Income Tax Appellate Tribunal - Pune
Inspecting Assistant Commissioner vs Trigon Metal Sections on 8 January, 1988
Equivalent citations: [1988]27ITD67(PUNE)
ORDER
V.S. Gaitonde, Accountant Member
1. This appeal is filed by the revenue against the order of the CIT(A) dated 5-8-1985 for A.Y. 1983-84 reversing the decision of the IAC Asstt., Range I, Pune, dated 28-2-1985 refusing registration to the assessee-firm. The facts of the case raises an interesting question regarding interaction between the Hindu law and partnership law.
2. The factual aspect admitted by both sides is briefly as below. The assessee-firm was constituted by a partnership deed dated 1-11-1979 amongst six partners as mentioned therein. Three of them represented their HUFs and the remaining three were also related and belong to the members of Patel family. This partnership was granted the benefit of registration, there being no dispute about its genuineness. There was a bigger joint Hindu family of which the karta was one CM. Patel. This family consisted of CM. Patel, his wife Smt. Dahiben C Patel and sons Jayantilal, Ashokkumar Rajnikant and Arunkumar. Sri CM. Patel expired in 1974 but the family remained in tact. There was, however, a partial partition of the assets of the bigger HUF and some of the assets so partitioned fell to the share of Jayantilal C Patel, who had his own smaller HUF' consisting of his wife, Smt. Sadgunaben and sons Minesh, Vishnu and Manik.
The original joint family of CM. Patel got inducted into a partnership by a partnership deed dt. 1-1-1982 amongst 12 persons mentioned therein, three minors having been admitted to the benefits of partnership. For the sake of convenience, the partnership shares of the various persons are mentioned below:
Name Share in Share in
profit loss
1. Smt. Dahiben C. Patel 15% 15%
2. Shri Rajnikant C. Patel (As
karta of the HUP of Shri
Rajnikant C. Patel) 10% 10%
3. Shri Arunkumar C. Patel (As
karta of the HUF of Shri
Arunkumar C. Patel) 5% 10%
4. Smt. Sadgunaben J. Patel 5% 5%
5. Smt. Sulochanaben N. Patel 5% 10%
6. Shri Jayantilal C. Patel
(As karta of the HUF of
Shri Chhotabhai M. Patel) 10% 10%
7. Shri Minesh J. Patel
(As karta of the HUF of
Shri Minesh J. Patel) 5% 5%
8. Smt. Asmeetaben R. Patel 5% 5%
9. Kumari Chaula N. Patel 5% 5%
10. Shri Ashokkumar C. Patel 10% 15%
11. Smt. Yasumatiben A. Patel 5% 5%
12. Shri Jayantilal C. Patel (As
karta of the HUF of Shri
Jayantilal C. Patel) 5% 5%
13. Minor Vidanuj N. Patel 5% -
14. Minor Maneesha A. Patel 5% -
15. Minor Shamit A. Patel 5% -
100% 100%
In due course procedural formalities regarding filing of applications, etc., were completed. It may also be mentioned here that the partnership underwent a small change on 29-5-1982, in that, Maneesha A. Patel attained majority, became a partner and the profits and losses proportions were rescheduled as below:
Name Share in Share in
profit loss
1. Smt. Dahiben C. Patel 15% 15%
2. Shri Rajnikant C. Patel (As
karta of the HUF of Shri
Rajnikant C. Patel) 10% 10%
3. Shri Arunkumar C. Patel
(As karta of the HUF of
Shri Arunkumar C. Patel) 5% 5%
4. Smt. Sadgunaben J. Patel 5% 5%
5. Smt. Suiochanaben N. Patel 5% 10%
6. Shri Jayantilal C. Patel (As
karta of the HUF of Shri
Chhotabhai M. Patel) 10% 10%
7. Shri Minesh J. Patel (As
karta of the HUF of Shri
Minesh J. Patel) 5% 5%
8. Smt. Asmeetaben R, Patel 5% 5%
9. Kumari Chaula N. Patel 5% 5%
10. Shri Ashokkumar C. Patel 10% 15%
11. Smt. Yasumatiben A. Patel 5% 5%
12. Shri Jayantilal C. Patel (As
karta of the HUF of Shri
Jayantilal C. Patel) 5% 5%
13. Kumari Maneesha A. Patel 5% 5%
14. Minor Vidanuj N. Patel 5% -
15. Minor Sumit A. Patel 5% -
100% 100%
