Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax References Nos. 61 and 77 of 1963

Judges

Mody
A.C.J
K.K Desai, J.

Acts

section 66(2) of the Indian Income-tax Act, 1922.2.

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Smart Summary

Structured Summary of the Opinion — Common Judgment by Mody, A.C.J.

Factual and Procedural Background

This is a common judgment in I.T.R. No. 61 of 1963 ("the first reference") and I.T.R. No. 77 of 1963 ("the second reference"), both references under section 66(2) of the Indian Income-tax Act, 1922. The important materials and questions arising in both references are common; the difference is only in the identity of the assessee in each case.

Prior to S.Y. 1997 (1940-41) Champaklal Dalsukhbhai and Mulchand Jambubhai (among others) were members of a joint undivided Hindu family which became divided on Aso Vad 30, S.Y. 1997. Each of Champaklal and Mulchand was a partner in four firms: (1) Chhaganlal Kasturchand, (2) Kasturchand Amarchand, (3) Aswin and Co., Bombay, and (4) Vijaykumar Ramanlal and Co. (the "fourth firm"). The fourth firm was started in S.Y. 2005.

For twelve assessment years (1944–45 to 1955–56, accounting years S.Y. 1999 to S.Y. 2010) both had included their shares of profits of all four firms in their individual returns. For the assessment year 1956–57 (accounting year S.Y. 2011) each filed returns (with identical covering letters dated 26 October 1956) stating that they had declared status as Hindu undivided family (HUF) instead of individual through misapprehension and sought assessment as karta of their respective HUFs; the Income-tax Officer accepted that position and assessed for S.Y. 2011 on the basis that each had made the return as karta of an HUF.

For the next accounting year S.Y. 2012 (assessment year 1957–58) each filed a return in which the shares of the first three firms were shown as HUF income but the share from the fourth firm was shown in separate returns as individual income. Each sent an identical covering letter dated 30 November 1957 explaining that inclusion of the fourth firm's share in the prior return had been a mistake and asserting that they had become partners in the fourth firm in their individual capacities (stating there was "no nucleus of the joint family" involved and that no capital of their own had been contributed to the fourth firm).

The Income-tax Officer assessed the share from the fourth firm as HUF income; the Appellate Assistant Commissioner confirmed that assessment. On appeal to the Income-tax Appellate Tribunal (two different Benches heard the two appeals), the Tribunal reversed the Appellate Assistant Commissioner in the first reference (Champaklal) and held that Champaklal was a partner of the fourth firm in his individual capacity. In the second reference (Mulchand) the Tribunal upheld the Appellate Assistant Commissioner and treated Mulchand's share as HUF income. The first reference was made by the Commissioner of Income-tax; the second reference was made by Mulchand (the assessee).

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the share from the firm of M/s. Vijaykumar Ramanlal and Co. was rightly assessed in the hands of the Hindu undivided family of which the assessee is the karta for the assessment year 1957–58? (first reference — original formulation)
Whether, on the facts and in the circumstances of the case, the Tribunal erred in law or acted without evidence in holding that the assessee was a partner in Vijaykumar Ramanlal and Co. in his capacity as the karta of the Hindu undivided family? (second reference — original formulation)
After correction of an error in framing, whether the Tribunal erred in law in holding that for the assessment year 1957–58 the assessee was a partner in Vijaykumar Ramanlal and Co. in his individual capacity? (reframed question in the first reference)

Arguments of the Parties

Department's Arguments (Mr. Joshi)

The department argued that because Champaklal and Mulchand had contributed their respective shares of capital to the firm of Messrs. Chhaganlal Kasturchand out of their HUF funds, and Messrs. Chhaganlal Kasturchand in turn advanced loans to the fourth firm, the necessary funds were made available to the fourth firm indirectly by the two HUFs — i.e., the HUFs had effectively contributed to the fourth firm's capital through that instrumentality.
Additionally, the department relied on the covering letter dated 26 October 1956 (in which each assessee declared that income from firms should be assessed as HUF income) and argued that the income was thrown into the family hotchpot by that unequivocal declaration.

