1. Partnership firm involving a Hindu Undivided Family reconstituted after partition; dispute over whether this constitutes a change in persons under Section 8(1), Excess Profits Tax Act. (Para 1 , 2 )
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1956 Supreme(SC) 14
SUPREME COURT OF INDIA
15th February 1956.
S.R. DAS, C.J.I., BHAGWATI AND VENKATARAMA AYYAR, JJ.
Firm Bhagat Ram Mohanlal, Appellant
Versus
Commissioner of Excess Profits Tax Nagpur and another, Respondents.
Civil Appeal No. 139 of 1953.
Advocates Appeared
Mr. Radhey Lal Agarwala and Mr. B. P. Maheshwari, Advocates, for Appellant; Mr. C. K. Daphtary, solicitor-General of India (Mr. G. N. Joashi and Mr. R. H. Dhebar, Advocates, with him), for Respondents.
Advocates:
B.P.MAHESHVARI, C.K.DAFTARY, G.N.Joshi, R.H.Dhebar, RADHEY LAL AGRAWAL
B.P.MAHESHVARI, C.K.DAFTARY, G.N.Joshi, R.H.Dhebar, RADHEY LAL AGRAWAL
A partition of a Hindu Undivided Family and the subsequent replacement of the HUF partner by individual members in a firm constitutes a 'change in the persons carrying on business,' leading to the deemed discontinuance of the business under the Excess Profits Tax Act.
Headnote:(A) Excess Profits Tax Act, 1940 - Sections 7, 8(1), 20 and 22(1) - Indian Income-tax Act, 1922 - Section 26-A - Change in constitution of a firm - When a Karta of a Hindu Undivided Family enters into a partnership with strangers, the members of the family do not ipso facto become partners in that firm; their liability arises from their status as coparceners and not by reason of any contract of partnership - A partition of the joint family resulting in the replacement of the joint family partner by individual members as partners constitutes a change in the persons carrying on the business under Section 8(1), leading to the deemed discontinuance of the old business and commencement of a new one. (Paras 6, 9)
(B) Excess Profits Tax Act, 1940 - Section 20 - Mistake apparent from the record - The record for the purpose of rectifying a mistake includes information, statements, or returns furnished under the Indian Income-tax Act, as the proceedings under the two Acts are interdependent and Section 22(1) expressly allows such information to be used. (Para 10)
Facts of the case:
A firm was constituted with a Hindu Undivided Family, represented by its Karta, and two other individuals as partners. Following a partition of the joint family, the firm was reconstituted, replacing the joint family partner with the individual members of that family as partners. The tax authorities sought to recover a refund previously granted for deficiency of profits, contending that the change in the constitution of the firm meant the business was discontinued and a new business commenced, thereby disqualifying the firm from relief.
Findings of Court:
The court held that the partition of the joint family and the subsequent reconstitution of the firm resulted in a change in the persons carrying on the business. It further held that the records of income-tax proceedings, including registration certificates and returns, are admissible for determining mistakes apparent from the record under the Excess Profits Tax Act.
Issues: (1) Whether the partition of a joint family and the reconstitution of a firm constitutes a change in the persons carrying on business within the meaning of Section 8(1) of the Act; (2) Whether the order of the Commissioner was valid under Section 20 of the Act on the ground that there was a mistake apparent from the record.
Ratio Decidendi: Coparceners of a joint family do not automatically become partners when the Karta enters a partnership on behalf of the family; their liability is based on status, not contract. Therefore, the dissolution of the joint family and the entry of individual members as partners constitutes a change in personnel. Additionally, since the proceedings under the Excess Profits Tax Act and the Indian Income-tax Act are interdependent, information from the latter is part of the record available for rectification under Section 20.
Result: Appeal dismissed.
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2. Whether partition of HUF and subsequent reconstitution of firm constitutes a change in persons under Section 8(1) and if the Commissioner's order involved a mistake apparent from record. (Para 5 , 7 , 8 , 10 , 11 )
3. Karta's entry into partnership does not make coparceners partners; partition of HUF results in the cessation of the HUF as a legal person under the Act. (Para 6 , 7 , 8 , 9 , 10 , 11 )
4. Partition of a joint family partner in a firm constitutes a change in the persons carrying on the business under Section 8(1) of the Excess Profits Tax Act. (Para 9 )
5. Appeal dismissed. (Para 12 )
6. Does a Karta entering a partnership make other HUF members partners?
No. When a Karta enters a partnership with strangers, other family members do not automatically become partners. Their liability for firm debts arises from their status as coparceners under Hindu Law, not from a partnership contract. (Para 6 )
7. Does the partition of a joint family partner constitute a change in persons under the Excess Profits Tax Act?
Yes. Since a joint family is defined as a person under Section 2(17), the partition of that family causes the joint family entity to cease to exist, resulting in a change in the personnel of the firm. (Para 9 )
8. Can records from income-tax proceedings be used to rectify mistakes under Section 20 of the Excess Profits Tax Act?
Yes. Section 22(1) of the Act allows information from statements or returns made under the Indian Income-tax Act to be used for the purposes of the Excess Profits Tax Act. (Para 10 )
Judgement
VENKATARAMA AYYAR, J., The firm of Bhagat Ram Mohanlal which is the appellant before us, was constituted on 23-8-1940, and registered under S. 26-A, Indian Income-tax Act. The Partners of 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. Mohanlal 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 profit for the business, the Excess Profits Tax Officer determined the deficiency of profits for the year at Rs. 53,571.
Section 7, Excess Profits Tax Act, hereinafter referred to as 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.
2. It should be mentioned that at the commencement of the assessment year 1944-45 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 former being entitled to 5 annas share 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 S. 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.
3. 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 S. 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 S. 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 car
