Sarjoo Prosad, C.J.
1. This is a reference made at the instance of the Commissioner of Income-tax, Assam, under Section 66(2) of the Income-tax Act, 1922 (Act XI of 1922). The only point which the Tribunal has formulated for our consideration is-
'Whether on the facts and in the circumstances of the case the Tribunal was right in holding that there was a partial partition of the Hindu undivided family and a valid partnership was brought into existence thereafter and in allowing registration to the respondent on that basis under Section 26A of the Indian Income-tax Act?'
2. The relevant facts stated may be briefly recapitulated. A Hindu undivided family consisting, of Lachminarain Singhania, the father, and four sons governed by the Mitakshara school of Hindu law was being assessed for income-tax as such till the assessment year 1952-53. It appears to have had two sources of income (1) from business and (2) from immoveable properties. During the assessment year 1953-54, the assessee claimed that a partial partition had been effected in respect of the business and that with effect from the beginning of Ramnavami 2009 Sambat (3-4-1952) a partnership with definite shares had been constituted between the father and the four sons, who were the coparceners of the joint family.
The assessment year commenced on the 3rd April, 1952, and the instrument of partnership on which the assessee relied came into being on 4-4-1952. An application under Section 26A of the Income-tax Act was, therefore, filed for registration of the partnership along with a copy of the partnership deed. The Income-tax Officer refused registration. He held that the deed required registration, because the capital of the family in the balance sheet represented the income from business as well as landed properties and a division of the capital, therefore, meant the division of the landed properties also.
He further held that the terms of the deed of partnership as contained in paragraphs 5 and 10 of the deed were contradictory. On appeal, the Appellate Assistant Commissioner held that what was divided was only the business capital including the net income from the immoveable properties and therefore, registration of the document was not necessary. He further did not find any discrepancy between the deed and the actual division of capital according to the balance sheet, as erroneously observed by the Income-tax Officer. He accordingly directed that the assessee should be granted registration on the strength of the partnership deed.
Against that order the Department preferred an appeal to the Tribunal. The Members of the Tribunal, who heard the matter, were divided in
their opinion. The Judicial Member appears to have agreed with the view of the Income-tax Officer. He was of the opinion that the instrument on which the
assessee relied for purposes of registration did require registration under the Registration Act and the alleged partial partition pleaded by the assessee in respect of the partnership business was a mere pretence. He, therefore, held that registration of the partnership under the law should be refused.
The Accountant Member on the contrary, held that the claim of the assessee for registration under Section 26A of the Income-tax Act could not be resisted. He found that there was a genuine partition of the business assets of the Hindu undivided family and the various coparceners did enter into a valid partnership as evidenced by the instrument of 4-4-1952. He further observed that the mere fact that there was a property account in the business books to which all income from the property
was credited and all expenditure on property was debited, did not establish that the capital cost of the properties was included in the capital of the business.
3. In view of this difference of opinion between the Members of the Tribunal, the matter was referred to another Member for determination of the point whether the registration application under Section 26A should or should not be accepted. The third Member agreed with the view of the Accountant Member with the result that registration under Section 26A of the Act was allowed in favour of the assessee. In substance therefore, the majority of the Members of the Tribunal found that there was no intention at any stage to divide the immoveable properties and no such division in fact had taken place; all that the partners agreed to do was that from the date of partnership, they would divide the income from the immoveable properties in certain proportions and as it was a matter of agreement between the parties concerned, the plea of partial partition effected between the members of the coparcenary was upheld. It was further found that the partnership as such did not own the immoveable properties and on the strength of the instrument of partnership, the assessee was entitled to registration.
4. The confusion as to the alleged discrepancy about the state of the accounts to which reference had been made by the Income-tax Officer and the Judicial Member of the Tribunal was also satisfactorily explained. The majority observed that even before the date of the instrument of partnership, there was a property account in the books of the Hindu undivided family. The capital cost of any of the immoveable properties owned by the family was never debited in the account books. All that was done was to show the income from each property in the property account on the credit side and the expenses of maintenance of such properties on the debit side of that account and the balance at the end of every year was transferred to the profit and Joss account. In the assessment year also in view of paragraph (10) of the partnership deed, the net income of the property account was transferred to the profit and loss account of the firm. The above findings are very material and have an important bearing on the point under investigation.
