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1961 Supreme(Mad) 25
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE RAJAGOPALAN & THE HONOURABLE MR. JUSTICE SRINIVASAN
Bagyalakshmi and Company - Appellant
Versus
Commissioner of Income Tax, Madras - Respondent
Case No : No
Decided On : 24 January 1961
The partition of a Hindu undivided family does not affect the validity or genuineness of the main partnership, and the partnership agreement not specifying the correct shares of the partners in the firm does not render the partnership ineligible for registration.
Headnote:
PARTNERSHIP - Registration - Hindu undivided family - Partition - Effect on partnership - Whether partition of Hindu undivided family affects the registrability of a partnership firm in which the family is represented by one of its members - Whether the partnership agreement not specifying the correct shares of the partners in the firm renders the partnership ineligible for registration.
Fact of the Case:
A Hindu undivided family was represented in a partnership firm by one of its members. The family underwent partition, and the share owned by the family in the firm was divided among the members in various proportions. The partnership agreement continued to show the same shares as before the partition. The Income-tax Officer and the Appellate Assistant Commissioner rejected the contention of two partners that their real income from the partnership related only to a smaller share, as per the partition arrangement. However, the Tribunal upheld the contention of these two partners.
Finding of the Court:
The court held that the partition of the Hindu undivided family did not affect the validity or genuineness of the main partnership. The court further held that the partnership agreement not specifying the correct shares of the partners in the firm did not render the partnership ineligible for registration.
Issues: 1. Whether the partition of a Hindu undivided family affects the registrability of a partnership firm in which the family is represented by one of its members? 2. Whether the partnership agreement not specifying the correct shares of the partners in the firm renders the partnership ineligible for registration?
Ratio Decidendi: 1. The court held that the partition of a Hindu undivided family does not affect the validity or genuineness of the main partnership. The court reasoned that a member of a partnership can enter into a valid sub-partnership, whereby his share in the main partnership becomes divided between himself and others; notwithstanding that his real interest in the main partnership is reduced thereby, the genuineness of the main partnership cannot be questioned. Vis-a-vis that partnership that partner continues to possess the same interest as before and he would be only accountable to the members of the sub-partnership with regard to the income derived from the share in the main partnership. 2. The court held that the partnership agreement not specifying the correct shares of the partners in the firm did not render the partnership ineligible for registration. The court reasoned that the Income-tax Department is not entitled to say that each and every one of the members of the erstwhile joint family becomes, by the mere fact of partition, a member of the partnership.
Final Decision: The court answered the first question in the negative, holding that the order of the Commissioner cancelling the registration of the firm for the three assessment years was erroneous. The court answered the second question in the affirmative, holding that the firm was entitled to registration for those years.
SRINIVASAN, J.
For the assessment year 1952-53, a firm called Messrs. Bhagyalakshmi land Co., which were the managing agents of the Palani Andavar Mills Ltd., Udamalpet, applied for registration, Though the firm was originally constituted in 1934, it remained unregistered. For the assessment years 1939-40 and 1940-41, it had sought and obtained registration, but subsequently, there had been no applications for renewal of registration. There had been changes in the constitution of the firm in 1941 and 1948. In 1950, a fresh partnership deed was drawn up. According to this document, of the several partners, one Guruswami Naidu was shown as the owner of a 7 annas 6 pies share and one Venkatasubba Naidu of a 2 annas 6 pies share. Each of the three other partners had a 2 annas share. On the basis of this partnership arrangement, the firm sought for and obtained registration for 1952-53. Renewal of registration was also granted by the Income-tax Officer for the assessment years 1953-54 and 1954-55 In the exercise of his revisional powers under section 33B of the Act, the Commissioner of Income-tax commenced proceedings. Now, it would appear that both Guruswami Naidu and Venkatasubba Naidu were members of a Hindu undivided family and the income derived from this firm in respect of the ten annas share owned by these two persons was treated for income-tax purposes as that of a Hindu undivided family. The Hindu undivided family underwent partition. According to this partition deed executed on August 24, 1950, the ten annas share owned by the Hindu undivided family in the firm was divided among the members of the family in various proportions. Notwithstanding this partition, the share of the family in the firm continued to be represented in the partnership arrangement in the same manner as previously. It would further appear that on the assessment of Guruswami Naidu and Venkatasubba Naidu on their 7 1/2 and 2 1/2 annas share respectively, these two persons contended that their real income from the partnership related only to a two anna and one anna four pies share respectively, the rest of the income derived from the ten anna share owned by the Hindu undivided family going to the other members of the family in accordance with the partition arrangement. This contention, viz., that the real income of these two persons must be computed on the basis of the partition, was rejected by the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal, however, upheld the contention of these two personsOn such finding of the Tribunal regarding the extent of the assessability of Guruswami Naidu and Venkatasubba Naidu, the Commissioner proceeded to hold that the partnership agreement did not specify the correct shares of the partners in the firm for the reason that the two persons did not in fact own the 7 1/2 and 2 1/2 annas shares in the firm as specified in that deed. On a notice being issued to the firm, time was applied for by the firm for submission of a reply, but the Commissioner, taking the view that the point involved was not one calling for any preparation or study involving time, proceeded to cancel the registration granted to the firm for the three assessment years 1952-53, 1953-54 and 1954-55. He further directed the Income-tax Officer to re-do the assessment as on an unregistered firm
In the appeal before the Tribunal it was contended that the disruption of the Hindu undivided family did not in any way affect the position of the two partners, Guruswami Naidu and Venkatasubba Naidu, in the firm and that at best the effect of the partition was only to bring into existence a sub-partnership. The Tribunal was apparently inclined to the view that while the division of income earned on a share held by a partner of a firm in whatever manner the earner thereof chose would not affect the validity or the genuineness of the main partnership, this was a case where the corpus of the share itself was affected, in that the tw
