1. This is a reference under Section 66 (1) of the Income-Tax Act, 1922. The question referred for decision is in the following terms:
'Whether on the facts and in the circumstances of the case the firm of Ramakrishna Transports, Kalabasthi was entitled to registration under Section 26-A of the Act.'
2. The dispute relates to the assessment year 1950-60, the relevant accounting year being the year ending on 31-3-1959
3. The assessee is a partnership firm constituted under an instrument of partnership dated 27-3-1955. It carries on business in bus transport. Two of the partners in this firm (1) Sri Venugopala Reddy and (2) Rama-krishna Reddy, holding 3 annas share each are the co-parceners of a Hindu undivided family, the Kartha being Sri A. Balarama Reddy. The only other two partners Sri Venku Reddy and Sri M. Veerabhadravya holding 5 annas share each are strangers The firm was duly registered under Section 26A of the Income-tax Act. The share income of Sri Venugopala Reddy and Ramkrishna Reddy were being offered for assessment as the income of the Hindu undivided family and assessed by the Income Tax Officer accordingly Some years later the assessee came with the contention that there was a family partition as a result of which the two partners of the family became separated with effect from 1-4-1958 and that thereafter these two families held their shares on behalf of their respective branches of the family to which they belong. This case, advanced for the first time for the assessment year 1959-90 did not find favour with the Department. The assessee went in appeal, but without success, upto the stage of the Appellate Tribunal. The two partners of the firm were recognised as before only as co-parceners of Hindu undividedfamily. The Income-tax Officer. Tirupatirenewed the registration of the firm in theyear 1959-60 by his order dated 30-10-1960.Thereupon the Commissioner of Income-laxtook exception as he was of the view that twocoparceners representing the Hindu undividedfamily cannot enter into a valid partnershipwith strangers. He served a notice under Section 33Bof the Indian Income-lax Act on 12-10-1962.Then after hearing the assessee, he cancelledthe registration by his order, dated 29-10-1962.Aggrieved by this order, the assessee wentin appeal before the income-tax AppellateTribunal. On failure to get a favourable decision, he moved the Appellate Tribunal underSection 66 (1) of the Income-tax Act to statethe case. That is how the matter has comebefore us for decision.
4. The controversy turns mainly on the question of registration under Section 26A of the Indian Income-tax Act. The question of registration is of vital importance to an assessee in view of certain special benefits accruing therefrom. An unregistered firm is invariably charged as 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 profits. 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 6 (B) made under Section 59 of the Act. Further the authority concerned should be satisfied that the partnership is not only genuine but also a valid one. It is settled law that if a partnership is a genuine and valid one and the provisions of Section 26 and rules connected therewith are complied with, the Income-tax authority shall have no power to reject its registration We are in this proceeding concerned with the question of the validity alone for it is only on that basis that the registration of the firm has been cancelled, Partnership being purely a creature of contrad, the validity and legality must of course depend upon a number of factors. A partnership would be illegal and invalid if its object is forbidden by law or is opposed to public policy. The same would be the consequence if a partnership when permitted would defeat any provision of law. There are other grounds rendering the validity of a parlnership open to question. It is unnecessary for us to consider all these grounds for on the facts and circumstances of the present case we are concerned with the limited question whether more than one coparcener representing a Hindu undivided family can enter into a valid partnership with strangers. The question involving as it docs a consideration of the principles of Hindu law and also the Partnership Act steering clear of all possible conflict must necessarily present considerable difficulty. The coparceners of H Hindu undivided family are not partners within the meaning of that term in the Partnership Act. Partnership according to the Partnership Act, is the relation between persons who have agreed to share theprofits of the business carried on by all or any of them acting for all. The persons who have thus entered into the contract are called individually partners and collectively a firm. The relationship between coparceners in connection with joint family business is not based on contract but on status and is created by operation of law. That is why Section 5 of the Partnership Acl excludes the members of a Hindu undivided family carrying on family business as such from the description of the parlners. The members of a Hindu undivided family carrying on family business are therefore not partners. Nor is the joint Hindu family a firm within the meaning of the Partnership Act though that terminology may be used loosely in relation thereto. A joint Hindu family is a unit to which no outsider can be admitted by agreement; it is a status which can only be acquired by birth or adoption. Then again it must, as a unit, act through some person and the only person who can act is the Karta or manager who may be a single individual or several adult members. In relation