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TMI Blog1973 (6) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... he firm was, therefore, not lawfully constituted. On appeal, the Appellate Assistant Commissioner upheld the said decision but came to the conclusion that where a partnership was illegal or non est, rule 6B could not be invoked and, therefore, the order cancelling the registration of the firm was ultra vires. On further appeal, the Income-tax Appellate Tribunal concurred with the decision of the taxing authority to the effect that the firm was not validly constituted. On the question of applicability of rule 6B, there appears to have been some difference of opinion between the Judicial Member and Accountant Member of the Tribunal. Still, however, the Tribunal ultimately came to the conclusion that the registration of the assessee-firm was validly cancelled under rule 6B. The assessee-firm thereupon moved the Tribunal to state a case and the Tribunal has accordingly referred the following two questions for the opinion of this court : " (1) Whether, on the facts and in the circumstances of the case, there was a valid and/or genuine partnership amongst C.P. Shah, as representing the Hindu undivided family, and Anubhai Chimanlal and Rajnikant being the son and grandson respectively of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6). Chimanlal, as the karta of the Hindu undivided family, would have ten annas share and Anubhai and Rajnikant would respectively have four annas and two annas share in the profits and losses of the firm. Clause (ii) provided that irrespective of profits and losses of the firm, Anubhai would be entitled to receive a sum of Rs. 6,000 per annum as salary and Rajnikant would be entitled to receive Rs. 3,000 per annum as salary for S. Ys. 2012 and 2013. For the subsequent years, Rajnikant would also be entitled to get salary at the rate of Rs. 6,000 per annum. The net profits and losses of the firm (after deducting the aforesaid payment made towards salary and other expenses of the firm) were to be shared by the partners in accordance with the provision made in clause (i). Clause (iii) provided that the karta would be responsible for the investment of funds for carrying out the business of the firm. Clause (iv) provided that the karta would not be entitled to receive interest on the funds invested by him. In case, however, Anubhai and Rajnikant contributed any capital, they would be entitled to receive interest on the amount invested by them at the rate of 6% per annum. Clause (v) pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in existence and further as to why the assessment for the assessment years 1957-58 to 1961-62 should not be reopened. The assessee showed cause by a letter dated 22nd February, 1965, addressed by the assessee's legal adviser to the Income-tax Officer concerned. The assessee pointed out that the joint family firm was converted into a partnership firm and Anubhai and Rajnikant were inducted as partners in the said firm in view of the fact that both of them had expressed their unwillingness to attend to the family business merely as employees and demanded that they should be given higher salary and their remuneration should be made dependent upon the earnings of the firm and further having regard to the fact that the karta, who was an old man aged about 70, could not have managed the business all by himself. It was also pointed out that both Anubhai and Rajnikant had invested funds in the partnership business and that the said investments were made out of their separate property acquired without any detriment to the joint family. It was lastly pointed out that in the circumstances of the case, the partnership firm which was brought into existence in the interest of the joint family w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Pitamberdas Bhikhabhai's case which according to him had taken the view that " two capacities of a person, one as a coparcener and the other as a partner, are irreconcilable and, therefore, a valid partnership cannot come into existence ". The Appellate Assistant Commissioner, however, held that rule 6B could be invoked " only where a firm obtained registration by putting up something which in fact was not genuine and the genuine partners are detected afterwards ". In the opinion of the Appellate Assistant Commissioner, " Where a partnership is illegal or where a partnership was non est in law, rule 6B could not be invoked ". In this view of the matter, the Appellate Assistant Commissioner, although he concurred with the decision of the Income-tax Officer as regards the invalidity of the firm, allowed the appeal and set aside the orders passed by the Income-tax Officer. The Income-tax Appellate Tribunal also assented to the conclusion of the income-tax authorities that the partnership in question was not valid. The Tribunal referred to three decisions which dealt with an identical or similar question in the context of different sets of facts and the decisions referred to were La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the cancellation of the registration, the Income-tax Officer proceeded on the assumption that there was a genuine firm in existence. However, since the Judicial Member was inclined to take the view that the word " genuine " was comprehensive enough to embrace illegality and invalidity of partnership and there was no clear decision on the point taking a contrary view, the Accountant Member ultimately agreed with the conclusion of the Judicial Member as regards applicability of rule 6B. The Tribunal, having regard to the conclusions aforesaid, allowed the appeal and restored the decision of the Income-tax Officer. Before we proceed to deal with the arguments advanced at the hearing of the reference, two more facts may be noted. First, it has been the assessee's case throughout and that case is supported by documentary evidence on record and has not been disputed at any stage heretofore that the amounts of remuneration which Anubhai and Rajnikant received in lieu of the services rendered by them to the joint family firm were credited in their respective accounts in the books of account of the family firm and that on the date on which the partnership came into existence, Rs. 4,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arate property into the partnership firm at the time of his induction in the partnership ; (iii) that the partnership in question was, therefore, in substance and effect