Jakka Devayya And Sons v. Commissioner Of Income-Tax

The Judgment of the Court was delivered by

Satyanarayana Rao, J.:— These two referred cases arise from the same facts, and the assessee in both is the same. R.C No. 1 of 1950 relates to the assessment for 1944-1945, the accounting year being the year ending on 24-3-1944. In R.C No. 1 of 1950 the question referred to us for decision by the Income-tax Appellate Tribunal is

“Whether on the facts and in the circumstances of the case and on a proper construction of the deeds of partnership and partition dated 22-6-1943, the finding of the Tribunal that cloth business continued to belong to the Hindu undivided family is erroneous in law.”

2. R.C No. 2 of 1950 arises but of proceedings for registration of the partnership of Jakka Devayya and Sons under Section 26-A of the Income-tax Act, and the question referred to us for decision under Section 66(1) of the Income-tax Act by the Income-tax Appellate Tribunal is

“Whether on the facts and in the circumstances of the case, there was a valid partnership in respect of the cloth business which could be registered under S. 26-A, Income-tax Act?”

3. Upto June 1952 the assessee was a Hindu undivided family. During the assessment year 1943-1944 the assessee claimed that there was a partition of the family properties in June 1942 and the Income-tax Officer after examining the evidence adduced by the assessee held that there was a division of the family properties on 4-4-1943. On the strength of this decision the assessee claimed during the assessment year now under consideration that the business carried on during the accounting year was the business belonging to a firm consisting of the erstwhile members of the Hindu undivided family, and that the firm should be registered under S. 26-A of the Act, and the assessment should be also remade from that date. These two claims were rejected by the Department and also by the Appellate Tribunal. Hence these two references. The family consisted of three brothers, Lakshminarayana, Krishnamurthi land Subbarao. Subbarao was a minor. On 24-6-1942 an unregistered partition list was drawn up between the members, and the minor Subbarao was represented by the eldest brother and manager Lakshmina-rayana, The family owned gold jewels, silverware, utensils, and furniture, houses and house sites and cloth business. On the date of this list Subbarao was unmarried. The jewels, silverware and other movables were divided between the sharers, and they took separate possession of those properties which were divided. They did not however divide by metes and bounds the houses and house-sites, because as per the directions of their deceased father they had to make provision for their widowed sister, and the division of the dwelling houses and the sites would necessitate certain structural alterations for the convenient enjoyment of the sharers which they did not intend to carry out during the minority of Subbarao, especially as he was unmarried. They therefore decided to keep these properties jointly. As regards the cloth business in this document, an account of the business was taken after valuing the stock on hand, and a balance sheet was embodied in the document. Details with reference to the property which was kept in joint possession were given in Sch. D appended to the document. The document contains a clear determination and an unambiguous declaration that the members decided to become separate and to divide the properties; only the physical division of the assets included in Sch. D was postponed to a later date.

4. By June 1943 Subbarao was married. On 22-6-1943, two documents came into existence. One was a partition deed, and the other was a deed of partnership. The partition deed was registered. In this deed the minor was represented by his father-in-law. It contains 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. The members began to live separately from 24-6-1942 taking possession of such of the properties as were physically divided. The shares allotted to each member in gold, silverware and utensils are described in Schs. A, only mean the winding up of the business and a division of the assets realised from the business. This need not be insisted upon. A partition in the case of business in definite portions may be brought about by a specification of the shares is the accounts and making the necessary entries B and C and the property kept joint was included therein to show that thereafter the business was in Sch. D. 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 is 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 has been found by the Appellate Assistant Commissioner — and there is no dispute — that there was division of the profits during the years 1942-1943 and 1943-1944, and that the profits of the first year were entered in the books on 4-4-1943 and of the second year on 24-3-1944, and that the mutation of the family account was effected by transferring the balance to the credit of the business to the ledger folios opened for the three sharers. Apparently they did not wish to discontinue the business as a result of the partition arrangement, as it ended in profit but agreed to continue it though as a partnership.