to the family business in the naturt of trade, the rights and liabilities of coparceners constituting the family firm are therefore not to determined by exclusive reference to the Partnership Act. So long as the trade is being carried on by them and no strangers are associated with them in any manner its incidents must be regulated essentially by Hindu Law. These incidents must vary substantially from those of a partnership. Whereas the death of a coparcener or the managing member does not dissolve the joint family firm and property passes by survivorship, the partnership under the Partnership Act is dissolved ordinarily by the death of a partner. A coparcener cannot ask for an account of past profits or losses. But it is otherwise in a partnership. In a joint family firm ordinarily it is only the managing member who can act on behalf of the family and bind his coparceners by his acts; but sometimes for the convenience of trade or business by arrangement the amongst members not only one manager but several persons with equal powers are entrusted with the duty of managership. In such a case the act of any one will bind all the coparceners. The Manager or managers of the joint family firm have implied authority to contract debts and pledge the properties and credit of the family for the ordinary purposes of family business. No other person has such authority. But in partnership each is the agent of the other. There is also difference as to the extent of liabilities for debts contracted. These and other differences create considerable difficulty when the case on its particular facts and circumstances attracts the provisions of both the Hindu law and the law of partnership.
5. The instant case obviously is not one where the manager is carrying on family business with family funds without being associated with any stranger. It is in fact a case where two of the coparceners representing the family have entered into partnership with strangers in a business, the capital of which, to theextent of their share agreed upon, is derived from the property of the joint family. It is tettled law that it is competent to the manager of a joint family business acting on behalf of the family to enter into a partnership with strangers. The manager, by doing so, does not introduce the members of the undivided family into that partnership. Such members alone us have entered partnership with the strangers ere partners. The manager and such of these members are accountable to the family. The law on this subject has been staled by Mayne in page 398 of his hook 'Mayne on Hindu Law and Usage, 9th Edition' in the following terms:
'Where a managing member of a joint family enters into a partnership with a stranger, the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Partnership Act. In such a case the family as a unit does not become a partner but only such of its members as in fact enter into a contractual relation with the stranger, the partnership will be governed by the Act.'
This statement of law has been approved of by the Privy Council in Pichappa Chettiar v. Chokalingam Plllai, AIR 1034 PC 192 and also accepted by the Supreme Court in Charan Das Haridas v. Commissioner of Income Tax, Bombay North, Kutch and Sau-rastra, Ahmedabad, : [1960]39ITR202(SC) . 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 partner, but only such of its 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 busi-ness, 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 earned 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 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 Annamalai Chetty v. Murugesa Chetty, ILR (1903) 26 Mad 544 is analogous to that of a trustee. He or they in such cases occupy a dual position. As betwe.en the parties to the contract they are partners and their rela-tionship is regulated by the Partnership Act. They as a rule are personally liable for all the obligations under the contract as against the partner strangers. In relation to the family members they have a duty to account for the profits that they made. For purposes 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, Madras v. Bagyalakshmi & Co. : [1965]55ITR660(SC) 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-lax 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 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 famly purporting to hold 7 1/2 annas and 2 1/2 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 distinrf relationship under the Partnership Act and under the Hindu Law has to he 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. Bombay City v. Nandlal Gandalal, : [1960]40ITR1(SC) 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 coparceners who join the partnership are regarded quoad theother 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 rights are the assets of the family. We have recently held in Charandas Haridas v. Commissioner of Income-Tax, Civil Appeal No. 108 of 1957 decided on March 15, 1860 (AP) that in such a situation the matter has to be looked at in the light of three separate and independent brandies 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 part nership 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 approach applies with all its vigour to our case here.
6. While considering whether the part- nership as entered into is against law or is in valid we cannot but bear in mind the principles of law relating to coparcenary and see whether it has been violated to any extent.
7. 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 part ners. 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.