3. The IAC examined the partnership deed in question. He held that the partnership is invalid in law. His main reason was that Shri Jayantilal Patel has signed partnership deed in two different capacities -- one as karta of his own smaller family consisting of himself, his wife and sons as mentioned above and another as the karta of CM. Patel, family consisting of himself, his mother and brothers as mentioned above. The IAC held that coparcener of different HUFs would be working against the interest of each other by becoming partners in different capacities. The interest of J.C. Patel smaller HUF and J.C. Patel bigger HUF would be clashing with each other. The IAC was not impressed by the argument on behalf of the assessee that in view of the Bombay High Court judgment in CIT v. Raghavji Anandji and Co. [1975] 100 ITR 246 followed by the Gujarat High Court in CIT v. Budhalal Amulakhdas [1981] 129 ITR 97, there is nothing wrong in the same person entering into partnership in two different capacities. According to the IAC, the question posed in this case gets complete answer in the Bombay High Court judgment in the case of Manilal Dharamchand v. CIT [1970] 78 ITR 96. Quoting from this judgment, the IAC held that 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 persons inter se and it would cut at the very root of the notion of joint undivided family to hold that with reference to coparcenary properties, the members can at the same time be both coparceners and partners. Further, the principle is that there cannot be a partnership in law where the karta of Hindu undivided family has become a partner in a partnership firm in which another coparcener has also become a partner in his individual capacity in respect of the family property brought into the partnership. The IAC refused the registration. Aggrieved, by the decision of the IAC the assessee filed an appeal before the CIT(A) who held that in view of Raghavji Anandji and Co.'s case (supra) and Budhalal Amulakhdas' case (supra) the assessee is entitled to registration. The CIT(A) has, however, held that Manilal Dharamchand''s case (supra) relied upon by the IAO is distinguishable on facts. The CIT(A) did not, however, spell out what exactly are the facts which warrant distinction. He merely held that the two judgments above provided an answer to the question posed by the IAC.
4. Now, the contention of the DR is that the CIT(A) has examined only one aspect, viz., whether one person can sign in two different capacities. The CIT(A) has not examined the main aspect, vis., whether the karta of a family can enter into a partnership with a member. The partnership deed would show that almost every individual who has become a partner has continued his interest in the C.M. Patel bigger family. Thus, Sadgunaben and Dahiben, Sulochanaben, Asmeetaben, Chaula, Ashokkumar and Yasumatiben have become partners with the karta of the joint family of which they continued to be the members or coparceners. Taking us elaborately through the full judgment of Manilal Dharamchand's case (supra) the DR submitted that there are no distinguishing features between the facts of this case and the facts before their Lordships of the Bombay High Court above. In the case before the Bombay High Court, Manual's son Rasiklal was a member of Manilal HUF and Keshavlal's son Champalal was a member of Keshavlal HUF.
No further capital was introduced into the firm by any partner but Rasiklal and Champalal entered into a partnership with shares specified therein. The signatures of the four persons were all in their individual names but the entire capital, came from Hindu undivided families of Manilal and Keshavlal and in the accounts, a sum of Rs. 50,000 was credited to the share of Manilal and Rs. 44,500 to the share of Keshavlal. No capital was introduced into the firm by any partner but the whole of the capital came by way of a loan from the Hindu undivided family of Manilal Dharamchand. Relying on the Supreme Court judgment in Firm Bhagat Ram Mohanlal v. CEPT [1956] 29 ITR 521, it was held that the partnership was not valid. At page 115 their Lordships observed as under:
The rights of Rasiklal and Champalal in the partnership firm would be contractual rights against the kartas of their respective families which rights would come into conflict with their rights as coparceners in the HUF vis-a-vis the two kartas such as, for instance, in the matter of taking accounts and so on. As coparceners of the HUF they would have no right to ask for accounts from the kartas, whereas, as partners in the partnership firm, they would have the rights, at least so far as the profits of the firm are concerned which undoubtedly arose out of the property of HUF.
