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TMI Blog1965 (2) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... Rajkumarsingh Hukumchand, Ramkumar Morarka & Sons Ltd., and Mannalal Onkarmal. The share of each of the first three partners was four annas, and of the remaining two partners was two annas each. Before the formation of this partnership, the joint Hindu family of Sir Hukumchand was the managing and selling agents of the mills. It has been found by the Appellate Assistant Commissioner, as well as by the Tribunal, that in the partnership, which came into existence on 16th July, 1948, Sir Hukumchand Sarupchand and his son Rajkumar Singh represented as partners in the firm the share and interest of their Hindu undivided family. On or about 31st March, 1950, a partition of the Hindu undivided family took place, and thereafter, the share and interest of the family in the firm along with the family's other business were transferred to a private limited company styled as "Sir Sarupchand Hukumchand Ltd." The Tribunal has found that: "The shares in this company were held by the members of the erstwhile Hindu undivided family. The share and interest in the names of Sir Hukumchand and that of his son Rajkumar Singhji were transferred to this new company. In other words, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was quoted with approval by the Privy Council in Pichappa v. Chokalingam AIR 1934 PC 192 and by the Supreme Court in Charandas Haridas v. Commissioner of Income-tax [1960] 39 ITR 202 ; [1960] 3 SCR 296, and on the unreported decision of the Bombay High Court in, Commissioner of Income-tax v. Ganeshnarayan Onkarmal IT Ref. No. 11 of 1947, dated 16th March, 1948, the Tribunal held that two or more coparceners of a joint Hindu family representing the joint family could enter into a partnership with a stranger. Before the Tribunal, the Revenue reiterated the contention, which had been rejected by the Appellate Assistant Commissioner, namely, that the assessee-firm shown in the document presented for registration had no legal existence inasmuch as Mannalal, one of the partners, had entered into agreements with five other persons including Chunnilal Onkarmal Ltd., in respect of his share. The Tribunal negatived this contention holding that Mannalal actually participated in the partnership business and exercised the rights and performed the functions of a partner as such ; that under the agreements concluded by him with five other persons, those persons were not entitled to participate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, it is Hukumchand and Rajkumar Singh who had both the rights and status of partners and, in fact, functioned as such. Qua the firm it was only Hukumchand and Rajkumar Singh who were the partners. The fact that the shares of profits earned by them were ultimately received by the limited company would not detract from the genuineness of the claim that Hukumchand and Rajkumar Singh were the partners." On the facts found by the Tribunal and the arguments presented before us by the learned Advocate-General, appearing for the Commissioner of Income-tax, and Shri Palkhivala, learned counsel for the assessee-firm, the first question that arises for consideration is whether by reason of Sir Hukumchand and his son, Rajkumar Singh, becoming partners in the assessee-firm not on their own account but as representing their joint Hindu family in the partnership business, the assessee-firm constituted by the deed of partnership of 16th July, 1948, and reconstituted by an identical deed of 16th January, 1950, became an invalid partnership so as to disentitle it to registration. Learned Advocate-General, while not disputing that the statement contained in Mayne's Hindu Law (11th edition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be governed by the Contract Act. The Privy Council laid down this proposition by quoting with approval the statement contained in paragraph 308 of Mayne's Hindu Law. This proposition clearly envisages that not only the managing member of the joint family but also the other members of the family can enter into a contractual relationship with a stranger and become partners with him in a partnership business. It proceeds on the principle that while membership of a joint family is one of status, the relation of partnership arises from a contract and not from status. The managing member of an undivided family, though he has the power of representing the interest of other members, is not their agent in the strict sense of the term so as to clothe the other members of the family with all the rights of principal in respect of contracts entered into by their agent. His position is, as pointed out by the Privy Council in Annamalai Chetty v. Murugasa Chetty [1903] LR 30 IA 220; ILR 26 Mad. 544 , more analogous to that of a trustee. When the managing member of a joint Hindu family and/or other adult members of it representing the family enter into a partnership with a stranger, the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appa Pillai's entering into partnership with the Chetties would not ipso facto make the other members of the family partners of the firm and that it would be a question of evidence and proof whether other members of the family entered into a contractual relationship with the Chetties making them partners. On the evidence in that case, the Privy Council held that of the two members of the joint family, who were sought to be made liable as partners, one was minor and there could be no possible ground for holding him to be a partner. As regards the other, it was held that there was no evidence to show that he ever agreed with the Chetties to become a partner or that the Chetties on their side ever agreed to take him as a partner. The Privy Council's decision in Pichappa's case (supra) is clearly an authority for the proposition that when the managing member of a joint family enters into a partnership with a stranger, the other members do not ipso facto become in law partners of the firm, but that they can enter into a contractual relationship with the stranger and become partners of the partnership. The law, as stated by Mayne and approved by the Privy Council in Pichappa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be said to be of a Hindu undivided family." Those observations, when read in the context of the reference made by the Supreme Court to the passage in Mayne's Hindu Law, only recognise the position that membership of a joint family is one of status and that in a partnership it is one created by a contract, and when the karta or any other coparcener representing the joint family enters into a partnership with a stranger, then so long as the asset of the joint family, namely, the