  R          1983 SC 409  (10,13,15,21,22)

ACT: Income-tax-Income   from  managing  agency-Karta  of   Hindu undivided  family becoming partner of managing agency  firm- Income  therefrom,  assessed  as  family   income-Subsequent Partition  of  managing commission-Claim for  assessment  as individual income of divided members.

HEADNOTE: C,  who  was the Karta of the Hindu  undivided  family  con- sisting  of his wife, three sons and himself, was a  partner in  six managing agency firms in six Mills, and  the  income received  by him as partner ’was being assessed as  that  of the  Hindu undivided family for the purposes of  income-tax. On December 31, 1945, C, acting for his three minor sons and himself,  and his wife entered into an oral agreement for  a partial  partition,  with effect from January  1,  1946,  by which C gave a certain share to his daughter in the managing agency commission from two of the six managing agencies held by  the family and the balance together with the  share*  in the  other  managing agencies was divided  into  five  equal shares  between  C, his wife and sons.   The  agreement  was subsequently  recorded  in a document  dated  September  II, 1946,  which  recited, inter alia: " By  this  partition  we decided that whatever commission fell due till 31-12-45  and which is received after 31-12-45 should be kept joint and in respect  of  the commission which accrues  from  1-1-46  and received after that date each of us become absolute owner of his one-fifth share and therefore from the date, i.e.,  from 1-1-46  these commissions cease to be the joint property  of our family." For the assessment years 1947-48 and 1948-49, C claimed  that  the  income from the  managing  agency  firms should  no  longer  be treated as the income  of  the  Hindu

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undivided  family but as the separate income of the  divided members,  but the Income-tax authorities rejected the  claim on the grounds that by the document in question the division was  of  the  income and not of the assets  from  which  the income was 297 derived  and since income-tax was payable at the  moment  of time when income accrued, this income must be taken to  have accrued to the Hindu undivided family: Held, that inasmuch as there was no other effective mode  of partitioning  this asset and further in view of the  finding that  the  partition was not a pretence, the asset  must  be treated  as divided for purposes of income-tax law  and  the income  was  not  assessable  as the  income  of  the  Hindu undivided family.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 108 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. 35/x of 1954. A.V. Viswanatha Sastri, B. K. B. Naidu and I. N.  Shroff, for the appellants. C. K. Daphtary, Solicitor-General of India K. N.  Rajagopal Sastri and D. Gupta, for the respondents. 1960.  March 15.  The Judgment of the Court was delivered by HIDAYATULLAH,  J.-This  is an appeal with  the  Hid  special leave  of  this Court against the judgment and  order  dated February 16, 1955, of the High Court of Bombay in an Income- tax Reference under s. 66(2) of the Indian Income-tax Act. The  appellants  are two assessees,  Charandas  Haridas  and Chinubhai Haridas, whose cases are identical, and, in  fact, there  was  a  consolidated  reference  by  the   Income-tax Appellate Tribunal, which was answered by the High Court  by its   judgment.   The  respondents  are   respectively   the Commissioner   of  Income-tax,  Bombay  North,   Kutch   and Saurashtra and the Commissioner of Income-tax, Delhi, Ajmer, Rajasthan and Madhya Bharat.  The two appellants represented two  units of Hindu undivided families.   Charandas  Haridas represented his wife, three sons and himself, and  Chinubhai Haridas  represented his wife, son and himself.  In  stating the  facts  relative  to the two families, it  will  not  be necessary  to  give them separately,  because  the  question which  was answered by the High Court in the judgment  under appeal arose in identical circumstances in the two families. The  only difference is in the shares held  respectively  by the two Hindu undivided families in the managing 298 agencies  to  be hereafter mentioned.  We  will,  therefore, confine  ourselves to a statement of the facts  relating  to Charandas Haridas only. Charandas  Haridas  was  the Karta of  the  Hindu  undivided family  consisting of his wife, three sons and himself.   He was a partner in six managing agency firms in six Mills.  In previous  years,  the income received by him as  partner  in these managing agencies was being assessed as the income  of the Hindu undivided family.  On December 31, 1945, Charandas Haridas  acting  for his three minor sons  and  himself  and Shantaben,  his wife, entered into an oral agreement  for  a partial partition.  By that agreement Charandas Haridas gave an  one pie share to his daughter, Pratima, in the  managing agency commission from two of the six managing agencies held by the family.  The balance together with the shares in  the

