15 February 1956
Supreme Court
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FIRM OF BHAGAT RAM MOHANLAL Vs THE COMMISSIONER OF EXCESS PROFITS TAX, MADHYA PRADES

Case number: Appeal (civil) 139 of 1953


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PETITIONER: FIRM OF BHAGAT RAM MOHANLAL

       Vs.

RESPONDENT: THE  COMMISSIONER  OF EXCESS PROFITS  TAX,  MADHYA  PRADESH,

DATE OF JUDGMENT: 15/02/1956

BENCH: AIYYAR, T.L. VENKATARAMA BENCH: AIYYAR, T.L. VENKATARAMA DAS, SUDHI RANJAN BHAGWATI, NATWARLAL H.

CITATION:  1956 AIR  374            1956 SCR  143

ACT: Indian  Income-Tax Act, 1922 (XI of 1922),  s.  26:-A-Excess Profits  Tax Act, 1940 (Act XV of 1940), ss. 7,8(1) and  20- Registration  of  appellant  firm-Partners-Hindu   undivided family  consisting  of karta and his two  brothers  and  two others-Made profits in two accounting years and assessed  to excess  profits-Loss during the succeeding year-Profits  set off  against loss under s. 7 of the Excess Profits Tax  Act- Partition of joint family-Appellant firm reconstituted under fresh agreement-Consisting of five partners-Erstwhile  karta and  his  two brothers and two previous  partners-Whether  a change  in  the  persons carrying  on  business  within  the meaning  of  S. 8(1) of the Excess Profits  Tax  Act-Whether previous  order  paying back excess profits  to  assessee  a mistake  apparent on the record within the meaning of s.  20 of the Excess Profits Tax Act.

HEADNOTE:    The firm of Bhagat Ram Mohan Lal-Appellant-constituted on 23-8-1940 was registered under s. 26-A of the Indian Income- tax  Act,  the  partners  of  the  firm  according  to   the registration  certificate  being (1) Bhagat  Ram  Mohan  Lal (Hindu  undivided  family), (2) Richpal  and  (3)  Gajadhar, their  shares  being  respectively 8 annas, 4  annas  and  4 annas.   Mohan  Lal was the karta of the  aforesaid  family, which  consisted of himself and his two brothers,  Chhotelal and  Bansilal.  The firm made profits during the  accounting years  ending  1943  and 1944 on which it  was  assessed  to excess  profits tax respectively of Rs. 10,023/5/-  and  Rs. 13,005/5/-.  During the year 19441945 it sustained a loss of Rs.  15,771  and  adding thereto  Rs.  37,800  the  standard profits  for  the business, the Excess Profits  Tax  Officer determined  the  deficiency of profits for the year  at  Rs. 53,571 . Acting under s. 7 of the Excess Profits Tax Act the Excess  Profits  Tax Officer passed an order  on  23-12-1946 whereby  after setting off the profits of the firm  for  the years ending 1943 and 1944 against the deficiency of profits during  the  year ending 1945, he directed a refund  of  Rs. 23,028/10/-  which had been paid by the appellant as  excess profits tax for those years.   At the commencement of the assessment year 1944-1945 there

