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Commissioner Of Income-Tax, Bombay City v. Nandlal Gandalal
Factual and Procedural Background
A Hindu undivided family (HUF) was carrying on a cloth business at Wadhwan in Kathiawar, which was outside the taxable territories under the Income Tax Act. Two coparceners of this family, Gandalal and Nandlal, entered into a partnership in a business called Amulakh Amiehand & Co., which operated within the taxable territories. The legal question arose whether this partnership activity by two coparceners renders the entire Hindu undivided family a resident within the meaning of the Income Tax Act. The matter was referred for determination of the correct interpretation of residence of a Hindu undivided family under the Act.
Legal Issues Presented
- Whether the Hindu undivided family is resident in the taxable territories within the meaning of the Income Tax Act by virtue of two coparceners carrying on business in partnership within those territories.
- What is the precise legal significance of the phrase "the affairs of the Hindu undivided family" in the context of residence under section 4A(b) of the Income Tax Act?
- Whether the control and management of a partnership business carried on by individual coparceners can be attributed to the Hindu undivided family for tax residency purposes.
Arguments of the Parties
Advocate General's Arguments
- The Hindu undivided family should be held resident in the taxable territories because two coparceners managed business affairs within those territories.
- The control and management of the partnership business by coparceners equates to control and management by the family itself under the Income Tax Act.
Court's Position (Respondent's Viewpoint Implicit)
- The partnership is contractual between the individual coparcener and other partners, not between the family and the partners.
- The family has no control over the partnership business; control and management rest solely with the individual coparcener.
- The mere fact that the family may be liable to pay tax on profits attributable to coparceners does not make the partnership business an affair of the family.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| V.V.R.N.M Subbayya Chettiar v. Commissioner Of Income Tax, Madras | Partnership activities by a Karta do not establish residence of the Hindu undivided family if control and management are not situated within taxable territories. | The Supreme Court's dismissal of partnership activities as a test of residence supported the view that partnership business is not the family's affair for residence purposes. |
| Commissioner of Income-tax v. Erin Estate | Affairs referred to in s. 4A(b) relate to business income and profits, not private or domestic affairs of individual partners. | The court agreed that the partnership affairs are those of the individual coparcener and not the joint family, supporting the distinction between partnership business and family business. |
Court's Reasoning and Analysis
The court began by examining the definition of residence for a Hindu undivided family under section 4A(b) of the Income Tax Act, which presumes residence unless control and management of the family's affairs are wholly outside taxable territories. The court clarified that "affairs" must be understood in the context of income tax and relate to taxable business activities, not private or domestic matters.
It was emphasized that a partnership formed by individual coparceners is contractual between those individuals and their partners, not involving the Hindu undivided family as a whole. Control and management of the partnership rest solely with the individual coparcener, not the family. Although the family may be liable to pay tax on profits attributable to the coparcener, this does not convert the partnership business into an affair of the family.
The court distinguished between a business carried on directly by the Hindu undivided family, where the family exercises control and management, and a partnership business carried on by individual coparceners, where the family has no such control.
The court relied on the Supreme Court decision in V.V.R.N.M Subbayya Chettiar, which held that partnership activities by the Karta do not amount to control and management of the Hindu family’s affairs within taxable territories. Similarly, the decision in Commissioner of Income-tax v. Erin Estate was cited to support the principle that the affairs taxed under s. 4A(b) relate to business income and not private affairs of partners.
Accordingly, the court concluded that the existence of partnership business by two coparceners within taxable territories does not render the Hindu undivided family resident thereunder.
Holding and Implications
The question whether the Hindu undivided family was resident in the taxable territories was answered in the negative.
The court upheld the view that partnership business activities conducted by individual coparceners do not constitute control and management of the Hindu undivided family's affairs for the purpose of determining residence under the Income Tax Act. The direct consequence is that the Hindu undivided family is not deemed resident merely because some coparceners carry on business in partnership within taxable territories. No new precedent was established beyond affirming existing principles as applied to the facts of this case.
Chagla, C.J:—
A rather interesting and important question arises on this reference, and the question is whether under the circumstances of the case a Hindu undivided family was resident in the taxable territories within the meaning of the Income Tax Act.
Now, one or two facts only need be stated in order to decide the question that has been submitted to us. A Hindu undivided family was carrying on business in cloth at Wadhwan in Kathiawar which was at the relevant date outside the taxable territories. Two coparceners of this family, Gandalal and Nandlal, became partners in the business of Amulakh Amiehand & Co., which was carried on in the taxable territories. The question that falls to be considered and decided is whether the fact that the two coparceners of a Hindu undivided family carried on business in partnership within the taxable territories renders the Hindu undivided family a resident within the meaning of the Income Tax Act.