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other  managing agencies was divided into five equal  shares between   Charandas  Haridas,  his  wife  and  sons.    This agreement  was  to come into effect from  January  1,  1946, which  was  the beginning of a fresh  accounting  year.   On September 11, 1946, Charandas Haridas acting for himself and his  minor  sons,  and Shantaben executed  a  memorandum  of partial partition in which the above facts were-recited, the document  purporting to be a record of what had taken  place orally earlier. In  the  assessment  years 1947-48  and  1948-49,  Charandas Haridas claimed that the income should no longer be  treated as  the  income  of the Hindu undivided family  but  as  the separate  income  of the divided  members.   The  Income-tax Officer declined to treat the income as any but of the Hindu undivided  family,  and assessed the income as  before.   An appeal   to   the  Appellate  Assistant   Commissioner   was un.successful,  and the matter was taken to  the  Income-tax Appellate Tribunal.  The Appellate Tribunal held that by the document  in  question,  the division, if any,  was  of  the income  and  not  of the assets from which  the  income  was derived, inasmuch as " the agreements of the managing agency with  the  managed  Companies did  not  undergo  any  change whatever as a result of the alleged partition The  Appellate Tribunal, 299 therefore,  held that the arrangement to share the  receipts from   this  source  of  income  was  not  binding  on   the Department,  if  the assets themselves continued  to  remain joint.   It further held that the document was " a farce  ", and  did  not  save  the family  from  assessment  as  Hindu undivided  family.  The Tribunal having declined to state  a ease under s. 66(1) of the Indian Income- tax Act, Charandas Haridas  moved the Bombay High Court, and obtained an  order under  s. 66(2) of the Act.  The question on which the  case was stated was: " Whether there were materials to justify the finding of the Tribunal  that  the income in the share  of  the  commission agency  of the Mills was the income of the  Hindu  undivided family ? " The  High  Court stated that though the reference  was  very elaborately argued, it raised a very simple question of fact and  all that it was required to find out was whether  there were materials before the Appellate Tribunal upon which  the finding  of fact could be rested.  The High Court held  that though the finding given by the Appellate Tribunal could not be construed as a finding that the document was not genuine, the method adopted by the family to partition the assets was insufficient  to  bring  about the result  intended  by  it. According  to  the High Court, the Appellate  Tribunal  war, right  in  holding that the document  was  ineffective,  and though  the income might have been purported to  be  divided and  might,  in fact, have been so divided,  the  source  of income. still remained united as belonging to the Hindu  un- divided family.  It accordingly answered the question in the affirmative,  holding that there were materials  before  the Tribunal  on which it could reach the conclusion that in  so far  as  these income-bearing assets  were  concerned,  they still  belonged  to the Hindu undivided  family.   Leave  to appeal  to  this Court was refused by the  High  Court,  but Charandas Haridas applied to this Court and obtained special leave, and the present appeal was filed. Mr.  Viswanatha  Sastri  appearing  for  Charandas  Haridas, pointed  out  that  a Hindu undivided  family  cannot  be  a partner of a firm Charandasa, Haridas, 300

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therefore, though he represented the Hindu undivided family, in his capacity as a partner could not insist that the other members of the family be received as    partners,         or admitted  to the benefits of partnership.  The only mode  in which the partition could be made was to divide the  income, and this bad the necessary    effect,  in law,  of  dividing the assets, if not for the purposes of the Partnership  Act, at  least  for the purposes of  assessing  income-tax.  lie, therefore,  contended that the Hindu undivided family  which had ceased to exist in so far as these assets were  concern- ed, could not be assessed as such after January 1, 1946, the date  from which the partition was effective.   The  learned Solicitor-General  for  the Department  contended  that  the argument itself involved the assumption that the assets were not,  in fact, divided, and since income-tax was payable  at the moment of time when income accrued, this income must  be taken to have accrued to the Hindu undivided family and  its subsequent partition into five or six shares did not  affect the position. Before  we  deal with these arguments, it  is  necessary  to quote  the  operative portion of the document, which  is  as follows: "  Re:-Partial  partition of the Hindu Undivided  Family  of Charandas Haridas of Ahmedabad. We the undersigned Sheth Charandas Haridas by himself and as the  guardian of minors Rameshchandra  Charandas,  Anilkumar Charandas and Gautamkumar Charandas and Shantaben  Charandas all  residing in Shahibaug, Ahmedabad make  this  memorandum (Nondh)  that,  we have a Hindu undivided family  and  Sheth Charandas  Haridas  manages our family’s joint  property  as Karta  or  Manager  and all of us as members  of  the  joint undivided family are entitled to our joint undivided  family as  Malik.  Our family received a commission of Re.  0-1-11. 5112  from  the  Vijaya  Mills Co., Ltd.  and  out  of  this commission  Sheth Charandas Haridas as Karta or  Manager  of the  family  has given already a commission of  one  pie  to Pratima,  the  daughter of the family.  So also out  of  the commission  of Re. 0-2-1/2 received by the family  from  the Gopal  301 Mills Co., Ltd.  Sheth Charandas Haridasas Karta and Manager has  given  already to Pratima one  pie  commission.   After deducting  these Re. 0-1-10. 5/12 and Re. 0-1-11  commission remained.   These commissions and other commission  received from various other mills have been partitioned orally by  us on  Samvat  Year 2002 Magsar Vadi 12, dated  31st  December, 1945.  By this partition we decided that whatever commission fell due till 31-12-45 and which is received after  31-12-45 should be kept joint and in respect of the commission  which accrues from 1-1-46 and received after that date each of  us become  absolute owner of his one-fifth share and  therefore from  the date,i.e., from 1-1-46 these commissions cease  to be  the joint property of our family.  But it is our  desire that we should keep a memorandum for our memory of the  oral partial  partition effected on Samvat Year 2002 Magsar  Vadi 12, dated 31-12-45 pursuant to which we have partitioned the commissions  to be received by our family.  Because of  this we keep this note." The document no doubt mentions "a commission" in respect  of each  of  the six managing agencies,  which  commission  was divided  by the document.  The word  "commission",  however, has  been used in two different senses; sometimes it  refers to  the  amount  of the managing  agency  commission  to  be received by Charandas Haridas and sometimes to the right  to that  commission which Charandas Haridas bad as  a  partner.

