04 November 1964
Supreme Court


Case number: Appeal (civil) 1099 of 1963






DATE OF JUDGMENT: 04/11/1964


CITATION:  1965 AIR 1708            1965 SCR  (2)  22  CITATOR INFO :  R          1966 SC1490  (9)  R          1970 SC1343  (17)  R          1971 SC 383  (5)

ACT: 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 registerable-Indian  Income-tax Act, 1922 (11 of  1922),  s. 26A.

HEADNOTE: G and his son V belonged to a Hindu undivided family, and as representatives of the family were partners in the  assesee- firm  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  deed. 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 afore- said  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  Commis- sioner’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 the Act. 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  partner- representative 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. [1965] 2 S.C.R. 12, referred to. Charandas  Haridas  v. Commissioner of  Income-tax,  Bombay, [1960] 3 S.C.R. 296, relied on.

JUDGMENT: 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  respondent. 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)  [1965]2S.C.R. 12. 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 partners :      (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  assessee- firm  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, here- 25 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 assessee- firm  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,  con- tended  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  con- tended  that  the  partition  of  the  family’s   beneficial interest in the Sup./65- 3 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  partnerrepresentative  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)[1965] 2 S.C.R. 12. 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  Income- tax, 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)   [1960] 3 S.C.R. 296.               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  dis-               rupted,  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. Appeals dismissed. 29