The DR. submitted that the principles laid down in this case apply to the facts of the present case also. The fact that there was a partial partition of the bigger HUF or that some persons whilst continuing to retain interest in HUF of CM. Patel had brought in their own capital, would not change the situation. Again the fact that there are other contracting parties would also not change the situation as held by the Bombay High Court in Manilal Dharamchand's case (supra). Thus, the issues to be decided were two-fold. The first one was whether one person can sign in two capacities and the second one was whether any members of the families and the kartas of the HUF in respect of family funds could enter into partnership. While the CIT(A) has taken note of the first aspect, he has not considered the second aspect though brought out clearly by the IAC in his order. Accordingly, the DR sought restoration of the order of the CIT(A).
5. Anticipating argument from the other side, relying on the Supreme Court decision in Ratanchand Darbarilal v. CIT [1985] 155 ITR 720, the DR submitted that the ratio of that case would not be applicable to the facts of the case all the more so because their Lordships have not even impliedly reversed the decision of the Bombay High Court in Manilal Dharamchand's case (supra). There can be no dispute about the principles laid down in the above judgment, vis., more than one member can represent the family in a partnership. It is a well settled proposition applicable to Hindu law that members of the joint family and even coparceners could without disturbing the status of the joint family or the coparcenary, acquire separate property or run independent business for themselves. This principle, however, is of no avail to the assessee because their Lordships in Ratanchand Darbarilal's case (supra) have not dealt with a contractual relationship that might come between a member and the karta, placing such member on a higher pedestal as far as asking for accounts is concerned, then the member who was not inducted as a partner in the partnership.
6. Shri Sathe on behalf of the assessee submitted that the case now attempted to be made out by the DR is different from the one before the authorities below. As far as he could see, the IAC'S order refusing registration centred only on the question whether J.C. Patel by signing in two capacities had rendered the partnership invalid. The observations of the IAC quoting from Manilal Dhararm-chand's case (supra) were only in respect of this proposition and not the proposition now raised by the DR regarding the partnership contract between members and the karta of the HUF. As far as the issue decided by the CIT(A) himself is concerned, the matter is wholly covered by Raghavji Anandji and Co.'s case (supra) and nothing remains to be done. The order of the CIT(A), therefore, deserves to be confirmed. Without prejudice Shri Sathe submitted that even the new case attempted to be made out by the DR has no substance. Tracing the history of Hindu law on the point Shri Sathe pointed out that shastric texts visualised partial partition only with reference to coparceners and not with reference to assets. It was the subsequent judgment law which recognised partial partition with reference to assets. This law is now finally established. Thus, the impact of partial partition with reference to assets is to be examined in the light of both Hindu law and Contract Act [vide Charandas Haridas v. CIT [1960] 39 ITR 202 (SC)]. In this connection, Shri Sathe referred to the observation of the Bombay High Court in Manilal Dharamchand's case (supra) (at page 114) as follows:
It was also held by the Privy Council in Sundar Singh Majithia v. CIT [1942] 10 ITR 457, that there was nothing in the IT 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.
Shri Sathe then submitted that the question whether the karta of a HUF can enter into a partnership with a member who contributes his own capital is no longer a matter of dispute, the issue having been decided in Lachhman Das v. CIT [1948] 16 ITR 35 (PC). Their Lordships have held as below:
There can be a valid partnership between a karta of a HUF representing the family on the one hand and a member of that family in his individual capacity on the other.
7. The DR. invited our attention to the decision of this Bench in ITA Nos. 413 and 414 dated 24-7-1983.
8. Shri Sathe was aware of the legal position emerging from Rai Bahadur Lokenath Prasad Dhandhania v. C1T [1940] 8 ITR 360 (Pat.). This was a case, where a deed of partnership was drawn up between 'A' in his individual capacity and again 'A' in his joint family capacity consisting of 'A' and his sons. Their Lordships held that there is no valid partnership in law which could have been registered by the ITO. This case, however, went on the footing that the two contracting parties are in the eyes of law one and the same person. As this is not prevailing in the present case, the ratio of Rai Bahadur Lokenath Prasad Dhandhania's case {supra) is clearly distinguishable.