5. The partnership deed is a part of the statement submitted by the Tribunal and as the arguments turn a great deal upon the interpretation of this document, it may be useful to refer to some of the relevant paragraphs thereof : The document opens with the recital that the members of the undivided family had been hitherto carrying on business with Lachminarain Singhania, the father, as the karta thereof, the family consisting of himself
and his four sons; the business was run in the name and style of 'Ramchandra Lachminarain' at Shillong and Gauhati and consisted amongst others of a cinema house and a medical store.
The document goes on to state that due to differences and dissensions amongst the members and also due to the old age of the Karta, who could not exercise effective control on the affairs of the family and its business, the parties agreed that in respect of the business they should enter into a contractual agreement with effect from Ramanavami 2009 Sambat (3-4-1952). It was further agreed that all the immoveable properties of the family should remain joint, but the income received should be divided between the partners in proportion to their shares in the firm.
Paragraph 1 of the document recites that the name of the partnership firm shall be 'Ramchandra Lachminarain' with its head office at Shillong and branches at Gauhati, while other branches may be opened later, if parties so desire. Paragraph 2 says that the business of the partnership should be deemed to have commenced from Chait Sudi 2009 Sambat. Paragraph 3 gives the shares of the five partners, the father Lachminarain Singhania getting four annas share, and the four sons getting three annas share each, thus making a total of 16 annas. Paragraph 4 enumerates the nature of the business carried on by the firm in grocery, medicines, wine, cinema, etc. Paragraph 5, which is an important paragraph, recites as follows:
'That the capital of the firm shall be as found on adjustment of the books of account and has been divided between the parties in proportion to their shares and credited to their individual account; on and from Chait Sudi Sambat 2009 and if more capital will be required for the business the parties shall provide the same, irrespective of the extent of their shares.'
Paragraphs 7, 8 and 9 provide that the partnership would subsist even after the death or retirement of any of the aforesaid partners and his heirs will be substituted in his place, if he or they consent to it; but if any partner desires to retire, he may do so after giving a month's notice to the other parties; and the parties were not entitled to transfer their shares to outsiders without the written consent of the others. Another important paragraph is para 10, which says :
'That all the immoveable properties belonging to Ramchandra Lachminarain shall remain joint but its rent shall be divided between the partners in proportion to their shares in the firm and the firm shall not be liable for the personal debts of any one of the partners.'
It is not necessary to refer to the other terms of the document, which are immaterial for the present.
6. In the background of the facts stated above, we have to consider the question under reference. We have to determine first of all whether there was a partial partition of the Hindu undivided family and a valid partnership was brought into existence thereafter. If this part of the question is answered in the affirmative, then it follows as a matter of course that the assessee would be entitled to registration on the strength of the partnership instrument under Section 26-A of the Income-tax Act. If the partnership is genuine, the partners as mentioned in the deed will be entitled to the benefit of the instrument during the assessment year under consideration.
On the findings and the statement of facts submitted by the Tribunal, there appears to be hardly any doubt that there was a partial partition of the assets of the Hindu undivided family and
a valid partnership was created in respect of the business owned by the family members as recorded in the instrument of partnership, which hereafter governed the rights and liabilities of the partners in the business concerned, irrespective of their interest in the immoveable properties belonging to the joint family. Under Hindu Law, it is well settled that the members of a coparcenary are entitled to run a partnership business of their own, which may consist of all or some of the members of the coparcenary or in some cases even in partnership with strangers.
This they can do quite independently of the other joint family properties. In this case therefore, if the members of the coparcenary chose to constitute a business of partnership under a partnership instrument and agreed that the partnership business should be hereafter regulated by the terms of that instrument, there is nothing in law to prevent them from doing so, even though in other respects the members continue to be joint and hold joint family properties.
