1969 PLP 873 (PTD)

This statement of law has been approved of by the Privy Council in P. K, P. S. Nichappa Chettiar v. Chockalingam Pillai (AIR 1934 P C 192) and also accepted by the Supreme Court in Charan Das Haridas v. Commissioner of Income‑tae ((1960) 39 I T R 202). It is plain from the language used that the karta or the adult members of a joint Hindu family, where it is a trading family, may enter into a partnership with a stranger or strangers representing the joint Hindu family. The family as a unit on that account does not become a partner, but only such members as in fact enter into a contractual relation with the stranger, and the partnership will be governed by the Act. In the management of that business, therefore, the other members of the family have no part to play. The only right that they have against the manager or the karta or the other members who entered into partnership representing the family is to call upon him or them to give an account of the business that they have done with the joint family funds. The income and profits which the managing member or members have learned from such partnership would belong to the joint family and the other coparceners would have a right to share such profits with these members of the joint family as a joint family asset. The position of the manager or the managing members in this way, as pointed out by the Privy Council in Annomalai Chetty v. Murugesa Chetty (I L R 26 Mad. 544 (P C)) is analogous to that of a trustee. He or they in such cases occupy a dual position. As between the parties to the contract they are partners and their relationship is regulated by the Partnership Act. They as a rule are personally liable for all the obligations under the contract as against the partners/ strangers. In relation to the family members they have a duty to account for the profits that they made. For purpose of income -tax the income derived is assessed to tax as the income of the Hindu undivided family. Thus, the provisions of three distinct laws are attracted in view of the role that they occupy. In Commissioner of Income‑tax v. Bagyalakshmi & Co. ((1965) 55 I T R 660 (S C)) the Supreme Court stressed on the necessity of always in such cases keeping in view the principles of the three laws. Their Lordships 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 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 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, be 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 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." These observations were made in connection with the question of genuineness of partnership where it was said that two of the partners, who were the members of a Hindu undivided family purporting to hold 7 annas and 2 annas share each by reason of the agreement with their family members, were in fact beneficially interested in much lesser share. That is not exactly the question here. But the principle enunciated is alike applicable while judging the validity of the partnership. The distinct relationship under the Partnership Act and under the Hindu Law has to be necessarily kept in view. In this connection we may also refer to the observations of Hidayatullah, J., in his minority judgment in Commissioner of Income‑tax v. Nandlal Gandalal ((1960) 40 I T R I), which are to the following effect: "Now, it is settled law that a Hindu undivided family cannot be a partner under the law of partnership. Such of the coparceners who join the partnership are regarded quoad the other partners, as individuals in their own names and rights. Yet, the benefits that arise to them from the partnership belong to the family, and their ri0hts are the asset of the family. We have recently held in Charandas Haridas v. Commissioner of income‑tax (1960) 39 I T R. 202 (Civil Appeal No. 108 of 1957 decided on March IS, 1960) that in such a situation the matter has to be looked at in the light of three separate and indepen dent branches of law. They are the law of partnership, the Hindu Law and the law relating to income‑tax. The implications of a coparcener joining as partner with strangers are different when one views the matter from the angle of the law of partnership or from the angle of the Hindu Law or the law of income‑tax. In so far as the law of partnership is concerned, the coparcenary has no place in the partnership, and the coparcener‑partner is everything. But, viewed from the angle of Hindu law, the position is entirely different." The question before his Lordship in that case was different from what is posed now; but the principle laid down as to the method of approached applies with all its vigour to our case here. While considering whether the partnership as entered into is against law or is invalid, we cannot but bear in mind the principle of law relating to coparcenary and see whether it has been violated to any extent. We have noticed that under Hindu Law it is open to the karta (whether one individual or several persons) on behalf of the family to enter into partnership with strangers. In that case, only the person or persons entering into contract will be partners qua the strangers who are the contracting parties. The other members though beneficially interested in the profits of the shares of the managing members are