5. On these facts, the first point for consideration is whether the business ceased to be a joint family asset during the relevant period, or whether it continued to belong to the Hindu undivided family. A further question for determination is whether the partnership is valid and could be registered under S. 26-A of the Act.

6. What constitutes “partition” under S. 25-A, Income-tax Act and its requirements are different from ‘partition” under Hindu Law. Under Hindu law it is well established that the word “partition” is used in two senses: It may be a mere division of the right, i.e, the disruption of the status of the joint family, or it may be not only a division of the status of the family but also a physical division, or in other words a division by metes and bounds of the properties. Under S. 25-A of the Act, it is not enough to establish that there was a mere division in status, but it must be proved that the family property was partitioned among the various members or groups of members in definite portions. Unless this requirement is established, the partition cannot be recognized under the Act, and the family is deemed to continue as a Hindu undivided family, notwithstanding the fact that its status as joint family had been terminated.

7. The meaning of the expression “in definite portions” has been construed by myself and Viswanatha Sastri J. in recent case in — ‘Meyappa Chettiar v. Commissioner of Income-tax’, 1950-18 ITR 586 (Mad) following the decision of the Privy Council in — ‘Sundar Singh v. Commissioner of Income-tax’, 1942-10 ITR 457. In that case we both expressed the view that in order to constitute partition of a business belonging to a joint family, it was not necessary to establish physical division of the business for to insist on this requirement would be to destroy the proverbial goose that lays the golden eggs. The physical division of the business into definite portions will held in severalty in specified or definite portions or shares. It is open to the members of the Hindu joint family to enter into a partnership thereafter in respect of the family business which they have divided by specified shares in the accounts, among themselves. The property so held in partnership is taken out of the joint family, and thereafter the income derived from the partnership would not be the income of the joint family. In other words, it ceases to be an asset owned by a Hindu family. That this is permissible follows, in our opinion, from — ‘Meyappa Chettiar v. Commissioner of Income-tax’, 1950-18 ITR 588 and from the decision in — ‘Sundar Singh Najitha v. Commissioner of Income-tax’, 1942-10 ITR 457. 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 is not to attract S. 25-A of the Act but to make it an asset whose income cannot 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 follows from this, whether in fact the family houses and house-sites were divided or not physically, if it is established that the joint family business was partitioned in definite portions, then it will be taken out of the property of the joint family.

8. The inference to be drawn from the two documents which came into existence on the same date namely, 22-6-1943, the partition deed and the partnership deed, in our opinion, is clearly to establish that this asset was divided and was taken out of the joint family assets. The necessary entries in the accounts were made on 4-4-1943 and on 24-3-1944. The shares were specified in the partnership deed. The contentions found in favour with the department and the Appellate tribunal were that the capital of the business was not divided, and that the documents themselves gave a clear indication that the members agreed to continue this asset also as joint. Regarding the first, it must be observed that when a business is conducted by a joint family there need not necessarily be an allocation of capital separately for the business. The joint family may from time to time supply the necessary capital for the successful prosecution of the business. That was the very reason why it was stated in the partnership deed that no capital was fixed for the business. It became necessary to fix the capital for the first time on 22-6-1943 when the partnership deed was executed.

9. It must be mentioned that in the case of a joint family business there will be no division of the profits periodically, for no member is entitled to claim that the profits should be so divided, and whatever income is earned in the business will accrue to the benefit of all the members of the coparcenary. The members are not partners in the business but parceners. Death of a member does not dissolve the business as in the case of a partnership. Birth of a member will give him an automatic right in the business which is a family asset. There is a clear contrast between joint family business and business belonging to a firm of partnership. It is therefore unreasonable to expect the existence of a separate capital for a joint family business, and if it does not exist, or if it is not divided, it cannot be said that there was no division of the business. The necessity for constituting the capital arose when the business was separated from the family assets, and it was then that the precaution of appropriating in the business the amounts specified in the partnership deed, i.e, the amounts standing to the credit of the individual partners in the accounts and that in the name of Jakka Davayya and Sons as capital was taken.