8. There may also be cases where the members not as coparceners or 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 Karta who re-presents 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, Punjab 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 capacity enter into partnership with the karta of the joint family. It is apt to quota 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 the partnership what is admittedly his separate property held in his individual capacity and unconnected with the 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, pro-perty which was his individual property, not acquired with the aid of or with any detriment to the joint family properly. 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 properly of the family, while he simultaneously enjoys the benefit of his separate propertv 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 separte 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 of 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 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
9. So far the law is well settled. Even so there arises a third question which in sub-stance seeks to demand a further clarification of the above propositions 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 be-come 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 properly 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 karla, if he is there, should not vis-a-vis the strangers figure as partners. The statement of law by Mayne as approved of by the Privy Council and the Supreme Court does permit such a contin-gency. The contracting members alone will be partners and they are responsible to the joint family in relation to their 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 26A 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-avis the strangers and other partners they may be distinct. Whatever the rights and liabilities vis-a-vis the other partners, they have a com-mon ground. With the family members in the coparcenary qua partnership, 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 Partnership Act and the Hindu law Thus each branch of law would have its operation in determining their various rights and lia-bilities. When the Hindu law on clear authority permits 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 pro-perty or funds. The Allahabad High Court in Ramkumar Ramniwas. In re, : [1952]22ITR474(All) . 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 makethe entire joint family liable for the debts of the partnership and be entitled to the benefits thereof. The Madras High Court in Bagya-laxmi & Co. v. Commissioner of Income-Tax, Madras : [1961]42ITR727(Mad) , 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 Na-rayan Onkarmal, I.T Ref No. 11 of 1947 decided on 16th March 1948 (Bom) accepted the principle that two or more members of a 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 M.P. v. Hukamchand Mannalal & Co. : [1965]57ITR213(MP) the Madhya Pradesh High Court has referred In 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 prevenf 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 the partnership with the outsiders is concerned they would he 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 enure for the benefit of the joint family does not make it any the less partnership for purposes of section 26-A.The above observations are to the effect that a partnership with strangers entered into by more than one coparcener representing 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.
10. But then in this connection we may also refer to the following observations of the Supreme Court in Firm Bhagai Ram Mohanlal v. Commissioner of Excess Profit Tax, Nagpur, AIR 1650 SC 374.
'In 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 properly. It was also held by the Privy Council in Sunder Singh Majtthia v. Commissioner of Income-Tax, United and Central Provinces, AIR 1942 PC 67 that there was nothing in the Income-tax Act to prohibit the 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 1840 is that the family was joint and that Mohanlal was its karta and that he entered into the partnership as karta on behalf of the joint family. It is difficult to reconcile this position with that of Chhotelal 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 eannot valldly 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 thekarta, not the others. The contention, therefore that Chotelal and Bansilal should be held to have become partners in the old firm tinder the agreement dated 23-8-1940 cannot be maintained.'
These observations, to our mind, but clarify the rule that the adult members of the joint Hindu family can become partners along with 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 Lachman Das' case. . 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.
11. The Madhya Pradesh High Court in : [1965]57ITR213(MP) 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 coparcenary 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.
12. In Pitamberdas Bhikhabhai & Co. v. Commissioner of Income-Tax. Gujarat, : [1964]53ITR341(Guj) the Gujaral High Court had to deal with a case where the father, Pithamberdas, purported to make a gift of Rs. 10,001 to each of his sons, Raman-lal and Jayantllal. 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 Jayantllal as partners in the business executing a deed of partnership showing that he was the absolute owner of the assels 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 indivi-dual capacity with specific shares. In this connection the learned Judges referred to the decision of the Privy Council in Supra and also the observations of the S.C. in : [1956]29ITR521(SC) Supra 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 coparcenary properly, the coparceners cannot become partners themselves. Section 5 of the Partnership Act makes this abundantly clear. The decision of the Allahabad High Court is S. C. Mulllck & Sons. In re, (1938) 6 ITR 89 is to the same effect, viz., that persons cannot at one and the same time be members of a joint Hindu family in respect of joint family property and be also members of a firm of which such properly iorms the asset. It may be noted here that In both the cases mentioned above there waa no element of strangers at all in the business.
13. 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 : [1956]29ITR521(SC) Supra. 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 26A 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.
14. We therefore answer the question in the affirmative. The Department shall the costs of the assessee. Advocate's fee is fixed at Rs. 100.