not the partners. That such partners acting on behalf of the undivided family can be more than one is not open to doubt in view of the statement of law by Mayne and the pronouncement of the Privy Council and the Supreme Court in the cases cited above. There may also be cases where the members not as copar ceners are members of the family but in their personal character, not with the aid of or detriment to the joint family funds but with their own separate funds, enter into contract with the karta who represents the family. It is well settled that individual members qua their separate property can enter. into a valid partnership with a karta representing the Hindu undivided family. In Lachhman Das v. Commissioner of Income‑tax ((1948) 16I T R 35 (P C)). it was observed that when it is open to a managing member of a joint Hindu family to enter into partnership with a stranger, there is no reason why a coparcener could not in his individual V capacity enter into partnership with the karta of the joint family. It is apt to quote here the words of their Lordships: " . . . on general principles they (their Lordships) cannot find any sound reason to distinguish the case of a stranger from that of a coparcener who puts into that partnership what is admittedly his separate property held in his individual capacity and unconnected with family funds. Whatever the View of a Hindu joint family and its property might have been at the early stages of its development, their Lordships think that it is now firmly established that an individual coparcener, while remaining joint, can possess, enjoy and utilise, in any way he likes, property which was his individual property, not acquired with the aid of or with any detriment to the joint family property. It follows from this, that to be able to utilise this property at his will, he must be 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 investments. 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." In view of the above discussion, two things may be laid down as well recognised general principles. The first is, as stated by Mayne, where a managing member of a joint Hindu family enters into partnership with a stranger in relation to a business whose capital in whole or in part is derived from the property or funds of the joint family, the family as a unit or the entire body or the family members do not ipso facto become partners in that partnership business. The partnership will be confined to the strangers and such of the members of the family who have actually entered into the partnership with them. Secondly, the members of the family in their personal or individual capacity can quoad their separate property enter into partnership with the karta of the joint family who represents the joint family. So far, the law is well settled. Even so, there arises a third question which in substance seeks to demand a further clari fication of .the above proposition in view of the basic rule of Hindu Law that persons cannot at the same time be members of a joint Hindu family and be also members of the firm, of which such property forms the asset. As already noticed, section 5 of the Partnership Act clearly lays down that the members of a Hindu undivided family carrying on family business as such are not partners in such business. The question for consideration is where some of the joint family members become partners {within the meaning of the term in the Partnership Act) in a partnership firm can they become so only in their individual character qua their separate property or they can as well become such partners, by reason of their contract with the strangers, representing the joint family by themselves or in conjunction with the karta. It is difficult to accede to the contention that the only way for the members of the‑joint family to become partners is to enter into contract in their individual or personal character. Of course, they can do so qua their separate property. In that case vis‑a‑vis the karta representing the family they will take the same place as the strangers would occupy by any contract with him. But when it is open to the adult members acting within the authority conferred on them, whether express or implied, to represent the family, there is no reason why they along with the karta, if he is there, should not vis‑a‑vis the strangers figure as partners. The statement of law by Mayne as approved by the Privy Council and the Supreme Court does permit such a. contingency. The contracting members alone will be partners and they are respon sible to the joint family in relation to the profits they make. They are in fact the representatives of the family and though their shares in the partnership are fixed as they should be even for purposes of section 26‑A the beneficial interest therein is of the joint family. Their actual shares may be much less. As representatives they are one body for purposes of Hindu Law. As partners under the Partnership Act vis‑a‑vis the strangers and other partners, they may be distinct. Whatever the rights and liabilities vis‑a‑vis the other partners, they have a common ground with the family members in the coparcenary qua partner ship, their relations are determined by the Partnership Act and qua coparcenary their relationship is governed by the Hindu Law. The