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was  a partition in the joint family of which Mohan Lal  was erstwhile karta, he and his two brothers becoming divided in status.   As  a  result  thereof  the  appellant  firm   was reconstituted  under  an  agreement  dated  17-10-1944,  the partners  of  the firm being five in number.   There  was  a reconstitution of the firm with respect to persons 144 and  their  shares.   According to s.  8(1)  of  the  Excess Profits Tax Act the change in the persons is deemed to bring about  a  discontinuation  of  the  old  business  and   the commencement  of  a new one and if that section  applied  no relief  could have been granted to the appellant under s.  7 of the Act. The  facts as to the reconstitution of the firm having  come to  the knowledge of the Commissioner of Excess Profits  Tax he issued a notice under s. 20 of the Excess Profits Tax Act calling  upon the appellant why the order of Excess  Profits Tax Officer dated 23-12-1946 should not be set aside on  the ground   of   mistake  as  he  had  failed  to   take   into consideration  the  change in the constitution of  the  firm which took place on 17-10-1944.  After hearing the appellant the  Commissioner held by his order dated 15-3-1950 that  on the  facts disclosed there was a change in the  persons  and that the award of relief under s. 7 of the Act by the Excess Profits Tax Officer was a mistake.  He set aside order  only so far as Bhagat Ram Mohan Lal was concerned maintaining  it with regard to two others. On an application for a writ of certiorari and for a writ of prohibition  under  Art. 226 of the  Constitution  the  High Court upheld the order of the Commissioner.  On an appeal by Special Leave to the Supreme Court: Held (1) that by reason of the partition of the joint family and the reconstitution of the firm under the deed dated  17- 10-1944  there  was  a change in  the  persons  carrying  on business within s. 8(1) of the Act. If  all the five persons who were mentioned as  partners  in the deed of 1944 were partners of the old firm, there  would be no change in the persons carrying on the business  within s.  8(1) of the Act by the mere fact of reshuffling  of  the shares  among them but the real question  for  determination was whether Chhotelal and Bansilal were partners in the firm constituted  on  23-8-1940.   It  is  not  in  dispute  that Mohanlal  was  the karta of the joint family,  and  that  he entered into the partnership on 23-8-1940 as such karta.  It is well settled that when the karta of a joint Hindu  family enters into a partnership with strangers, the members of the family do not ipso facto become partners in that firm.  They have  no right to take part in its management or to sue  for its  dissolution.  The creditors of the firm would no  doubt be  entitled  to  proceed against the  joint  family  assets including  the  shares of the  non-partner  copareeners  for realisation  of their debts.  But that is because under  the Hindu Law, the karta has the right when properly carrying on business  to  pledge the credit of the joint family  to  the extent  of  its assets, and not because the  junior  members become  partners  in  the business.  The  liability  of  the junior   members  arises  by  reason  of  their  status   as coparceners and not by reason of any contract of partnership and  it would follow therefore that when Mohanlal  became  a partner  of  the firm on 23-8-1940  Chhotelal  and  Bansilal could  not  be  held by reason of that fact  alone  to  have become partners therein, 145 Accordingly whether the question was to be considered on the principles  of Hindu law or on the principles of the  Excess