7. The main question, which arises under Section 26-A of the Income-tax Act, is whether on the terms of the above document, the firm as constituted by the instrument of partnership, was entitled to registration. On the authority of Section 26-A an application can be made on behalf of a firm to the Income-tax Officer for purposes of registration provided the firm is constituted under an instrument of partnership and the instrument specifies the individual shares of the partners. Of course, the Income-tax Officer has to be satisfied that the partnership is a genuine partnership and exists in accordance with the terms of the instrument.
In this case, the partnership deed gives all the particulars that are necessary, the names of the partners have been mentioned, the shares have been specified and on the face of it, it is difficult to take an exception to the instrument of partnership.
8. The learned counsel for the Department has developed his arguments on the lines indicated in the orders of the Income-tax Officer and the Judicial Member of the Tribunal. He contends that there could have been no partial partition of the assets of the joint family without a division of all the joint family properties; and at any rate, he urges that on the terms of the document, the so-called partial partition cannot be held to be genuine. As a bare proposition of law that there can be no partial partition of property belonging to a Hindu joint family governed by the Mitakshara school of Hindu law, the proposition is quite untenable.
Neither in the Hindu law nor in the Income-tax Act there is anything to prevent such a partition of the joint family property. In Hindu law, partition may take place by mere severance or disruption of the joint family status and definition of shares of the various coparceners or by division of the properties by metes and bounds, nor is there anything in the law to prohibit the members of the joint family by mutual agreement from excluding a joint family property from the joint family assets and in treating that property alone as belonging to the members in defined shares.
Even if there is a partial partition of some of the joint family assets or an item of property is alienated to a stranger or an asset of the family is divided and constituted into a partnership specifying definite shares of the partners, the family may still continue to be joint and continue to own other properties jointly. The assessment on the undivided Hindu family would then be confined to the income of the property so remaining undivided and the income of the property partitioned or alienated or constituted into a partnership would be excluded from computation of the income of the family for assessment.
Therefore, if in this case the members of the coparcenary agreed that the business could not be satisfactorily carried on as a part of the joint family asset, but mat a partnership was necessary in order to make the business run smoothly, the mere fact that the other properties of the family continued to be held jointly by the members of the family or as tenants in common, would not invalidate the agreement constituting the partnership in respect of the business. Even for partition of the immoveable properties no registered deed of partition is necessary and the members of the family by mutual arrangement can enjoy the properties in definite shares giving a somewhat larger share to one coparcener or for the matter of that to the father and erstwhile Karta of the family.
9. The point has been well illustrated in a decision of the Privy Council in Sunder Singh v. Commr. of Income-tax . There, the contention advanced on behalf of the Commissioner of Income-tax was that for the purposes of the income-tax, the members of an undivided Hindu family could not enter into a partnership in respect of a portion of the joint family property and partition it among themselves. Their Lordships repelled the contention and held that Section 25A of the Income-tax Act contained no warrant for any such prohibition. In other words, the decision clearly implied that it was open to the members of the coparcenary to enter into such a partnership in respect of the joint family business. They further proceeded to observe as follows:
'No difficulty whatever in the assessment of a Hindu undivided family is caused--or was ever thought to be caused--by the facts that in one year it has certain assets and certain income therefrom and that in the next year it is found to have parted with one asset and to be no longer in receipt of the same income. The same assessee has a different income in each year--that is all. It matters nothing whether the particular asset no longer possessed by the undivided family has become the separate property of a member or belongs to a stranger''.
10. In the instant case, we are of course not concerned with the assessment of a Hindu undivided family, but we are concerned to find whether there could be a valid partnership created by the coparceners in respect of the joint family business, by a partnership deed defining the shares of the partners. If the answer is in the affirmative, as in the above case the Privy Council did answer, then the partnership is doubtless entitled to registration under Section 26A of the Act, The above principle has been recognised and adopted in several other cases some of them almost parallel to the case in hand.
In Bansidhar Dhandhania v. Commr. of Income-tax, B. and O. : [1944]12ITR126(Patna) there was no division of any of the landed properties between the members of a particular coparcenary (Group A), but the profits and losses of the business were adjusted every year according to the shares of the members. The Income-tax authorities refused to register the firm on the ground that even assuming there was a partition in the family it was only a partial partition, namely of the business alone which they would not recognise.