10. The Appellate Tribunal and the Appellate Assistant Commissioner thought that the recitals in the documents that the business was not divided, as there was no possibility of dividing it, and that they agreed to carry it on in the name of Jakka Devayya and Sons precluded an inference of division of the business into definite portions. The intention to carry on the business jointly, in the context and reading the recital in the partnership deed, can only be that they intended to carry on the business as a separate firm. “Joint” in the context does not mean “as joint family property.” Apart from other difficulties which would be dealt with presently, on a plain reading of the two documents together it seems to us obvious that there was a division of the business into definite portions, and that the asset was effectively taken out of the joint family properties by constituting it a partnership after division.

11. It is no doubt true that in the matter of partition under the first document of 1942 Lakshminarayana, the eldest brother, represented Subbarao. In the later document, the registered partnership deed of 1943, Subbarao was represented by his father-in-law. It might be argued that as the minor was not represented by a lawful guardian, the partition was invalid. The two brothers Lakshminarayana and Krishnamurthi, were adults. On account of certain family reasons they decided to become separate. If two out of the three brothers cut themselves out from the family, the third brother remains divided. As pointed out by the Judicial Committee in — ‘Balkishendas v. Ramnarain Sahu’, 30 Cal 738;

“There is no doubt that a valid agreement for partition may be made during the minority of one or more of the coparceners. That seems to follow from the admitted right of one coparcener to claim a partition; and (as has been said) if an agreement for partition could not be made binding on minors, a partition could hardly ever take place. No doubt if the partition was unfair or prejudicial to the minors' interests, he might, on attaining his majority, by proper proceedings, set it aside so far as regards himself.”

12. So long therefore as the two adult brothers made a division of the properties which was fair which was not unequal or prejudicial, to the minor's interest, the division would be binding, and if the minor after attaining majority thinks that it was unfair or prejudicial, it would be open to him to attack the partition by appropriate proceedings. So long as the interests of the minor have not suffered, it is open even to a person; other than the natural guardian to represent the minor in the partition; this is recognised in — ‘Bhagavati Prasad v. Bhagwati Prosad’, 35 All 126. In that case, as in the present, the brother acted on behalf of the minor, though there was the mother. Partition was already determined in the present case in 1942 and the registered partition was only an affirmation of what was decided in 1942, and the fact that the father-in-law represented the minor as the guardian in the matter of the execution of the deed is of no consequence. The partition therefore cannot be impugned on this ground.

13. It follows from the foregoing that the business ceased to belong to the Hindu undivided; family, and the view taken by the Appellate Tribunal is erroneous. The question referred to us in R.C No. 1 of 1950 must be answered in the affirmative and against the Commissioner of Income-tax.

14. This conclusion would not be enough to enable the assessee to insist that the assessment should be made on the various members separately, for unless they establish that there was a valid partnership they cannot achieve this result. If there is no valid partnership, the business carried on by the members would be assessed as an association and not as individuals. Vide S. 3, which refers to “other association of persons.”

15. Subba Rao was a minor on the date on which the partnership deed was entered into, and it is undoubted law that a minor cannot be made a partner even by a natural guardian acting on behalf of the minor. There can be no partnership between an individual and a minor represented by a person as a guardian. Such a contract does-not bind the minor. But it is open to partners to admit a minor into the benefits of a partnership. (Vide S. 30, Partnership Act). If he is so admitted, under S. 2(6B), Income-tax Act, he becomes a partner for the purpose of the Act, for it says,

“‘Partner’ includes any person who being a minor has been admitted to the benefits of partnership.”