9. With this background, Shri Sathe highlighted the main feature of the case. CM. Patel family was in existence all along. Through a partial partition, each of the sons constituted their own small HUF in respect of such partially partitioned assets. Their retention of interest in the undivided property of the bigger HUF, therefore, need not come in the way of their guarding the interest of the small HUF. Where capital is brought from a source which at the relevant time did not have any link with the HUF funds, the mere fact that at one point of time before partial partition some assets formed part of the assets of the bigger HUF can be no ground for foisting a permanent life-long disability either on the karta of the HUF or on the members (separated partially with reference to above) as far as their contracting capacity is concerned. Shri Sathe explained how the facts of the case are materially different from those in Manilal Dharamchand's case (supra). Shri Sathe gave a full chart of the capital accounts of the various persons before and after execution of the deed dated 1-1-1982 as given in annexure to this order. The proposition made out by Shri Sathe is that unlike Manilal Dharamchand case where the undivided members of the family did not bring any capital, in the present case, each partner whilst retaining the interest in the undivided assets of the bigger family has brought in own capital either as individual or as karta of HUF. Some of them like Ashokkumar have brought capital as individual with no link whatsoever with the HUF of CM. Patel. The lady members did derive some wealth at the time of partial partition but once such partial partition is complete with reference to any particular asset the same should be taken as separate giving rise to no conflict with the interests of the bigger joint family of CM. Patel. Thus, rights of the members who received assets on the partial partition do not get expanded to cover rights of asking for accounts from the bigger joint family merely because they ha,ve entered into a partnership along with such bigger HUF in the firm. Their rights as partners extend to the accounts of the firm and not of the account of the HUF which had shares from those firms as only one of the many sources of income shown in its return. Thus, the ratio of Manilal Dharamchand's case (supra) is clearly inapplicable to the facts of the case.
10. Regarding the DR's view about the impact of the ratio of Ratanchand Darbarilal's case (supra) Shri Sathe submitted that this is a distinction without a difference. Firstly, whether the firm is genuine or not is a question of fact. There is no dispute that the contracting parties were capable and have actually entered into a contract to share the profits of the business. The only question is whether the contract under which the partnership has come into existence is valid in law. Once it is accepted that each of the partners has brought capital, the ratio of Manilal Dharamchand's case (supra) would not apply. This point has become further clear from the Supreme Court judgment in Ratanchand Darbarilal's case (supra) above. Summing up, Shri Sathe submitted that Manilal Dharamchand's case (supra) applied in ITA Nos. 413, 414 dated 24-7-1983 is confined to facts of that case and cannot be extended to cases where accepted partitions and separate property are involved. Neither the karta nor the members suffer from any legal disability as far as the capacity to enter into partnership contract are concerned. The joint families of CM. Patel and J.C. Patel exist independently (though acting through the same karta J.C Patel) with their own capital, etc. Shri J.C. Patel is the karta of both the families and is bound to administer the family share for the common good with the duty cast on him as karta. Even regarding the contracts with lady members of the CM. Patel family there is no question of any conflict when they are deriving their rights by contributing own funds.
11. Regarding ITA Nos. 413 and 414 dated 24-7-1983, Shri Sathe submitted that that was also a case where no capital was contributed by the member partners. Further, at that time, the Supreme Court judgment in Ratanchand Darbarilal's case (supra) was not available.
12. Shri Sathe next pointed out that he had raised a further ground of appeal before the CIT(A) that having exercised option of assessing the partners direct, the department could not have refused registration and assessed the firm as URF. Shri Sathe's reliance is on the fact that one of the partners who had filed a return before ITO, 'A' Ward, Pune showing share from the asses-see-firm, got his assessment completed on 29-9-1984 under Section 143(1). It was, however, admitted that the assessment was made subject to rectification under Section 154. According to Shri Sathe the ratio of CIT v. V.H. Sheth [1984] 148 ITR 169 (Bom.) would be applicable. When it was pointed out to Shri Sathe that in V.H. Sheth's case (supra) it was the same ITO who had assessed the partner, was also assessing the firm, Shri Sathe contended that it makes no difference. The issue came in Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129 (Mad.) where relying on CIT v. R. Dhandayutham [1978] 113 ITR 602 (Mad.), their Lordships held that there can be exercise of option by the ITO who assessed the individual (partner) even though he has no jurisdiction to assess the association as such. Shri Sathe submitted that although this ground of appeal was raised before the CIT(A) there is no adjudication on this issue. However, as the issue is quite clear he would seek adjudication directly for us although he has not come in appeal or CO.