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Profits  Tax Act there was a change in the personnel of  the firm on 17-10-1944 and the matter fell within s. 8(1) of the Act. (2)  That  there  was a mistake apparent on  the  record  as required  by  s.  20 of the Act  and  the  Commissioner  had jurisdiction to pass the order dated 15-3-1950 which he did. There  was  no force in the contention that  the  record  in Excess Profits Tax proceedings consisted in the present case of  the  only order dated 23-12-1946 and that the  facts  on which  the proceedings were taken under s. 20,  namely,  the constitution  of  the  firm on  23-8-1940  and  the  changes effected therein on 17-10-1944 were not recited therein  and that  in  consequence there were no materials  on  which  an order  could  have been passed under  that  section  because though the order of the Excess Profits Tax Officer dated 23- 12-1946 does not mention these facts these facts appear from the record of the income-tax proceedings which included the, registration  certificate of the firm under s. 26-A  of  the Income-Tax  Act and the returns made by the firm  disclosing the names of the partners and their respective shares.  Fur- ther  the fact is that the proceedings under the  two  Acts, namely,  the Excess Profits Tax Act and the Income Tax  Act, are interdependent. Lachman Das v. Commissioner of Income-Tax ([1948] 16 I. T.R. 35),  Sundar  Singh Majithia v. Commissioner  of  Income-tax ([1942]  10  I.T.R.  457), Shanmugavel  Nadar  and  Sons  v. Commissioner  of  Income-tax  ([1948]  16  I.T.R.  355)  and Shapurji  Pellonji v. Commissioner of Income-tax ([1945]  13 I.T.R. 113), referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 139 of 1953. Appeal  by special leave from the judgment and  order  dated the  22nd  day of August 1950 of the Nagpur  High  Court  in Miscellaneous Petition No. 67 of 1950. Radhey Lal Agarwala and B. P. Maheshwari, for the appellant. C.   K.  Daphtary, Solicitor-General of India (G.  N.  Joshi and R. H. Dhebar, with him) for the respondents. 1956.  February 15.  The Judgment of the-Court was delivered by. VENKATARAMA AYYAR J.-The firm of Bhagat Ram Mohanlal,  which is  the appellant before us, was constituted  on  23-8-1940, and  registered under section 26-A of the Indian  Income-tax Act, The partners of 146 the firm, according to the registration certificate, were (1)  Bhagat Ram Mohanlal, Hindu undivided family, (2)  Richpal and (3) Gajadhar, their shares being respectively  8 annas, 4 annas and 4 annas   Mohan  lal  was the, karta of the aforesaid joint family, which consisted of himself and his two brothers, Chhotelal and Bansilal, and he entered  into  the  partnership as  such  karta.   The  firm carried  on business at Drug in Madhya Pradesh as the  agent of the Government for the purchase of foodgrains, and during the  accounting years ending 1943 and 1944, it made  profits on which it was assessed to excess profits tax  respectively of Rs. 10,023-5-0 and Rs. 13,005-5-0.  During the year 1944- 1945 it sustained a loss of Rs. 15,771, and adding it to the sum  of  Rs. 37,800 which was the standard profits  for  the business,  the  Excess Profits Tax  Officer  determined  the deficiency of profits for the year at Rs. 53,571.  Section 7 of  the Excess Profits Tax Act, hereinafter referred  to  as

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the Act, provides that when there is a deficiency of profits in  any  chargeable accounting period in any  business,  the profits of that business during the previous years shall  be deemed  to  be  reduced  eo extanti,  and  that  the  relief necessary to give effect to the reduction shall be given  by repayment  of the tax paid or otherwise.  Acting under  this section,  the Excess Profits Tax Officer passed an order  on 23-12-1946 whereby after setting off the profits of the firm for the years ending 1943 and 1944 against the deficiency of profits during the year ending 1945, he directed a refund of Rs.  23,028-10-0  which had been paid by  the  appellant  as excess profits tax for those years.   It  should  be mentioned that at the commencement  of  the assessment year 1944-1945 there was a partition in the joint family  of  which  Mohanlal was the erstwhile  karta,  as  a result of which he and his brothers, Chhotelal and Bansilal, became divided in status.  Consequent on this disruption  of the joint family, the appellant firm was reconstituted under an  agreement dated 17-10-1944.  Under this  agreement,  the partners of the firm were five in number, Richpal  .Gajadhar Mohanlal, Chhotelal and Bansilal, the two 147 former  being entitled to 5 annas share each and the  latter three  to 2 annas each.  There was thus a reconstitution  of the  firm  both with reference to the persons who  were  its partners  and the shares which were allotted to them.   Now, section  8(1) provides, omitting what is not material,  that "as from the date of any change in the persons carrying on a business,  the  business  shall  be  deemed  to  have   been discontinued and a new business commenced".  If this section applied,  then  no  relief could have been  granted  to  the appellant under section 7 of the Act.   The  facts  relating  to the reconstitution  of  the  firm having  come to the knowledge of the Commissioner of  Excess Profits Tax on examination of the record, he issued a notice on  19-2-1948 calling upon the appellant to show  cause  why the  order of -the Excess Profits Tax Officer  dated  23-12- 1946 should not be set aside on the ground of mistake.  This notice was issued under section 20 of the Act, which confers on  the  Commissioner  authority  to  rectify  "any  mistake apparent  from the record".  The mistake, according  to  the Commissioner,  consisted in the Excess Profits  Tax  Officer failing  "to  take  into consideration  the  change  in  the constitution  of  the firm which took place  on  17-10-1944, consequent  on the disruption of the joint Hindu  family  of one of the partners".  The appellant appeared in response to the notice, and contended that on the facts the  proceedings under section 20 were misconceived.  The facts on which  the proceedings were taken were not themselves disputed.  By his order  dated  15-3-1950 the Commissioner held  that  on  the facts  disclosed  on the record, there was a change  in  the persons  carrying  on the business, and that  the  award  of relief under section 7 by the Excess Profits Tax Officer was a  mistake.  He, however, maintained the order dated  23-12- 1946  with  reference to Richpal and Gajadhar,  and  set  it aside only so far as "Bhagat Ram Mohanlal, Hindu.  undivided family"  which was registered as partner on  23-8-1940,  was concerned.   He further directed that Rs.  11,514-5-0  which had been refunded to it should be collected. 148 The appellant thereupon moved the High Court of Nagpur under article  226 for a writ of certiorari quashing the order  of the   Commissioner  dated  15-3-1950  and  for  a  writ   of prohibition restraining the authorities from collecting  Rs. 11,514-5-0  under that order.  By their judgment dated  22nd