income‑tax law for purposes of registration etc. cannot ignore the considerations which are relevant under the Partner ship Act and the Hindu Law. Thus, each branch of law would have its operation in determining their various rights and liabilities. When the Hindu Law on clear authority permits the karta or manager who may be a single individual or several adult members, to enter into a contract with strangers in a representative capacity, the presence of more than one coparcener in the same partnership when it is in representative capacity cannot render the partnership void or invalid. There are several decisions of the various High Courts which have proceeded on the basis that the adult members in a representative capacity can enter into a valid partnership with strangers in relation to a business whose capital in part consists of joint family property or funds. The Allahabad High Court in In re: Ramkumar Ramniwas of Nanpara ((1952) 22 I T R 474), expressed the view that the adult members of the family acting within their rights under the Hindu Law may be able to enter into partnership and make the entire joint family liable for the debts of the partnership and be entitled to the benefits thereof. The Madras High Court in Bagyalakshmi & Co. v. Commissioner of Income‑tax ((1961) 42 I T R 727), approved of the principle of some members of joint family representing the family entering into a partnership with a stranger. The Bombay High Court also has in an unreported case, Commissioner of Income‑tax v. Ganesh Narayan Onkarmal I. T. Ref. No. 11 of 1947, decided on 16‑3‑1948 accepted the principle that two or more members of an undivided Hindu family can enter into a partnership with strangers rendering themselves accountable for their individual shares to the joint family. In Commissioner of Income‑tax v. Hukumchand Mannalal & Co. ((1965) 57 I T R 213), the Madhya Pradesh High Court has referred to this case. It was a case where the instrument of partnership showed that there were ten persons representing the four branches with different shares so as to give each branch quarter share in the profits and loss of the business. It was contended that, while the karta of a Hindu undivided family could enter into a partnership with a stranger, two or more members of the joint family could not in their individual capacity, enter into a partnership with outsiders. Chagla, C. J. said; "I do not see what is there opposed to principle or opposed to authority which would or should prevent two or three members of a joint family individually contracting with outsiders and entering into partnership. As far as their individual shares are concerned they would be accountable to their joint family. The profits which they would earn in respect of their individual shares would ultimately belong to the joint family but so far as partnership with the outsiders is concerned they would be individual partners with their individual shares. Tendolkar, J. observed: "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 far as the partnership is concerned, they have their individual shares in the partnership. It may be that in this partnership they represent the joint family or use joint family funds for the purposes of the partnership. They are accountable to the joint family for the profits made in the partnership. But the fact that the profits earned by a coparcener who is partner in a firm ensure for the benefit of the joint family does not make it any the less partnership for the purposes of sec tion 26‑A." The above observations are to the effect that a partnership with strangers entered into by more than one coparcener re presenting the family is valid in law for purposes of section 26‑A. It may be stated here that the expression "individual capacity" used here is not the same as personal capacity qua separate property. But then in this connection we may also refer to the following observations of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax ((1956) 29 I T R 521); "In Lachman Das v. Commissioner of Income‑tax (1948) 16 I T R 35 (P C) 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. Commissioner of Income‑tax (1942) 10 I T R 457 (PC) that there was nothing in the Income‑tax Act to prohibit tire 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 Mohanhil was its karta and that he entered into the partners as karta on behalf of the joint family. It is difficult to reconcile this position with that of Chotalal 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." On the basis of the above observations, what is contended for on behalf of the revenue is that where a karta representing the family has entered into a partnership with strangers, the other members of the coparcenary by reason of contract of their own cannot validly become partners in the same partnership. In order to appreciate the full implications of the above observations, we may also bear in mind the further observations made by the Supreme Court in that connection which are to the following effect: "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. The contention, therefore, that Chotalal and Bansilal should be held to have become partners in the old firm under the agreement dated 23rd August 1940, cannot be maintained." These observations, to our mind, but clarify the rule