Assessees' Arguments (Mr. Mehta)

The assessees contended that while their shares of capital in Messrs. Chhaganlal Kasturchand had been contributed from HUF funds, as regards the fourth firm it borrowed loans from Messrs. Chhaganlal Kasturchand in the same way as from banks and other lenders; no partner contributed any capital to the fourth firm.
They maintained that the loans from Messrs. Chhaganlal Kasturchand were borrowings on which the fourth firm paid the prevailing market rate of interest (i.e., like any other loan) and, therefore, the fact that Messrs. Chhaganlal Kasturchand were funded in part by HUF capital did not mean the HUFs had contributed to the capital of the fourth firm or that the partners were partners as karta representatives.
The assessees also relied on the absence of any family nucleus employed in acquiring the share in the fourth firm, the separate treatment of profits (kept separate and not thrown into the family hotchpot), and the lack of any provision in the partnership deed to show that a partner was acting as karta or representing a HUF.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Chattanatha Karayalar v. Ramachandra Iyer [1955] 2 S.C.R. 477	The principle under Hindu law that there is no presumption that a business standing in the name of any member is a joint family business, even when that member is the manager of the family; a manager (even a father) cannot impose upon other coparceners the risk of a new business.	The Court applied this principle to infer that, in the absence of any express declaration or other contemporaneous evidence that the partners intended to act as karta-representatives, the presumption is that the business was individual in nature. For want of evidence to rebut that presumption, the Court held that the assessee(s) became partners in the fourth firm in their personal capacities.

Court's Reasoning and Analysis

The Court's analysis proceeded in several interlocking steps, grounded in documentary conduct, Hindu law principles, and the factual picture about the fourth firm's finances:

Documentary conduct and returns: The Court examined the sequence of income-tax returns and covering letters. For accounting years S.Y. 1999 to S.Y. 2010 the assessees had shown the income of the fourth firm as their personal income. For S.Y. 2011 they filed returns and covering letters (26 October 1956) asserting HUF status and inclusion of firm incomes in HUF income; for S.Y. 2012 they filed returns treating the fourth firm's share as individual income and sent covering letters (30 November 1957) explaining that including the fourth firm in the earlier return had been a mistake and that they had become partners in the fourth firm in their individual capacity.
Absence of contemporaneous declaration of intention: The partnership deed of the fourth firm did not show any partner contributing capital or stipulating that any partner was joining as karta or on behalf of an HUF. There was no express declaration at the time the fourth firm was started as to whether partnership was as individuals or on behalf of HUFs; therefore intention had to be inferred from subsequent conduct.
Finance and capital structure of the fourth firm: The partnership deed did not require any partner to contribute capital and, in fact, no partner contributed capital. The fourth firm raised finance by borrowing — from Messrs. Chhaganlal Kasturchand and from banks/others. Interest was paid to creditors. The Court noted both that loans were obtained and that the interest treatment was similar to ordinary borrowings.
Role of prior HUF contributions to a different firm: It was undisputed that both assessees had contributed HUF funds as capital in the firm of Messrs. Chhaganlal Kasturchand (one of the other firms). The department's argument was that, because that firm lent to the fourth firm, the HUF funds indirectly became capital of the fourth firm. The Court examined this chain and characterized the loans to the fourth firm as borrowings by the fourth firm from Messrs. Chhaganlal Kasturchand like borrowings from outsiders; the fact that Messrs. Chhaganlal Kasturchand had HUF-funded capital did not establish that the HUFs had contributed to the capital of the fourth firm.
Application of Hindu law presumption: Citing the Supreme Court in Chattanatha Karayalar v. Ramachandra Iyer, the Court reiterated that under Hindu law there is no presumption that a business in the name of a family member is a family business and a manager cannot impose the risk of a new business on coparceners. Because there was no evidence (no capital contribution by the partners, no family nucleus employed, no partnership-deed indication, and no contemporaneous evidence of intention) to rebut the presumption of individual ownership, that presumption prevailed.
Assessment of the 26 October 1956 declaration and hotchpot contention: The Court addressed the department's argument that the earlier declaration (26 October 1956) threw the fourth firm's income into the family hotchpot. It found that that declaration was inconsistent with the assessee's earlier returns and that there was no reliable evidence that the share of profits of the fourth firm had been thrown into the hotchpot. Consequently, the hotchpot argument failed.
Conclusion of fact and law: Weighing the documentary conduct, the lack of contemporaneous evidence showing an intention to represent an HUF in the fourth firm's partnership, the financing facts, and the governing Hindu law principle, the Court concluded that the presumption of individual capacity was not rebutted and so each of the two assessees became a partner in the fourth firm in his personal capacity.