one which was entered into for enjoying the benefits of the separate property of each one of the said two coparceners and the fruits of its investment and that such a partnership is clearly legal and valid ; (iv) that, in any event, the principle of Hindu law which in terms recognises that the karta of a joint Hindu family could enter into partnership with an individual member of the coparcenary quoad his separate property was not confined merely to property in the shape of money but embraced within its fold the case of an individual coparcener contributing the partnership merely his skill, experience and labour all of which are incorporeal property or intangible assets and since in the present case the two coparceners were taken up as working partners on account of their skill and experience and had to put in labour to look after the entire business of the partnership, the partnership was legally and validly constituted. Reliance was placed in support of these arguments principally on the decision of the Judici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough it was true that the rules of Hindu law permitted formation of a partnership between the managing member of a Hindu joint family on the one hand and a stranger on the other, Daulat Ram could not be regarded as a stranger so long as he continued his connections with the undivided family in his capacity as a coparcener and this would be so irrespective of the fact that he might have made a contribution to the partnership in his individual capacity from his separate funds. There could, therefore, be no valid partnership between Lachhman Das on the one hand and Daulat Ram on the other and the mill was, therefore, required to be treated as the asset of the joint Hindu family. An appeal was carried to the Privy Council which reversed the decision of the High Court. The first of the decisions of the Privy Council is contained in the following observations : " After careful consideration, their Lordships cannot accept this view and on general principles they cannot find any sound reason to distinguish the case of a stranger from that of a coparcener who puts into the partnership what is admittedly his separate property held in his individual capacity and unconnected with the family f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and his two brothers Chhotalal and Bansilal. In the accounting years ending 1943 and 1944, the firm made profits on which it was assessed to excess profits tax. During the year ending 1945, however, it sustained a loss and acting under section 7 of the Excess Profits Tax Act, the concerned officer set off the profits of the firm for the years ending 1943 and 1944, against the deficiency of profits during the year ending 1945. Under section 8 of the said Act, such relief could not have been granted if there was a change in the persons carrying on business and there was in fact such a change in the constitution of the firm in question during the relevant period since it was reconstituted under an agreement dated 17th October, 1944, consequent upon the disruption of the joint family consisting of Mohanlal and his brothers. Under the said agreement Mohanlal, Chhotalal and Bansilal were all introduced as partners of the firm along with the two other original partners and there was also a change in shares of each partner. The order granting relief under section 7 to the Hindu undivided family was thereupon set aside by the Excess Profits Tax Commissioner in purported exercise of his pow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. " It would appear that the principle of law laid down by the Judicial Committee, namely, that the karta of a joint Hindu family could enter into partnership with an individual member of the coparcenary in respect of his separate property was quoted with approval by the Supreme Court at two places in the aforesaid citation. It can be said without any reservations, therefore, that there is no room for doubt as regards the validity of a partnership between the karta of a joint Hindu family and a coparcener which falls within the principle enunciated by the Judicial Committee in Lachhman Das's case. The facts in Pitamberdas's case, decided by this court, were as under : One Bhikhabhai Gokaldas was the karta of a Hindu undivided family consisting of himself and his three sons, Pitamberdas, Amrutlal and Jekisandas. The joint family carried on business in various articles. Some time in 1939, Pitamberdas and Amrutlal separated from the joint family and on separation became entitled to the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not granted to the firm, the assessment made upon the Hindu undivided family was, in conformity with the said finding, set aside by the Appellate Assistant Commissioner. On further appeal, the Tribunal restored the decision of the Income-tax Officer. At the instance of the partnership firm and the Hindu undivided family, reference was made to the High Court and one of the questions referred was whether Ramanlal and Jayantilal in their personal capacity and Pitamberdas as the karta of the Hindu undivided family could have entered into partnership in respect of the business carried on by them. This court took the view that the business in the hands of Pitamberdas was ancestral in character and that it did not belong to him absolutely as his self-acquired property and further that even the sums of Rs. 10,001 purported to have been gifted by Pitamberdas to each of his two sons belonged to the said Hindu undivided family. Having made this finding, this court posed the question which fell for its determination in the following words : " The controversy thus boils down to the narrow question whether in respect of a business belonging to a Hindu undivided family, the coparceners can be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat was their separate property unconnected with the family and that the entire capital of the said firm in substance and effect continued to be contributed by the Hindu undivided family. The business, therefore, retained its ancestral character and coparceners became partners in it without putting in their separate property. It is against the background of these facts that it was held by this court that the partnership in that case was invalid and, with respect, rightly, since the attempt was to admit two coparceners who still retained their joint character as partners in their individual capacity in what was in fact and substance a joint family business