16. If he is not admitted to the benefits of the partnership but the assets in the business belonging to his share are utilised in the business continued by the other partners after division, the minor may be entitled to the profits attributable to the use of his share in the property in the business on the principle of S. 37, Partnership Act, though the section itself may not apply, or under the general principles indicated in Ss. 80, 90 and 95, Trusts Act. The difference between the two rights is that in the one case the minor will be entitled only to the profits attributable to his share which has been utilised in the business, while in the other case he would be entitled to the share of the profits to which he was admitted by the major members irrespective of the value of his share utilised in the business. In the deed of partnership the minor is given a right to the profits, and is made liable to losses. This of course is not permissible in law, as no guardian can enforce a personal obligation on behalf of the minor under a contract.

17. It was argued with considerable force by Mr. Subbaraya Aiyar, the learned advocate for the assessee, that the main object of the brothers was to confer a benefit on the minor and to admit him to the benefits of the partnership. The parties being ignorant introduced in the deed the usual clauses of a partnership deed making the minor also equally liable for losses, and we should therefore construe the contract between the adults as tantamount to an admission of the minor to the benefits of the partnership. Admission to the benefits of a partnership undoubtedly implies the existence of a partnership. Where two persons, one a major and the other a minor, purport to enter into a partnership deed, as the minor had no contractual capacity, the partnership would be invalid, and there would not be an existing partnership. The question therefore of construing such a contract as admitting the-minor to the benefits of a partnership does not arise, as the partnership is non-existent. That was the position in the two cases referred to in the course of the arguments in — ‘Muhammad Rafiq v. Khwaja Qamar Din’, AIR 1922 Lah 441 and — ‘Lachmi Narain v. Beniram’, 53 All 479. But here, there could be a valid partnership between the two adults, Lakshminarayana and Krishnamurthi, and there would be an existing partnership to the benefit of which the minor could be admitted. And all that is required by S. 30 is that there should be a consent of all the partners for the time being to admit the minor to the benefits of the partnership. Lakshminarayana and Krishnamurthi were willing to admit the minor to the benefits of the partnership, and in fact in the accounts they opened a ledger page in his name and entered the profits earned on his behalf for the two years. We think therefore that too rigid a construction of the document need not be placed, and that the real intention of the parties can be gathered from the document and from their conduct in crediting the profits in the accounts. The father-in-law certainly must have had enough knowledge that the business was a profitable one and not a losing concern.

18. The case which is analogous to the present is, in our opinion, the decision in — ‘Khorasany v. Acha’, 6 Rang 198. There a Mahomedan who was carrying on business in partnership with another died, leaving his widow and minor children. After the death of the husband, the widow entered into a contract of partnership on behalf of herself and also on behalf of the minor children. She had no power to enter into such a contract so as to bind the minors, but nevertheless it was held that as between the widow and the partnership to the extent of her interest the partnership was legal. It was observed in that case;

“.. both plaintiff 1 and the defendant at the time of making the agreement were not aware of the legal difficulty and believed that they were entering into a valid contract, and as between plaintiff 1 Amina Bi and the defendant I think that partnership was validly created by the agreement.”

19. In Lindley on Partnership, 11th Edn., at page 87 it is pointed out:

“Agreements entered into between several persons, some of whom are by law incompetent to contract are not wholly null and void, but are only in some respects less effective than if all the parties to them were competent.”

20. ‘See also — ‘Jafferali v. Standard Bank’, AIR 1928 P.C 135 which to some extent supports our conclusion. The fact therefore that the minor was included in the contract would not make the partnership as between the two adults invalid, and the minor may be deemed to have been admitted to the benefits of the partnership by the two adults. Under the Income-tax law a minor admitted to the benefits of a partnership becomes a partner. It therefore appears to us that on the facts and circumstances of this case there was undoubtedly a valid partnership in respect of the cloth business which could be registered under S. 26-A of the Act. The answer therefore to the question referred to us in R.C No. 2 of 1950 is in the affirmative and in favour of the assessee. As the assessee has succeeded in both the references, we think he is entitled to costs one set, which we fix at Rs. 250.

B/K.S

21. Answer in the affirmative.