Holding and Implications

Holding (core rulings):

First reference (Champaklal): The Court answered the reframed question in the negative — i.e., the Tribunal did not err in holding that for the assessment year 1957–58 the assessee was a partner in Vijaykumar Ramanlal and Co. in his individual capacity.
Second reference (Mulchand): The Court answered the question in the second reference in the affirmative — i.e., the Tribunal erred in holding that the assessee was a partner in Vijaykumar Ramanlal and Co. in his capacity as the karta of the Hindu undivided family.

Implications:

Direct effect: On the facts of these references, the Court concluded that the share of profits from the fourth firm belonged to the partners in their personal/individual capacities (as to Champaklal it upholds the Tribunal's conclusion; as to Mulchand it reverses the Tribunal where it had treated the share as HUF income).
Costs: The department was ordered to pay the costs of each of the two assessees in respect of the reference concerning each assessee; the costs include the costs of the income-tax application.
Precedential scope: The Court applied established Hindu law principles (as summarized from the cited Supreme Court authority) about presumptions regarding family businesses and the inability of a manager to saddle coparceners with the risk of a new business. The opinion does not purport to create a new legal principle but applies the existing presumption to the specific factual pattern before it.

This summary strictly reflects only the facts, arguments, precedents, reasoning and outcomes that were contained in the provided opinion text.

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Commissioner Of Income-Tax, Bombay City I v. Champaklal Dalsukhbhai.

Mody, A.C.J:— This is a common judgment in I.T.R No. 61 of 1963, hereinafter referred to as “the first reference” and I.T.R No. 77 of 1963, hereinafter referred to as “the second reference”. All the important materials and even the questions arising in these two references are common, the only material difference being that the assessee in each case is different. It is, however, convenient to deal with both the references by a common judgment and the parties also have not objected to that procedure being adopted. Both the references are under section 66(2) of the Indian Income-tax Act, 1922.

2. The question of law referred in the first reference is:

“Whether, on the facts and in the circumstances of the case, the share from the firm of M/s. Vijaykumar Ramanlal and Co. was rightly assessed in the hands of the Hindu undivided family of which the assessee is the ‘karta’ for the assessment year 1957-58?”

3. The question of law referred in the second reference is:

“Whether, on the facts and in the circumstances of the case, the Tribunal erred in law or acted without evidence in holding that the assessee was a partner in Vijaykumar Ramanlal and Co. in his capacity as the karta of the Hindu undivided family?”

4. Prior to S.Y 1997 (1940-41) Champaklal Dalsukhbhai and Mulchand Jambubhai, along with many others, were members of a joint and undivided Hindu family. All the coparceners of that joint family became divided as on Aso Vad 30, S.Y 1997. Champaklal as well as Mulchand were assessed to income-tax as individuals in respect of the twelve assessment years 1944-45 to 1955-56 relating to the accounting years S.Y 1999 to S.Y 2010. Both these references relate to the assessment year 1957-58, the accounting year being S.Y 2012, ending on 2nd November, 1956. Each, Champaklal as also Mulchand, was a partner in four firms, the four firms being:

(1) Messrs. Chhaganlal Kasturchand,

(2) Messrs. Kasturchand Amarchand,

(3) Messrs. Aswin and Co., Bombay, and

(4) Messrs. Vijaykumar Ramanlal and Co.