share in the partnership, is not partitioned, the assessment on the karta and/or coparcener partner is not qua partner but as representing the Hindu undivided family. In Commissioner of Income-tax v. Ganeshnarayan Onkarmal IT Ref. No. 11 1947, decided on 16th March, 1948, the Bombay High Court, while considering a question very similar to the one before us, laid down that it is open not only to a karta of a joint family but also to two or more members of the joint family in their individual capacity to enter into a partnership with outsiders. That was a case where one Soniram Devidutta had four sons, Surajmal, Ramanand, Mitanand and Rampratap. Their joint family disrupted in 1926-27 and the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red because then ten persons who have taken shares under the said deed of partnership did not take any individual shares for themselves. He contends that the shares taken by the co-partners belonged not to the individuals but are the shares held by them for the benefit of their branch of the family which is still joint and that they therefore together form only one share in the partnership. In other words, there are really and truly four partners in the partnership, viz., the four branches of the joint family which has separated. To my mind this argument is based upon a misconception of the position of the coparceners qua the partners. It is now well established that a member of a joint Hindu family can enter into a partnership with an outsider, may be that in such a partnership he represents the joint family of which he is a member and if so, he is accountable to the joint family for the profits of such business and cannot retain those profits for himself, but qua the partnership he is certainly a partner. The position is not any different when instead of one coparcener of the joint family two or more coparceners of that joint family enter into a partnership with the outsider. So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners had four-annas share each. The Excess Profits Tax Officer set off the profits of the firm for the years 1943 and 1944 against a deficiency of profits for the year 1945 under section 7 of the Excess Profits Tax Act, 1940, and directed a refund of excess profits tax. Later when it came to the knowledge of the Commissioner of Excess Profits Tax that the joint family of which A was the karta had disrupted and the firm had been reconstituted on 17th October, 1944, so as to include in the partnership the karta, two members of the joint family and the two strangers with whom the karta had originally entered into a contractual relation of partnership, and that the karta and the two members were each entitled to two annas share in the partnership and the two strangers had five annas share in the partnership, he set aside the order of refund on the view that there was a change on 17th October, 1944, in the persons who carried on the business and the provisions of section 8(1) of the Excess Profits Tax Act applied. It was argued on behalf of the firm Bhagat Ram Mohanlal that there was no change in the partnership firm when it was reconstituted on 17th October, 1944, as when originally th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." In our view, the above observations of the Supreme Court must be read as confined to the nature of the case which was before the Supreme Court. As was remarked by Lord Halsbury in Quinn v. Leathem [1901] AC 495 every judgment must be read as applicable to "the particular facts proved or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found." Now the Supreme Court made the above observations while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city, as distinguished from their capacity as representatives of the joint family. In the context of the facts of the case before the Supreme Court, it would not be legitimate to think that by making the above observations the Supreme Court disagreed with the statement of law given in paragraph 308 of Mayne's Hindu Law (11th edition), which was approved by the Privy Council in Pichappa v. Chokalingam AIR 1934 PC 192 and accepted by the Supreme Court in the case of Charandas Haridas v. Commissioner of Income-tax [1960] 39 ITR 202; [1960] 3 SCR 296 , and also overruled the decisions of the several High Courts in which, on the basis of Pichappa's case (supra) , it has been held that besides the karta, other coparceners, as representing the joint family, can enter into a partnership with a stranger. In our opinion, the decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Income-tax [1956] 29 ITR 521 ; [1956] SCR 143 does not in any way advance the case of the department. Reference was also made by the learned Advocate-General to the decision of the Gujarat High Court in Pitamberdas Bhikhabhai & Co. v. Commissioner of Income-tax [1964] 53 ITR 341. That c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... du undivided family and the members continued to constitute one. The Allahabad High Court, while holding that there was no partnership and the family remained undivided, said that persons cannot at one and the same time be members of a joint Hindu family in respect of a joint family property and be also members of a firm of which such property forms the assets, and that the mere fact that a partnership deed was executed in respect of the business of the family was not by itself sufficient to show that there had been a division of the family. In the Allahabad case, no question of the validity of a partnership entered into by the karta and coparceners as representing a joint family with an outsider arose. In our opinion, the Tribunal was right in holding that the assessee-firm could not be denied registration under section 26A on the ground that Sir Hukumchand and his son, Rajkumar Singh, represented the interest of the Hindu undivided family in the firm. Turning to the second question, whether the registration of the firm could be refused for the reason that Mannalal had entered into agreements with five other persons, including Chunnilal Onkarmal Ltd., for sharing the profits deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an agreement for division of the share of profits, the person in whose favour an agreement has been concluded would not be entitled to claim that the partnership firm should deal directly with him to the extent of the interest created in him by the agreement. So far as the partnership is concerned, the partner, who has entered into an agreement with an outsider for the sharing of his profits after they are received by him, continues to possess the same interest as before. Thus in the assessee-firm, even after concluding the agreements that he did, Mannalal continued to be the partner entitled to get