The learned Judges did not accept this position as correct and they held that though the family of the assessee may be regarded as an undivided family for the purposes of Section 25A of the Act, inasmuch as the landed properties had not been divided; but there was nothing in Section 25A to prohibit the members
of a Hindu undivided family from entering into a partnership in respect of a portion of the joint property, which they had partitioned among themselves and the business carried on by the members of that family was, therefore, not the business of a Hindu undivided family, but was the business of persons named as partners in the partnership deed.
The business was, therefore, held entitled to registration under Section 26A of the Income-tax Act. It is to be noticed from the judgment of Chatterji, J., who was a party to that decision, that an important defect to which his attention was drawn on behalf of the Department in the partnership instrument related to the fact that there was no mention of any capital invested in the new business and that no capital accounts were started by the partners, but omissions of these details in the deed were held not to affect the validity of the partnership. The learned Judges in that case followed the dictum of the Privy Council in Sundar Singh Majithia's case cited earlier. The same view has prevailed in other High Courts also.
In Meyyappa Chettiar v. Commr. of Income-tax, Madras AIR 1951 Mad 506, the main question was of course whether the partition of properties, belonging to a Hindu joint family governed by the Mitakshara school, satisfied the requirements of Section 25A of the Act, but one of the subsidiary questions involved was whether the division of the business brought about by the father in exercise of his superior power was valid and effective, notwithstanding the unequal nature of the division.
The learned Judges in deciding the question, relied upon the observations of the Privy Council as an authority for the position that even if there was a partial partition or an item of property was alienated to a stranger or an asset of the family was divided and a partnership was constituted, as the family continued joint and continued to own other properties, the assessment on the basis of undivided Hindu family would be confined to the income of the property so remaining undivided, and the income of the property partitioned or alienated would be excluded from computation of the income for assessment.
It followed, in other words, that the partnership formed by the members of the coparcenary became a separate unit of assessment, no longer appertaining to the joint family hotchpotch; and the inequality of the distribution of shares did not affect the genuineness of the partnership, if it was as a result of voluntary agreement between the parties. In such cases, even if the arrangement affected the shares of minors, the arrangement would not be void, but only voidable at the instance of the minor affected when the latter attained majority.
11. A case more in point is the decision in Jakka Devayya and Sons, Tenali v. Commr. of Income-tax, Madras AIR 1953 Mad. 315. There an identical question arose whether a deed of partnership in respect of cloth business continued to belong to the Hindu family or it should be treated as a valid partnership document for purposes of registration under Section 26A of the Income-tax Act, The document contained a resolution to keep the houses and house-sites joint, and that as there was no possibility to divide the cloth business consisting of cloth, furniture, etc., the business should be carried on jointly in the name of Jakka Devayya and Sons.
Regarding the business, the profits of each sharer were separately shown and the balance that was available in the accounts of the business was also separately entered. The whole stock was valued. In the partnership deed, the shares of the three sharers were fixed at one-third each and as there was no fixed capital for the business during the time when the business was joint family business, it was stated in the document that they had invested amounts standing to the credit of each in their individual accounts as well as the amount credited in the name of Jakka Devayya and Sons as capital.
If any further amount was required for the business, it was provided in the deed, that it should be borrowed either in cash or in kind. It was held in the circumstances that even though the rest of the properties and the status of the family regarding them may continue to be joint, the only effect of taking out an asset from and out of the assets of the joint family was not to attract Section 25A of the Act, but to make it an asset whose income could not be taken into consideration in computing the income of the joint family for the purpose of assessment.
It has to be assessed separately. It, therefore, followed from the above whether in fact the family houses and house-sites were divided or not physically, if it was established that the joint family business was partitioned in definite portions, then it would be taken out of the property of the joint family. In other words, it was held that there was a valid partnership constituted. It was also pointed, out that though it was indicated in the document that the business should be carried on jointly, it did not in the context mean as joint family property, but that the intention to carry on the business jointly, in the context and reading the recital in the partnership deed, could only be that they intended to carry on the business as a separate firm. 'Joint' in the context did not mean 'as joint family property'.