5. Each of them had in his returns for the said twelve years included his share of the profits of the said four firms. It may be stated that the firm of Messrs. Vijaykumar Ramanlal and Co., hereinafter referred to as “the fourth firm”, was started only in S.Y 2005. Each of them filed a return for the assessment year 1956-57 relating to the accounting year S.Y 2011 on the basis of the income being of a Hindu undivided family of which each of them was the karta and in the return included his share of the profits of all the said four firms. Each of them forwarded the return to the income-tax authorities along with a covering letter dated the 26th October, 1956. The contents of the covering letters are identical. Each letter states that each had declared in the return sent therewith his status as Hindu undivided family instead of his status declared in the earlier years as individual under misapprehension. It states that, as known to the income-tax authorities, the Hindu undivided family of their late ancestor Kasturchand became divided on Aso Vad 30, S.Y 1997 and all members of the family thereupon became divided on that day and that the assets which came to the share of each of them as the coparcener of the said Hindu undivided family became the ancestral property between each of them and his issues. It further states that the assessment made after that partition till S.Y 2010 should have been made on him as the karta of the Hindu undivided family consisting of himself and his issues, but that through some misapprehension each of them had declared his status as an individual and assessments had been made on him as such. The letter further states that each of them was then advised that the correct status was that of an Hindu undivided family and that the return sent with the covering letter was therefore being made on that basis.

6. In the case of each of them the Income-tax Officer, after going into the evidence, accepted the contention of each of them and for the assessment year 1956-57 relating to the accounting year S.Y 2011 assessed the income on the basis of each of them having made the return as the karta of the Hindu undivided family.

7. For the next accounting year, being S.Y 2012, corresponding to the assessment year 1957-58, each of them filed a return. In that return of each of them the share of the profits of the fourth firm was not included, but the share of profits from the other three firms was included as forming part of the income of the respective Hindu undivided family of each of them. So far as the share of income of the fourth firm was concerned, each of them filed a separate return as an individual. The return as the karta was sent by each of them with a covering letter dated the 30 th November, 1957. The contents of the letter written by each are identical. The letter refers to the said earlier letter dated the 26th October, 1956. The letter states, in effect, that in the said letter dated the 26th October, 1956, and in the return sent along with that letter each had made a mistake in that the share of income of each of them from the profits of the fourth firm had been included and shown in the return as forming part of the income of the Hindu undivided family although it should have been shown as the income of each of them as his individual or personal income. It states that the mistake happened to have been made as each had received income in that year from several concerns and that his income from several concerns was derived from the assets which were received by each on partition of Hindu undivided family. It states that the fourth firm was started on Shravan Sud I.S.Y 2005 and each of them became a partner therein in his individual capacity and that each of them had contributed no capital whatever of his own. It further states that there was “no nucleus of the joint family” for his being a partner in the fourth firm or for earning profits as a partner in the fourth firm. The letter winds up with a request to accept the status of each of them as an individual in respect of his share of income as a partner in the fourth firm.

8. The Income-tax Officer did not accept the contention of each of them and proceeded to assess the share of the fourth firm in the hands of each of them as being the income of the Hindu undivided family. In appeal the Appellate Assistant Commissioner confirmed the assessment as made by the Income-tax Officer. Each of them appealed to the Income-tax Appellate Tribunal. The two appeals were heard by two different Benches of the Tribunal.

9. So far as the first reference is concerned, the Tribunal reversed the order of the Appellate Assistant Commissioner and held that there was no reason to hold that Champaklal, the assessee, in the first reference, held his share in the fourth firm as the property of Hindu undivided family as there was no family nucleus employed in acquiring the share in that firm and the profit earned in that firm was all along kept separate and was not thrown into the common hotchpot, nor even enjoyed by the Hindu undivided family and further that there was nothing in the partnership deed of the fourth firm to show that Champaklal was a partner in the firm in his capacity as a karta of the Hindu undivided family. In view of this judgment of the Tribunal, the first reference has been made at the instance of the Commissioner of Income-tax.