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The  sole  question is whether the  source  was  effectively divided  for  purposes of the Income-tax law,  so  that  the assessment could not be made upon a Hindu undivided family. The  law  was  stated by Mayne, and approved  by  the  Privy Council in Pichappa v. Chokalingam in the following words: "  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 (1)  A.I.R. 1934 P.C. 192. 39 302 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 partnership will be governed by  the Act." Further,  the Privy Council in Appovier v. Rama Subba  Aiyan (1) observed: "  Nothing can express more definitely a conversion  of  the tenancy, and with that conversion a change of the status  of the family quad this property.  The produce is no longer  to be  brought to the common chest, as representing the  income of an undivided property, but the proceeds are to be enjoyed in  six distinct equal shares by the members of the  family, who  are  thenceforth to become entitled to  those  definite shares." The  Bombay High Court quoted this passage, and stated  that there must be a division of the right as well as a  division of  the  property;  and  unless  the  division  effected   a separation of the property into shares, it would remain only as  a separation of the income after its accrual  and  would not  affect the asset as such.  In this view of the  matter, the  Bombay High Court held that the asset continued  to  be joint  in  spite  of the division of the  income  after  its accrual. 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 of the separated members enjoying separate shares by partition.  The fact of a partition in the Hindu law  may have  no effect upon the position of the partner, in so  far as  the  law of Partnership is concerned, but  it  has  full effect  upon  the  family  in so far 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 the  position of the partner Vis-a-vis the other partner  or partners.  The Income- (1)  (1866) 11 M.I.A. 75. 303 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

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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.  Such division  must, of course, be effective so as to bind the members; but Hindu law does not further require that the property must in every case be partitioned by metes and bounds, if separate  enjoy- ment can otherwise be secured according to the shares of the members.  For an asset of this kind, there was no other mode of  partition open to the parties if they wished  to  retain the  property and yet hold it not jointly but in  severally, and the law does not contemplate that a person should do the impossible.   Indeed, the result would have been  the  same, even if the dividing members had said in so many words  that they  had partitioned the assets, because in so far  as  the firms  were  concerned,  the step  would  have  been  wholly inconsequential. The   respondent  suggested  that  the  family  could   have partitioned the managing agencies ’among the members of  the family by balloting them severally; but that would not  have been  possible without a dissolution of the managing  agency firms and their reconstitution, which was not altogether  in the hands of Charandas Haridas.  It was also suggested  that the managing agencies could have been allotted to  Charandas Haridas  while  the others took some other  property,  or  a receiver  could have been appointed.  No doubt,  there  were many  modes of partition which might have been adopted;  but the question remains that if the family desired to partition these assets only and no more, could they have acted in some other manner 304 to achieve the same result?  No answer to this question  was attempted. It is, therefore, manifest that the family took the  fullest measure  possible  for  dividing  the  joint  interest  into separate  interests.  There is no suggestion here that  this division was a mere pretence; nor has the Appellate Tribunal given  such  a finding.  The document  was  fully  effective between  the members of the family, and there was  factually no  Hindu  undivided family in respect of  these  particular assets.   The  assets  at all times stood  in  the  name  of Charandas  Haridas, and looked at from the point of view  of the  law  of Partnership, the family had no  standing.   The assets  still  are  in the name of  Charandas  Haridas,  and looked  again from the same viewpoint, the division  has  no different signification.  What has altered is the status  of the family.  While it was joint, the Department could  treat the  income as that of the family; but after partition,  the Department could not say that it was still the income of the Hindu undivided family, when there was none.  In the face of the finding that this was a genuine document and not a sham, and  that  it  effectually divided the  income  and  in  the circumstances,  the assets, the question answers  itself  in the  negative, that is to say, that there were no  materials to  justify the finding that the income in the share of  the commission  agency of the Mills was the income of the  Hindu undivided family. The  appeal will be allowed.  The respondents will  pay  the costs  of the two assessees here and below.  There  will  be only one set of costs here. Appeal allowed. 305