12. The above decisions, with which I respectfully agree in principle, leave no doubt in the mind that although the other properties of the family may continue to be joint or jointly held by the coparceners, so far as the business was concerned, there could be a valid partnership constituted between the partners, who were the erstwhile members of the coparcenary. The main attack of the Department is based upon the recitals in paragraphs 5 and 10 of the document. As I have shown earlier, paragraph 5 recites that the capital of the firm shall be as found on adjustment of the books of account and had been divided between the parties in proportion to the shares specified in the partnership deed and credited to their individual accounts from the commencement of the partnership and if further capital was required, the parties were to provide the same irrespective of the extent of their shares.
It has been argued that the capital of the firm included both the income received from the immoveable properties as also the income from the business and therefore, without a division of the immoveable properties, there could be no division of the business alone. This point has been already explained by the majority of the Members of the Tribunal, who observed that there was some confusion about the statement in the accounts. The Income-tax Officer did not appreciate the fact that the capital value of the landed properties was not at all a part of the capital.
What was divided was the business capital including the net income from the properties and as the capital cost of the landed properties did not form part of the business capital as shown in the balance sheet, such cost was not divided at all. No exception, therefore, could be taken to the document on that ground. When a business is conducted by a joint family, there need not be separately an allocation of capital for running the business. The joint family funds may from time to time supply the necessary capital for the successful prosecution of the business, but it became necessary to fix the
capital when the business was constituted a partnership business, and the document came into existence, At that time, therefore, the parties could adjust the net income from the landed properties and divide that income between the partners in proportion to their shares as forming the capital of the firm, which started functioning under the partnership
deed. Paragraph 10 of the document says that all the immoveable properties belonging to the family Ramchandra Lachminarain shall remain joint, but its rent shall be divided between the partners in proportion to their shares in the firm. Now much
controversy centres on this paragraph.
It is contended that although the immoveable properties are to remain joint, the rent is to be divided between the partners in proportion to their shares; which means, in other words, that there is in effect also a division of the joint family properties and the document requires registration. It is
also contended that the shares mentioned in the partnership deed are not in accord with the shares, which under Hindu law, would accrue to the members of the family in case there was a regular partition of the joint family properties.
In case of a regular partition, the shares would be undoubtedly equal, but there is nothing to prevent the members of the joint family from coming to an agreement under which they may allot a larger share of the income to the Karta and although they may continue to hold the properties jointly, they may choose to divide the income in certain proportions as agreed between them. As I have already said, in Hindu law, there is nothing to prevent the parties from coming to any such agreement, nor is a formal deed of partition necessary for this purpose. As to in what manner the members of the family have been enjoying the properties between themselves may be determined from the facts and circumstances of the case and the conduct of the parties concerned.
Therefore if the parties agree to divide the income from the joint family properties in certain proportions amongst the members of the coparcenary, it cannot be said that necessarily there should be a registered document for that purpose; but, whatever the effect of paragraph 10 of the instrument may be, it does not, in my opinion, invalidate the constitution of the partnership in respect of the family business under the terms of the partnership deed. It would be a matter of detail whether the Department will continue to assess the joint family as such in respect of the income from the immoveable properties, or they will treat it as the separate income of the individual members.
The mere fact, therefore, that para 10 has been inserted in the document does not, in my opinion, affect the legal position and render the constitution of the partnership, which is otherwise valid and legal, invalid; much less is it a mere pretext to avoid payment of income-tax. While discussing some of the cases referred to above, I have already shown that objections like these have not found favour in pronouncing upon the validity of the partnership instrument for purposes of registration under Section 26A of the Income-tax Act. In the circumstances, therefore, my answer to the question under reference is, as held by the Tribunal, in favour of the assessee.
13. As the Department has failed, the assessee should be entitled to his costs of this application, which I would assess at Rs. 150/-
H. Deka, J.
14. I agree.