the stipulated two annas share of profits; and when Chunnilal Onkarmal Ltd. got from Mannalal a share of his profits under one such agreement, they got it as a private individual entity and not in their capacity as a partner of the firm. There is abundant authority to support the above view. In Lindley on Partnership (12th edition), it has been stated at page 100 that: "An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, several persons are partners and one of them agrees to share the profits derived by him with a st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under section 26A cannot be refused on the ground that one of the partners is a benamidar of another, and the share given to the benamidar will be the correct specification of his individual share in the partnership ; that the beneficial interest in the income pertaining to the share of the benamidar may have relevance to the matter of assessment, but none in regard to the question of registration; and that the benami character does not affect the benamidar's capacity as partner or his relationship with the other members of the partnership. If the validity or genuineness of a firm is in no way affected by the membership of a benamidar-partner therein, then a fortiori an agreement entered into by a partner with a person for the sharing of his profits in the firm after he has received them cannot make a partnership, which is otherwise genuine and valid, an invalid or bogus one. The contention of the learned Advocate-General that Mannalal ceased to be a partner because the agreements, which he executed with regard to the division of his share of profits, were contrary to clause 13 of the instrument of partnership is altogether unsubstantial. That clause, so far as it is mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the joint family was not divided, they were accountable to the joint family for all the profits earned from their partnership in the assessee-firm. The partition of the family, and the formation of the private limited company thereafer, did not in any way change their position as partners in the assessee-firm vis-a-vis other partners; nor did it make Sir Sarupchand Hukumchand Private Ltd. a partner in the assessee-firm after the partition of the family and the formation of the said company. Even after the partition, Sir Hukumchand and Rajkumar Singh continued to be partners in the assessee-firm with this difference that after the partition of the family and the formation of the private limited company, behind them was the private limited company and not any Hindu undivided family. The question whether the profits received by Sir Hukumchand and Rajkumar Singh from the partnership belonged to the joint family or to the private limited company, Sir Sarupchand Hukumchand Private Limited, has relevance only to the matter of assessment, and none whatsoever in regard to the question of registration. This is clear from the decision of the Supreme Court in Charandas Haridas v. Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch proposition. In that case, a Hindu undivided family consisting of two brothers carried on a business. Some time after the death of one brother, there was a partition in the family followed by a partnership consisting of the widow and two minor sons of the deceased, and the surviving brother. When it was found that there could be no valid partnership between an adult and two minors, a fresh partnership was entered into between the surviving brother and the widow of the deceased. This partnership firm's application for registration was refused by the Income-tax Officer on the ground that there was no genuine partnership between the surviving brother and the widow and the share shown as belonging to the widow did not really belong to her but to the minor sons and the partnership did not specify the real partners and their shares and so there was no real firm in existence which could be registered under the Act. The principle that the Madras case lays down is this: that when any document purporting to be an instrument of partnership is tendered under section 26A on behalf of a firm when an application is made for registration, the Income-tax Officer is entitled to examine wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the period for which registration was sought. It was said that though the department did not contend before the Tribunal that registration should have been refused on the ground that the application did not strictly comply with section 26A and the rules relating to the procedure for registration, it was entitled to so urge before us, as when the question whether in the facts and circumstances of the case the assessee-firm could be granted registration itself was under issue, the reference could not be limited to only those aspects of the question which had been argued before the Tribunal. Reliance was placed on the decision of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 ; [1962] 1 SCR 788 We see no ground whatsoever for allowing this plea. If the objection be that the application for registration, though it correctly stated the names of the partners and specified their shares as given in the instrument of partnership itself, did not really represent the state of affairs during the material period inasmuch as Mannalal had entered into agreements with five persons for the sharing of his profits and the joint Hindu family ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is the facts admitted or found by the Appellate Tribunal that form the basis of a statement of case on reference; that facts which are not found in the order of the Tribunal or the record before it cannot be the foundation for raising any question of law in abstract or otherwise; and that the High Court cannot refer the case back to the Tribunal to find new facts or embark upon a new line of enquiry which would enable either the assessee or the Tribunal to make out a case which had never been made during the course of proceedings before the income-tax authorities or the Tribunal. Shri Chitale supplemented the arguments of Shri Palkhivala by adding that there was a distinction between the case of Firm Bhagat Ram Mohanlal v. Commissioner of Income-tax [1956] 29 ITR 521 (SC), and the present case as here there was no partnership in any coparcenary property. It seems to us unnecessary to consider this contention when the case of the assessee-firm has all along been that Sir Hukumchand and his son, Rajkumar Singh, became partners of the assessee-firm on behalf of a Hindu undivided family and the share and interest in the firm held by them beneficially belonged to the Hindu undivide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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