TMI Blog1973 (4) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... Darbarilal separated from each other. On disruption, the joint family business was converted into a partnership business. Dhanyakumar representing the branch of Darbarilal and Jaikumar representing the branch of Ratanchand agreed to carry on the business in partnership under the firm name, M/s. Ratanchand Darbarilal, Katni. Each of the two partners was to have equal shares of 50P each in profit and loss. The firm was granted registration under section 26A of the Act for the assessment year 1945-46 to the year 1957-58. During the years to come, the business of the firm prospered. The firm acquired various properties, for which the funds were contributed by the two Hindu undivided families. In the year 1950, the firm opened a retail shop at Katni styled " Premier Cloth Shop ". In the year 1953-54, the firm opened a branch at Satna for carrying on wholesale business in cloth. That state of affairs continued till the assessment year 1957-58. Up to and including the assessment year 1957-58, the shop at Satna was treated for income-tax purposes as branch of the Katni firm. During the assessment year 1958-59, the assessee claimed that there was bifurcation of the business of the partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credited to the account of Darbarilal Dhanyakumar, Rs. 3,386 to the account of Keshavkumar and Rs. 6,773 to the account of Ratanchand Abhaykumar. It was also mentioned that the credit to the account of Ratanchand Abhaykumar comprised Rs. 3,386 for Abhaykumar and Rs. 3,386 for Jaikumar. In the Satna business, profits of Rs. 29,973 were divided into four equal parts and an amount of Rs. 7,493 was credited to each of the accounts of Darbarilal Dhanyakumar, Ratanchand Abhaykumar, Prasannakumar and Ratanchand Jaikumar. In the case of Katni branch, called Premier Cloth Store, the profit of Rs. 4,444 was divided equally between Darbarilal Dhanyakumar and Ratanchand Abhaykumar... " Both the Katni and Satna firms separately applied for registration under section 26A of the Act. The registration was refused in both the cases by the Income-tax Officer, and that refusal was confirmed on appeal by the Appellate Assistant Commissioner. The assessee's claim before the Income-tax Officer that the firm, M/s. S. S. Ratanchand Darbarilal of Satna, was brought into existence with effect from 9th September, 1956, was based on the following circumstances : (1) On August 9, 1956, the firm, M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... na shop, they were arranged for by the head office. The loans were taken by the head office, i.e., under the name of the Katni firm and then the amounts in question were transferred to the Satna shop ; (4) when the Satna shop had to make payments for its purchases, the money was remitted by the head office ; (5) the head office controlled the finances and the business activities of the Satna shop as before, i.e., there was no change in the circumstances, and the Satna shop was treated to be a branch of the Katni firm ; (6) the recitals in the partnership deed suggest that the alleged partnership was merely a reconstitution of an already existing firm. Such a reconstitution could have been possible if there was already a firm in the name and style " Ratanchand Darbarilal ", Satna. If there was no such firm in existence, there could be no possibility of admitting any one as partners. The partnership deed was, therefore, legally void and inoperative ; (7) the alleged partnership was merely an extension of the already existing firm, and there can be no severance of that business into two by merely executing separate instruments of partnership and adopting separate firm name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have only been brought about by making relevant entries in the capital account as per the books of the firm itself. In the case of the other Hindu undivided family, viz., Darbarilal Dhanyakumar, it is admitted that there is no division of profits between Dhanyakumar and his two sons, i.e., Keshavkumar and Prasannakumar, shown as partners respectively in Katni and Satna business. The capital account that stood in the books of the Katni firm, therefore, continued to be that of the Hindu undivided family. It was submitted by the appellant's representative that by transferring a sum of Rs. 4,000 each to Keshavkumar and Prasannakumar the said two partners could be said to have become partners on the strength of funds which belonged to them. Therefore, although 0-4-0 share in the Katni firm belonged to Keshavkumar and similarly 0-4-0 share in the Satna firm belonged to Prasannakumar in their personal capacities, they had still their right in the remaining profit which fell to the share of Darbarilal Dhanyakumar because that account continued to remain as that of the Hindu undivided family. What the counsel contends is not true because Dhanyakumar has filed a return in respect of his s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Abhaykumar and Jaikumar credited with Rs. 5,000 each showing their capital contribution. The transfer entry was alleged to have been made on Bhado Sudi 5, Samvat 2013, corresponding to September 9, 1956, but on examination of the bijak nakal, it appears that the entry was actually made on September 9, 1957. The figure 7 was later on changed to 6. (8) Right till the end of the year, the assessee did not know its mind. The business was continued to be carried on as before. Towards the end of the year, the entries were made so as to conform with the recitals in the deeds of partnership. On further appeal, the Tribunal accepted the assessee's contention that the firm, M/s. S. S. Ratanchand Darbarilal of Satna, was entitled to registration under section 26A of the Act. The operative part of the Tribunal's order reads : " The assessee has effectively separated the business of Satna from the business of Katni and there is no justification whatsoever for treating the two businesses as one single whole. The aspects emphasized by the income-tax authorities are not such as to justify the clubbing of the two units. There was nothing to stop the Satna branch from purchasing a small p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing question under section 66(1) : " Whether, on the facts and in the circumstances of the case, M/s. Ratanchand Darbarilal, Satna, was entitled to registration under section 20A of the Indian Income-tax Act, 1922, for the assessment year 1958-59 ? " but