without their putting into the partnership their separate and individual property unconnected with the family funds. Pitamberdas's case was on its own facts clearly distinguishable from Lachhman Das's case and fell squarely within the principle laid down by the Supreme court in Bhagat Ram's case, namely, that with reference to coparcenary properties, members of a coparcenary cannot at the same time be both coparceners and partners. The principle which emerges on a combined reading of the aforementioned three authorities is that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of them. As regards the second aspect, we will have to look at the substance of the transaction in order to determine whether the partnership was formed with reference to or in respect of the separate property of each of the said two coparceners. The substance of the transaction can only be ascertained by taking an integral view of the terms and conditions of the partnership and the actual conduct of the parties at or about the time when the partnership came into existence. Now, it is true that on a conjoint reading of the preambulary part and a few of the various clauses of the partnership deed it appears that both Anubhai and Rajnikant were inducted in the partnership as working partners and that they were given share in the profits and losses of the firm in order to induce them to continue to attend to the business of the firm and that it was the sole responsibility of the karta to contribute to the partnership capital on which no interest was payable to him. At the same time, however, it is apparent from clause 4 of the partnership deed that Anubhai and Rajnikant were also at liberty to bring in and invest in the partnership their own separate funds and that in case such inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he partnership was not genuine since various terms and conditions incorporated in the partnership deed revealed that the business still retained its ancestral character and that the transaction in substance was an attempt or a device to enable the coparceners in their individual capacity to participate in the profits of a joint family business. The argument, in other words was that in the guise of partnership, in substance and effect, the transaction was one entered into with a view to making it possible for the two coparceners to share in specified proportions in the earnings from a joint family business and that the transaction was, therefore, not genuine. Reliance was placed in this connection on the following features of the partnership agreement : (a) that the coparceners were introduced as partners in ancestral business ; (b) that they were introduced merely as working partners ; (c) that there was no obligation on their part to contribute any amount towards capital or working funds of the firm ; (d) that the entire responsibility for contributing the capital of the firm was that of the karta ; (e) that the coparceners had no share in the goodwill of the firm ; and (f) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mily 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 ...... 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 coparcenery properties the members can at the same time be both coparceners and partners. " This argument is also devoid of merit. In the first place, it proceeds on the assumption that the business continued to retain its ancestral character and that in such a business the two coparceners while still remaining joint became partners in their individual capacity. This assumption is not warranted by the facts and circumstances of the case. Secondly, the aforesaid observations of the Supreme Court have to be read in the light of the facts of that case. The argument before the Supreme Court in that case in substance and effect was that even prior to the reconstitution of the firms on 17th October, 1944, the two other coparceners were part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital or working funds of the partnership, the partnership may still be not valid if in fact no contribution is made by him. On the other hand, in a case like the present, where enjoyment of the benefit of the separate property of each coparcener by its investment in the partnership firm is one of the objects in contemplation of the parties and the said object is in fact carried out by the coparceners by putting into the partnership their respective separate property, there can be no valid reason for holding that the partnership is not legal. The applicability of the principle laid down by the Judicial Committee must depend on the real intention of the parties as gathered from the construction of the deed of partnership as a whole viewed in the light of the conduct of the parties. It is not the apparent form in which the transaction is couched but its real substance and character together with the surrounding circumstances which must be held to be determinative. It was next argued that the principle in Lachhman Das's case would apply only to a case where the partnership formed between the karta and coparceners acquired new business and not where ancestral business is sought to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership, since the latter two had put into the partnership their separate property acquired by them without detriment to the Hindu undivided family and the partnership was formed, inter alia, with the object in contemplation that the two coparceners might enjoy the benefit of their separate property by its investment in the firm. In this view of the matter, it is not necessary for us to enter upon a consideration of the alternative argument urged on behalf of the assessee, namely, that even in a case where an individual coparcener contributes to the partnership only his skill, experience and labour, there could still be a valid partnership between such coparcener in his individual capacity and the karta of the family of which he is the coparcener. The question was debated before us at some length and able arguments were urged on behalf of both sides in support of their rival claims. The arguments raise a question of some importance and the answer to the question is beset with doubts and difficulties. Since on the view taken by us, it is unnecessary to examine this question, we would prefer not to express any opinion upon it. In view of the answer which we propose to give to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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