Turning to the definition of a resident, when it applies to a Hindu undivided family we find the definition in s. 4A(b).
“A Hindu undivided family, firm or other association of persons is resident in the taxable territories unless the control and management of its affairs is situated wholly without the taxable territories.”
Therefore, the presumption that arises is that a Hindu undivided family is resident in the taxable territories, but it is open to the Hindu undivided family to rebut that presumption by establishing that the control and management of its affairs are situated wholly without the taxable territories, and the interesting question that we have to decide in this reference is what is the exact significance to be attached to the expression “the affairs of the Hindu undivided family”. It is clear that the affairs contemplated by this definition are not the private or domestic affairs of the family. They must be affairs which have some reference to the Income Tax Act itself. The Income Tax Act is concerned with taxation and it is in relation to taxation that we must construe the expression “affairs”. What is suggested by the Advocate General is that inasmuch as two coparceners of the family looked after this business the Hindu undivided family must be held to have control and management of this particular affair within the taxable territories.
Now, we must first clarify the position in Hindu law with regard to a coparcener entering into partnership with others in carrying on a business. The partnership that is created is a contractual partnership and the partnership is between the coparcener individually and his other partners. The partnership is not between the family and the other partners. If the coparcener represents the Hindu family in the partnership, then undoubtedly he has an obligation to account to the family for profits made by him in the partnership. But it is equally clear that the family has no control whatsoever with regard to the affairs of the partnership. The other partners would refuse to recognise the fact that one of their partners is accountable for the profits made by him to the family. Therefore, as far as the partnership is concerned, the control and management is in the hands of the individual coparcener who is the partner and not the family. Now, can it be said that the mere fact that the Hindu family has to pay tax in respect of profits which would be attributable to the share of the coparcener renders the business itself the affairs of the partnership? Let us look at the different position that would arise when a Hindu family carries on a business itself when the business is its own and not a partnership business. In that case the business is the affair of the family; the family is in control and management of that business; it can give directions as to how the business can be carried on; and it can deal with all the questions that arise in the course of the business. But when the business is a partnership business in which one coparcener is a partner, undoubtedly on behalf of the family, the position is entirely different. We might put the matter in this way that when a coparcener carries on business in partnership on behalf of the Hindu family, the affair is of the coparcener and not of the family, but when the business is carried on by the family itself then it is the affair of the family and not of the coparcener or coparceners.
Now, this question came to be considered by the Supreme Court in V.V.R.N.M Subbayya Chettiar v. Commissioner Of Income Tax, Madras.(3) In that case the Karta of the Hindu undivided family was living in Ceylon. He had property in British India and also he had a business in Burma and in Saigon, and in the accounting year he came to British India and lived here for about 101 days. While he was in British India he started two partnership businesses, and the question arose, which the Supreme Court had to consider, whether the Karta controlled and managed the affairs of the Hindu undivided family within the taxable territories, and the Supreme Court dealt with different pieces of evidence which had been considered by the Income Tax Authorities and the High Court, and with regard to the formation of two partnerships by the Karta the Supreme Court dismissed that evidence with the remark that the starting of two partnership businesses were mere activities on the part of the Karta which would be no test of residence as far as the Hindu family was concerned. Therefore, the view of the Supreme Court seems to be that even though a partnership business may be a profit making activity of the Hindu family, it would not be the affair of the Hindu family in the sense in which that expression is used in the Income Tax Act, and Mr. Justice Fazl Ali in his judgment also points out that the word “affairs” must mean affairs which are relevant for the purposes of the Income Tax Act and which have some relation to income. But from this it does not follow that every activity by a coparcener or even by a Karta, which activity may result in profit, becomes the affair of the Hindu undivided family.
The Advocate General relied on a decision of the Madras High Court reported in Commissioner of Income-tax v. Erin Estate,(4) and the only relevant passage is at page 420 where the learned Judge of the High Court points out that the affairs referred to in s. 4A(b) are affairs which have some relation to the business whose income, profits and gains are sought to be taxed and not the private or domestic affairs of the individual partner having no relation to the firm's business. With respect, we agree with that view, but as we have pointed out in this particular case the affair is the affair of the coparcener and not of the joint family.
The result is that we must agree with the view taken by the Tribunal and we must answer the question submitted to us in the negative. Commissioner to pay the costs.
Attorney for Applicant: N.K Petigara.
Attorney for Respondent: Sanat P. Mehta.
Answer accordingly.
P.M.P
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