declined to refer the other questions saying that they involved questions of fact. This court then issued a direction under section 66(2) requiring the Tribunal to refer the other questions. Pursuant to the direction the questions that have now been referred by the Tribunal under section 66(2), are : " (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in so interpreting the evidence on record as to come to a finding that the Satna business has to be taken as an independent unit with its own constitution and that it is separate and distinct from the Katni business ? (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in directing that the firm owning the Satna business should be registered in spite of the fact that the members of the two Hindu undivided families entered as partners inter se without their effecting in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership deed did not bring into existence a genuine firm. He contends that the karta of a joint Hindu family could enter into a valid partnership with some of the coparceners of the family, and, therefore, the instrument of partnership dated November 1, 1956, brought into existence a valid partnership in respect of which registration could be granted under section 26A of the Act. The partnership will not be invalid merely because two or more of its partners are members of a Hindu undivided family and representing the interest of the family. The income-tax authorities were, therefore, not justified in holding that the partnership was not valid in law. Further, he contends that the circumstances taken into consideration by the income-tax authorities, viz., that no share capital was contributed by some of the partners and that the formation of the partnership was not disclosed to the bankers, were not grounds relevant for refusing registration to the firm. Lastly, the learned counsel contends that everyone is entitled to arrange his affairs in such a manner as to reduce his tax liability, and merely because there was bifurcation of the business with the evident object of avoidance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablished that when a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises. " In Umacharan Shaw Bros. v. Commissioner of Income-tax the Supreme Court upon analysis of the circumstances of that case held that there was no material upon which the Tribunal could come to the conclusion that the firm was not genuine and that it proceeded on mere surmises and conjectures and, therefore, the finding of the Tribunal was not binding. In Commissioner of Income-tax v. Sivakasi Match Exporting Co. the Supreme Court was dealing with refusal of registration to a firm under section 26A of the Act, and the question was whether the refusal was correct in law, and held that if there was no evidence to sustain the finding of the Tribunal, then a question of law within the meaning of section 66(2) of the Act arose for decision, in view of the decision of the Supreme Court in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax . In Udh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a unit. But registration makes all the difference, for, in that event, the tax is levied on each individual partner in respect of his share in the firm's profit. The gain to the assessee thereby is not inconsiderable. In order to be entitled to this privilege it is, however, essential that a firm should conform to the conditions prescribed by section 26A and rules 2 to 6B made under the Act. Further, the Income-tax Officer should be satisfied that the partnership is not only genuine but also a valid one. The crux of the matter is whether there was a splitting up of one business into two. The test to be applied in order to determine whether two businesses are separate businesses or are the same business must be an inter-connection, and interlacing, and inter-dependence between, and a unity embracing, the two businesses. That raises a further question whether there could or could not be any severance of one business from another, unless there was, in the first instance, a discontinuance of the business carried on by the firm as orginally constituted at Satna. The answer to these questions, as it must be, is furnished by the recitals of the deed coupled with the course of dealings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be taken over by any new firm styled as M/s. S. S. Ratanchand Darbarilal, Satna. There was no question of reconstitution of the firm because, in fact, no such firm ever existed. The dissolution and reconstitution of a partnership are two different legal concepts. The dissolution puts an end to the partnership, but reconstitution keeps it subsisting, though in another form. A dissolution followed by some of the erstwhile partners taking over the assets and liabilities of the dissolved partnership and forming themselves into a partnership is not reconstitution of the original partnership. A partnership formed after dissolution is a new partnership and not a continuation of the old partnership, for it would be a contradiction in terms to say that what ceased to exist was continued. A reconstitution of a partnership necessarily implies that the firm never became extinct. What it denotes is the structural alteration of the membership of the firm, by addition or reduction of members, and the incidental re-distribution of the shares of the partners. That distinction must be borne in mind in considering the genuineness of the transaction. The essential steps that had to be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind. The business was continued to be carried on as before. Towards the end of the year, the entries in the account books were made so as to conform with the recitals in the deeds of partnership. The business between the two Hindu undivided families continued to be carried on as in the past. The members of the two Hindu undivided families had been brought in as partners without bringing in any partial partition of the respective Hindu undivided families. The head office controlled the finances and business of the Satna shop as before, i.e., there was no change in the circumstances and the Satna shop was treated to be a branch of the Katni firm. The theory that there was a separate partnership was merely an after-thought. The account of the two Hindu undivided families M/s. Ratanchand Darbarilal and M/s. Ratanchand Abhaykumar were debited with Rs. 10,000 and Rs. 8,000, respectively, and the incoming partners credited with Rs. 5,000 