10. The question of law as referred appears to have been framed through some mistake inasmuch as it assumes that the Tribunal has held that Champaklal held his share in the fourth firm as karta on behalf of his Hindu undivided family, whereas in fact the Tribunal has as a matter of fact held to the contrary, that is, it has held that Champaklal held that share in his personal individual capacity. On this fact being pointed out to the parties, both parties have agreed that the question in the first reference be reframed as follows and we, therefore, reframe it. The question as reframed is:

“Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that for the assessment year 1957-58 the assessee was a partner in Vijaykumar Ramanlal and Co. in his individual capacity?”

11. In the second reference, however, the Tribunal upheld the decision of the Appellate Assistant Commissioner, with the result that Mulchand's share of the profits of the fourth firm was treated as forming part of the income of his Hindu undivided family. The second reference has been made at the instance of Mulchand, he being the assessee in that reference.

12. Now, as stated earlier, the fourth firm was started in S.Y 2005. The partnership deed does not provide that any of the partners constituting that firm had to contribute anything by way of capital of the firm and in fact no partner contributed anything by way of capital. The orders of the Appellate Assistant Commissioner show that the finance needed by the fourth firm was obtained by borrowing loans. The loans were borrowed from the firm of Messrs. Chhaganlal Kasturchand as also from others, including banks. The fourth firm paid interest to all its creditors from whom it had borrowed such loans. There is no dispute raised at any time that the interest paid by the fourth firm to Messrs. Chhaganlal Kasturchand was at a rate of interest lesser (sic) than the prevalent market rate.

13. It is an undisputed fact that each of these two assessees was a partner in the firm of Messrs. Chhaganlal Kasturchand in his capacity as the karta and as representing his Hindu undivided family. In that partnership capital had to be contributed and both these assessees contributed their shares of the capital from the monies belonging to their respective Hindu undivided families. The question which arises is whether because their share of the capital required for the business of Messrs. Chhaganlal Kasturchand was contributed by Champaklal and Mulchand out of the funds of their respective Hindu undivided families and Messrs. Chhaganlal Kasturchand, in their turn, advanced loans to the fourth firm, it can be said, as contended by Mr. Joshi, the learned counsel for the department, that these two persons made the necessary funds available to the fourth firm indirectly through the instrumentality of Messrs. Chhaganlal Kasturchand. Mr. Mehta, the learned counsel for the assessees, has, on the other hand, contended that the share of capital contributed by each of these two persons in the firm of Messrs. Chhaganlal Kasturchand was admittedly provided out of the funds of his respective joint family, but that so far as the fourth firm was concerned, the fourth firm borrowed loans from Messrs. Chhaganlal Kasturchand like the loans which they borrowed from others and that as there is no dispute that the proper rate of interest was paid by the fourth firm to Messrs. Chhaganlal Kasturchand it was a borrowing like any other borrowing and from the mere fact of the two Hindu undivided families having contributed to the capital of Messrs. Chhaganlal Kasturchand, it cannot be said that in that way the two Hindu undivided families contributed to the capital of the fourth firm.