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August 1950, the learned Judges agreed with the Commissioner that  by reason of the partition there was a change in  the- persons  who  carried on the business, and  that  the  order dated  23-12-1946 was contrary to section 8(1) of  the  Act. They  also held that as the mistake appeared on the face  of the record, the Commissioner had jurisdiction under  section 20  of  the  Act to pass the order which  he  did.   In  the result, the writs -were refused.  Against this judgment, the appellant prefers this appeal by special leave.   Two  questions have been raised for our  determination  in this  appeal: (1) whether by reason of the partition of  the joint  family and the reconstitution of the firm  under  the deed  dated  17-10-1944 there was a change  in  the  persons carrying on business within section 8(1) of the Act; and (2) whether the order of the Commissioner dated 15-3-1950 is bad on  the ground that there was no mistake apparent  from  the record, as required by section 20 of the Act.  On the  first question,  the  contention  of the appellant  is  that  when Mohanlal entered into partnership with Richpal and  Gajadhar on 23-8-1940 as karta of the joint family, the other members of  that  family,  Chhotelal and Bansilal,  also  became  in substance  partners  of the firm, and that  when  they  were mentioned  eo nominee as partners in the deed  dated  17-10- 1944  the change was more formal than substantial, and  that further  the  fact that there was a re-allotment  of  shares among  the  partners  would not amount to a  change  in  the persons  who carried on the business.  We agree that if  all the five persons who were mentioned as partners in the  deed of  1944  were partners of the old firm, there would  be  no change  in  the  persons carrying  on  the  business  within section  8(1) of the Act by the mere fact of reshuffling  of shares  among  them.  But the real question that has  to  be decided 149 is whether Chhotelal and Bansilal were partners in the firm, which was constituted on 23-8-1940.  The appellant  contends that  they  were, both according to the Hindu law  and  even apart   from   it,  under  the  general  law   relating   to partnerships.   It  is not in dispute that Mohanlal was the karta  of  the joint  family, and that he entered into the  partnership  on 23-8-1940  as such karta.  It is well settled that when  the karta of a joint Hindu family enters into a partnership with strangers,  the  members  of the family do  not  ipso  facto become  partners in that firm.  They have no right  to  take part  in its management or to sue for its dissolution.   The creditors of the firm would no doubt be entitled to  proceed against the joint family assets including the shares of  the nonpartner co-parceners for realisation of their debts.  But that is because under the Hindu law, the karta has the right when  properly carrying on business to pledge the credit  of the  joint  family  to the extent of  its  assets,  and  not because the junior members become partners in the  business. In  short, the liability of the latter arises by  reason  of their status as copartners and not by reason of any contract of partnership by them.  It would therefore follow that when Mohanlal  became  a  partner  of  the  firm  on   23-8-1940, Chhotelal  and Bansilal could not be held by reason of  that fact alone, to have become partners therein.   It is argued that when that firm was constituted on  23-8- 1940   the  persons  who  entered  into  the   contract   of partnership  were not merely Mohanlal as karta of the  joint family  but also Chhotelal and Bansilal in their  individual capacity, and that therefore they became partners under  the ordinary partnership law.  But the registration  certificate