in the Katni firm and Rs. 4,000 in the Satna firm showing their capital contribution. The transfer entries were alleged to have been made on bhado sudi 5, Samvat 2013, corresponding to September 9, 1956, but on examination of the bijak nakal, it appears t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court observed thus : " If the distinction between the three concepts is borne in mind much of the confusion disappears. A partnership is a creature of contract. Under Hindu law 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 provision will 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 repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accorded the freedom to enter into contractual relations with others, including his family, so long as it is represented in such transactions by a definite personality like its manager. In such a case he retains his share and interests in the property of the family, while he simultaneously enjoys the benefit of his separate property and the fruits of its investment. To be able to do this, it is not necessary for him to separate himself from his family......... In this view of the Hindu law, it is clear that if a stranger can enter into partnership, with reference to his own property, with a joint Hindu family through its karta, there is no sound reason in their Lordships' view to withhold such opportunity from a coparcener in respect of his separate and individual property. " It was also held by the Privy Council in Sundar Singh Majithia v. Commissioner of Income-tax that there was nothing in the Income-tax Act to prohibit the members of a joint Hindu family from dividing some property while electing to retain their joint status and carrying on business in respect of those properties treating them as its capital. In Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 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. " The principles laid down by the Supreme Court in Firm Bhagat Ram Mohanlal's case would squarely apply to the facts of the preset case. The firm as originally constituted in the year 1943 was formed of two partners, Ratanchand and Darbarilal, the kartas of their respective Hindu undivided families, representing the branches of Ratanchand and Darbarilal, respectively. They represented, their sons as kartas of their Hindu undivided families. In such circumstances, their sons could not also enter into partnership in their individual capacity, because, as pointed out by the Supreme Court, that would cut at the very root of the notion of a Hindu undivided family. The question whether when a joint Hindu family has entered into a partnership with a stranger, through its karta, the junior members of the family could also become partners in their personal capacity, has been considered by some of the High Courts. In Pitamberdas Bhikhabhai Co. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as the Hindu law was concerned. Just as the fact of a karta becoming a partner did not introduce the members of the undivided family into the partnership, the division of the family did not change the position of the partner vis-a-vis the other partner or partners. The income-tax law, before the partition, took note, factually, of the position of the karta and assessed him not as partner but as representing the Hindu undivided family. In doing so, the income-tax law looked not to the provisions of the Partnership Act, but to the provisions of the Hindu law. When once the family had disrupted, the position under the partnership continued as before, but the position under the Hindu law changed. There was then no Hindu undivided family as a unit of assessment in point of fact, and the income which accrued could not be said to be that of a Hindu undivided family. There was nothing in the Indian income-tax law or the law of partnership which prevented 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 did not further require that the property must in every case be partitioned by metes and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing to show any transgression of the provisions of the Bengal Excise Act. Incidentally, the Supreme Court observed that the maintenance of the bank accounts in the names of the holders of the excise licences and not in the name of the firm, was in accordance with the provisions of the partnership deed and could not be said merely to furnish a veneer of partnership while the family continued without disruption. In Commissioner of Income-tax v. Sir Hukumchand Mannalal Co. the firm was formed under a deed to carry on the business of " managing and selling agents " of Hukumchand Mills Ltd. Sir Hukumchand and his son, Rajkumarsingh, were the two of the five partners. They represented the interest of the Hindu undivided family of Sir Hukumchand and his sons. The Tribunal affirmed the order of the Income-tax Officer refusing registration of the firm. On reference, the High Court held that the firm was entitled to registration under section 26A of the Act, as there was nothing in law which prevented two or more coparceners of a Hindu undivided family, representing the joint family, from entering into a partnership with a stranger or strangers. That view of the High Court was affirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur answers to the questions referred must be : (1) The firm, M/s. S. S. Ratanchand Darbarilal, Satna, was not entitled to registration under section 26A of the Indian Income-tax Act, 1922, for the assessment year 1958-59. (2) The Appellate Tribunal was not justified in so interpreting the evidence on record as to come to a finding that the Satna business had to be taken as an independent unit with its own constitution and that it was separate and distinct from the Katni business. (3) The Appellate Tribunal was not justified in directing that the firm owning the Satna business should be registered in spite of the fact that the members of the two Hindu undivided families entered as partners inter se without their effecting, in the first instance, a severance of joint status by partitioning, either partially or totally, the assets of the respective two Hindu undivided families. (4) The Appellate Tribunal was not justified in holding that the profits from the business run in the name and style of M/s. S. S. Ratanchand Darbarilal, Satna, shall be excluded from the total income of M/s. Ratanchand Darbarilal, Katni. The Commissioner of Income-tax shall have the costs of thi ..... 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