that the adult members of the joint Hindu family can become partners alongwith the karta only in a representative capacity. If the karta alone represents the family they can become partners only in their personal character qua their self acquired property as held in Lachhman Das case ((1948) 16I T R 35 (P C)). They cannot become partners quoad their share in the joint Hindu family. Of course there can be little difficulty if they together with the said karta under authority of the family, express or implied, represent the family. The Madhya Pradesh High Court in Commissioner of Income‑tax v. Hukumchand Mannalal & Co., considered this question and accepted the contention that the above observations of the Supreme Court meant simply that with reference to coparcenary property the members of the joint family cannot become partners in their personal or individual capacity and not that if the karta had entered into partnership, the coparceners could not also be partners as representatives of the family. The learned Judges construed the observations of the Supreme Court to mean that with reference to coparcenery property the members cannot at the same time be both coparceners and partners in their individual capacity as distinct from their capacities as representatives of the joint family. We find ourselves in respectful agreement with these observations. In Pitamberdas Bhikhabhai & Co. v. Commissioner of Income- tax ((1964) 53 I T R 341), the Gujarat High Court had to deal with a case where the father Pitamberdas, purported to make a gift of Rs. 10,001 to each of his sons, Ramanlal and Jayantilal. The purported gift was made by debiting a sum of Rs. 20,002 in the books of the business to Pitamberdas Bhikhabhai and crediting a sum of Rs. 10,001 to Ramanlal Pitamberdas and a sum of Rs. 10,001 to Jayantilal Pitamberdas. Pitamberdas then took Ramanlal and Jayantilal as partners in the business executing a deed of partnership showing that he was the absolute owner of the assets of the business and that there was no ancestral business that he got. This stand taken by him in the deed of partnership was not true. The business did not belong to him absolutely but was an asset of the Hindu undivided family consisting of Pitamberdas, his wife and his sons and daughters. Even the sum of Rs. 10,001 a piece, purported to have been gifted by Pitamberdas to Ramanlal and Jayantilal belonged to the said Hindu undivided family. So then the only question was whether in respect of a business belonging to a Hindu undivided family the coparceners can be taken as partners in the business in their individual capacity with specific shares. In this connection, the learned Judges referred to the decision of the Privy Council in Lachhman Das v. Commissioner of Income‑tax and also the observations of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax and held that no such partnership is possible in relation to coparcenary property between the coparceners themselves. The principle laid down is unexceptionable for in relation to coparcenery property, the coparceners cannot become partners themselves. Section 5 of the Partnership Act makes this abundantly clear. The decision of the Allahabad High Court in In re : S. C. Mullick & Sons ((1938) 6 I T R 99) is to the same effect, viz., that persons cannot at one and 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 asset. It may be noted here that in both the cases mentioned above there was no element of strangers at all in the business. The facts and circumstances of the present case are entirely different. There is of course a karta of the family, but it is not he who had entered into partnership. Instead, the two adult coparceners had entered into partnership with strangers. Both of them entered into the agreement as representatives of the family. The family or the department never disputed this position. Indeed their share in the partnership was an asset of the joint family and was being regarded as such. The income from such partnership was the income of the joint family and was being assessed in the hands of the family as such. It is, therefore, clear that the present case is not hit by any of the prohibitions or infirmities contemplated by the observations of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax. It is further clear that the partnership in question is quite consistent with the rule approved of by the Privy Council and accepted by the Supreme Court, viz. it is open to one or more coparceners representing the joint family to enter into partnership with strangers under the authority of the family. The cancellation of the registration in these circumstances was not justified in law. It is not the case of the Tribunal that the partnership is not genuine. Nor is it its case that there has been no compliance with the provisions of section 26‑A or the rules framed under section 59 of the Income‑tax Act. The only ground on which cancellation was made by the Commissioner, was that the case was hit by the observations of the Supreme Court in the above case. As we have already pointed out, that is not the position in this case. We, therefore, answer the question in the affirmative. The department shall pay the costs of the assessee. Advocate's fee is fixed at Rs.

100. Question answered in the affirmative.