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of  the  firm  while showing  "Bhagat  Ram  Mohanlal,  Hindu undivided  family" as a partner, makes no mention of  either Chotelal or Bansilal as partners.  The contention that  they also  became in their individual capacity  partners  appears therefore  to  be  an afterthought, and is  opposed  to  the findings  of the learned Judges of the High Court.  This  is sufficient,  without  more, to dispose of  this  contention. But even apart from this, 20 150 it  is  difficult to visualise the situation which  the  ap- pellant contends for, of a Hindu joint family entering  into a  partnership  with  strangers through its  karta  and  the junior members of the family also becoming at the same  time its partners in their personal capacity.  In Lachhman Das v. COmmissioner  of Incometax(1), it was held by  the  Judicial Committee that the karta of a joint Hindu family could enter into   partnership   with  an  individual  member   of   the coparcenary  quoad his separate property.  It was also  held by  the Privy Council in Sundar Singh Majithia  v.  Commiss- ioner of Income-tax(2) that there was nothing in the Income- tax Act to prohibit the members of a joint Hindu family from dividing  some  properties, while electing to  retain  their joint  status,  and  carrying on  business  as  partners  in respect  of those properties. treating them as its  capital. But  in  the  present case, the  basis  of  the  partnership agreement  of  1940 is that the family was  joint  and  that Mohanlal  was  its  karta  and  that  he  entered  into  the partnership  as karta on behalf of the joint family.  It  is difficult to reconcile this position with that of  Chhotelal and  Bansilal  being  also partners in  the  firm  in  their individual  capacity, which can only be in respect of  their separate  or divided property.  If members of a  coparcenary are to be regarded as having become partners in a firm  with strangers, they would also become under the partnership  law partners inter se, and it would cut at the very root of  the notion  of  a  joint  undivided family  to  hold  that  with reference  to coparcenary properties the members can at  the same time be both coparceners and partners.  To get over this difficulty, it was suggested that all  the three  coparceners might be regarded as having entered  into the  contract of partnership as kartas of the joint  family. But  even  if  that  could be  done  consistently  with  the principles of Hindu law, the very pleadings of the appellant are against such a supposition being made, affirming as they do  that  it was only Mohanlal that was the karta,  not  the others. (1) [1948]16 I.T.R 35. (2) [1942] 10 I.T.R. 457. 151 The  contention,  therefore,  that  Chhotelal  and  Bansilal should be held to have become partners in the old firm under the agreement dated 23-8-1940 cannot be maintained.   The  question  whether there was a change in  the  persons carrying on the business may now be considered independently of  the  principles  of  Hindu Law or  the  general  law  of Partnership and with special reference to the provisions  of the Indian Excess Profits Tax Act.  Section 2(17) of the Act defines  a ’person’ as including a joint  family.   Applying this  definition., who were the members of the firm when  it was constituted on 23-8-1940?  Richpal, Gajadhar and "Bhagat Ram  Mohanlal, Hindu undivided family" consisting  of  three coparceners,  Mohanlal,  Chhotelal and  Bansilal,  it  being immaterial for the present purpose whether the karta of  the family  was only Mohanlal, or all the three of them.   Then,