14. Now, in respect of the assessments relating to the twelve accounting years, S.Y 1999 to S.Y 2010, the share of income from the profits of all the four firms had been shown by Champaklal and Mulchand as forming part of their individual income. When filing the return in respect of the assessment year relating to the accounting year S.Y 2011, each of these two persons sought to make a correction so far as the first three firms were concerned. Each of them had contributed his share of the capital out of the funds of his Hindu undivided family. It was, therefore, realised that the share of profits earned with the aid of those funds belonged to the Hindu undivided family and not to the karta in his personal individual capacity. This correction was sought to be made by the return filed and by the covering letter dated the 26th October, 1956. The letter and the return, however, refer to the share in respect of all the four firms. The return for the next year, which is the one relevant to these two references, was on the basis that the share of income of the fourth firm formed part of the income of the karta in his individual status and the reason for doing so was explained in the said covering letter dated the 30th November, 1957. The reasons have been specifically stated in that letter. One point which appealed to the Tribunal in the second reference is that Champaklal had solemnly declared in his return in respect of the accounting year S.Y 2011 that his share of income from the fourth firm was the income of his Hindu undivided family. In our opinion, such importance cannot be attached to this fact, because as against it Mulchand had also made a declaration in respect of each of the twelve earlier assessment years that the part of the income arising out of the fourth firm was his income in his status as an individual. The Tribunal probably lost sight of this factor and has therefore not weighed the effect of one against the other. But that is a matter of lesser importance in this case. The real question is whether each of the two assessees was a partner in the fourth firm in his individual capacity or as representing his Hindu undivided family. It is a matter of intention. There is, however, no express declaration as to intention in the deed of partnership of the fourth firm, nor in any other contemporaneous document when the fourth firm was started. The intention has, therefore, to be ascertained from subsequent conduct. The conduct of the karta can be ascertained only from the income-tax returns which they filed. The returns up to S.Y 2010 showed the income of the fourth firm as belonging to Champaklal and Mulchand personally. A correction was made in respect of S.Y 2011, but when filing the return for S.Y 2012 it was contended that it was by mistake that the share of the income of the fourth firm was included in the income of the Hindu undivided family. In short, the contention was that when rectifying the mistake which had occurred in respect of S.Y 1999 to S.Y 2010 the rectification itself instead of being confined to the other three firms mistakenly included also the fourth firm and that the latter mistake of including the fourth firm was sought to be corrected in respect of S.Y 2012. It is difficult to arrive at a definite conclusion as to whether the correction made in respect of S.Y 2011 was the correct position or that it was a mistake in so far as it related to the fourth firm and that that particular mistake was sought to be re-corrected to bring it back to the original position, viz., that the income of the fourth firm was the income of the karta personally in his status as an individual. In our opinion, the position will have to be judged from the principles of the Hindu law. As pointed out by the Supreme Court in Chattanatha Karayalar v. Ramachandra Iyer [1955] 2 S.C.R 477, under the Hindu law there is no presumption that a business standing in the name of any member is a joint family one even when that member is the manager of the family and it makes no difference in this respect that the manager is the father of the other coparceners. We must also bear in mind that the fourth business was a new business started by each of the two assessees after the partition of their joint family. In Hindu law a manager, even if he be a father, cannot impose upon the other coparceners the risk of a new business. In this case there is no indication by way of any money being contributed by the two managers by way of capital of the fourth firm. There is no other evidence whatever to show that there was any intention on the part of either Champaklal or Mulchand to become a partner in the fourth firm as representing his respective Hindu undivided family and not in his individual personal capacity. The presumption of the Hindu law, as pointed out by the Supreme Court, must, therefore, prevail for want of any evidence to rebut it. The fact that the fourth firm took loans from Messrs. Chhaganlal Kasturchand cannot rebut that presumption. The fourth firm borrowed such loans from Messrs. Chhaganlal Kasturchand just as it borrowed loans from outsiders. Looked at conversely, Messrs. Chhaganlal Kasturchand advanced loans to the fourth firm and charged the fourth firm the prevailing market rate of interest just as it would have advanced loans to others and charged interest thereon. The conclusion must, therefore, be that the presumption is not rebutted and that, therefore, each of the two assessees became a partner in the fourth firm in his personal capacity and in his status of an individual.

15. Mr. Joshi advanced an argument which had found favour with the Tribunal in the second reference. The argument was that even if the income be the individual income of the karta, it was thrown into the hotchpot by the unequivocal declaration made by the karta in his letter dated the 26th October, 1956. As seen earlier, that declaration is inconsistent with the returns of the earlier twelve years. There is no other evidence to support this argument. As there is no reliable evidence whatever to show that the share of profits of the fourth firm was thrown by either assessee into the family hotchpot this argument of Mr. Joshi fails. In the result, we answer the reframed question in the first reference in the negative and the question in the second reference in the affirmative.

16. The department to pay the costs of each of the two assessees in respect of the reference in which each assessee was concerned. The costs will include the costs of the income-tax application.

Commissioner Of Income-Tax, Bombay City I v. Champaklal Dalsukhbhai.

Structured Summary of the Opinion — Common Judgment by Mody, A.C.J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Department's Arguments (Mr. Joshi)

Assessees' Arguments (Mr. Mehta)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax, Bombay City I v. Champaklal Dalsukhbhai.

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