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the family became divided in 1944, and the result of it  was that  one of the three persons who were partners in the  old firm, "Bhagat Ram Mohanlal" ceased to exist.  On 17-10-1944, the  two  surviving partners of the old  firm,  Richpal  and Gajadhar,  entered  into  a  contract  of  partnership  with Mohanlal,  Chhotelal  and  Bansilal.   The  erstwhile  joint family of which they were members not being a partner in the new  firm,  it  having  ceased to exist  by  reason  of  the partition,  there  was, having regard to the  definition  in section  2(17)  of  the Act, a change  in  the  persons  who carried  on  the  business.   That was  the  view  taken  in Shanmugavel  Nadar  and  Sons V.   Commissioner  of  Income- tax(1),  and  we  agree with it.  Whether  the  question  is considered  on  the  principles  of  Hindu  law  or  on  the provisions of the Excess Profits Tax Act, there was a change in  the personnel of the firm on 17-10-1944, and the  matter falls within section 8(1) of the Act. (2) The next question for determination is whether the order of  the Commissioner dated 153-1950 is not justified by  the provisions  of  section 20 of the Act for  the  reason  that there was no mistake apparent from the record.  The argument in support of this conten- (1)  [1948]16 I.T.R. 355, 152 tion  is  that  the record in the Excess  Profits  Tax  pro- ceedings  consisted  in the present case of only  the  order dated  23-12-1946, that the facts on which  the  proceedings were taken under section 20, namely, the constitution of the firm on 23-8-1940 and the changes effected therein on 17-10- 1944  were  not recited therein, and that,  in  consequence, there  were no materials on which an order could  have  been passed under that section.  It is true that the order of the Excess Profits Tax Officer dated 23-12-1946 does not mention these facts, but they appear from the record of the  income- tax proceedings which included the registration certificates of the firm under section 26-A of the Income-tax Act and the returns  made  by  the  firm disclosing  the  names  of  the partners and their respective shares.  It is argued for  the appellant  that  these  records were  inadmissible  for  the purpose of proceedings under section 20 of the Act,  because the record referred to and contemplated by that section must be  the  record of the excess profits tax  proceedings,  and that the records of the income-tax proceedings could not  be used  under that section.  We are unable to agree with  this contention.  Section 22(1) of the Act provides that:   "Notwithstanding anything contained in the Indian  Income- tax Act, 1922, all information contained in any statement or return made or furnished under the provisions of that Act or obtained  or collected for the purposes of that Act  may  be used for the purposes of this Act".   Section  22(2)  similarly makes the record of  the  excess profits tax proceedings admissible in proceedings under  the Indian  Income-tax  Act.  The fact is that  the  proceedings under  the two Acts are interdependent.   Assessments  under the  Excess  Profits  Tax Act are, subject  to  the  special provisions of that Act, made on the basis of the assessments made under the provisions of the Indian Income-tax Act.  The same  officers are in chargev of the proceedings under  both the enactments.  The order of the Excess Profits Tax Officer dated  23-12-1946 refers in terms to the order  dated  28-9- 1946 passed in the proceedings for assess- 153 ment  of income-tax on the appellant, and the deficiency  of profits is worked out on the basis of the loss of Rs. 15,771 as  ascertained  therein.   We  see  no  substance  in  this

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contention, which must accordingly be rejected.   It  was finally contended that the particulars recited  in the registration certificate as to who were all partners  of the firm were not conclusive, and that the appellant was not estopped  from  proving  that even  on  23-8-1940  the  real partners  were  all the five persons mentioned in  the  deed dated  17-10-1944, and the decision in Shapurji Pellonji  v. Commissioner  of Income-tax(1) was relied on in  support  of the  position.   It  is undoubted law  that  the  income-tax authorities  are  not estopped by the fact  of  registration from going behind the certificate, and deciding who the real partners  of  the  firm are.  But  can  the  assessee  whose statement is the basis on which the registration is made and who   has   possibly  been  benefited   thereby   deny   its correctness,  when the facts mentioned therein turn  out  to his disadvantage?  It is unnecessary to consider this point, in view of our decision that on the facts as pleaded by  the appellant,  Chhotelal and Bansilal could not be regarded  as partners  in the old firm.  We may add that this  contention does  not  appear  to  have  been  put  forward  before  the Commissioner  when notice was issued to the appellant  under section  20  of the Act.  If any such  contention  had  been raised, it would have been open to the Commissioner to  have taken action under section 19 of the Act. In  the  result,  the appeal fails, and  is  dismissed  with costs. (1) [1945] 13 I.T.R. 118. 154