13. In reply to the new contention above, the D.R. submitted firstly that in departmental appeal, the assessee cannot make up any issue of this type. Without prejudice, the D.R. submitted that even assuming for the sake of argument, one ITO can exercise option on behalf of others, in fact there is no such option exercised. The ITO 'A' Ward's order dated 29-9-1984 under Section 143(1) taking the share as declared subject to rectification does not amount to an overt act amounting to exercise of option with knowledge about the existence of such option. In this respect, reference was made to decision of this Bench in ITO v. Babulal Tulsiram Burud [1985] 13 ITD 70 (Pune). Without prejudice, the D.R. further contended that as held by the Supreme Court in MM. Ipoh v. CIT [1968] 67 ITR 106, the question whether the option has been exercised correctly or not has to be looked into by the appellate authorities. It is well settled that the revenue officers are expected to exercise option in such a manner as to ensure that proper revenues are collected. Thus, if the option exercised is seen to be wrong, the same has to be set right by the concerned authorities. Lastly, it was contended that the point cannot be considered at all, as the same does not arise out of the order of the CIT(A). The matter can at best be only remitted back to the
14. We have considered the various facts and arguments. On the main issue, vis., regarding the grant of registration, as far as the first objection raised by the IAC is concerned, the same cannot come in the way of grant of registration as the issue is clearly decided in favour of the assessee by the Bombay High Court in Raghavji Anandji and Co.'s case (supra). As far as the second objection regarding the validity of a partneship between the karta of the family and a member who has a separate existence with reference to certain assets whether self-acquired or derived from partition is concerned, in our opinion, the ratio of Manilal Dharam-chand's case (supra) would not be applicable to the facts of this case. We find considerable force in the argument of Shri Sathe that the ratio of Manilal Dharamchand can apply only if an undivided member of HUF does not bring any capital. If a member brings capital or provides certain services, the contract is valid as held in Lachhman Das' case (supra). In the case before us from the capital structure mentioned above, it is quite clear that no partner who has retained interest in the bigger HUF of C.M. Patel in respect of unpartitioned assets is in a position to set up conflicting interest because the partners are all working together with the common intention of sharing the profits of the business carried on by one or more of them on behalf of all of them. There is also no question of any such partner getting himself elevated to a higher status by becoming a partner and acquiring any right superior to that which a member of the family who is not a partner may be having. The partially divided member by becoming a partner with the karta of bigger family can ask for accounts of the firm and not of the joint family who is only a partner in the firm. The observations in Sir Sundar Singh Majithia v. CIT [1942] 10 ITR 457 (PC) quoted in para 6 above would show clearly that the ratio of Manilal Dharamchand's case (supra) can apply only when a member of undivided family is made a partner without bringing any capital. For this and the other reasons canvassed by Shri Sathe, we hold that the assessee is entitled to the benefits of registration.
15. Coming now to the ground of appeal raised before the CIT(A) but not considered by him, we agree that the same cannot be the subject-matter of decision by the Bench side-tracking the prescribed procedure and skipping one stage of appeal. The assessee cannot raise an issue of this type, without a formal cross-objection in departmental appeal where we have to consider only the grounds of appeal raised by the revenue. Nevertheless as it has been held in CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42 (Guj.) in the part not reversed by the Supreme Court that the Tribunal should decide all interlocutory matters, we give our decision without prejudice to our stand that the ground is not maintainable. We agree with the D.R. on facts, that it cannot be held that the ITO, 'A' Ward was aware of the existence of option or that he has in fact exercised option on behalf of the Income-tax Department. The ratio of Babulal Tulsiram Burud's case (supra) distinguishing other case law is applicable to the facts of the case. For holding that the option has been exercised there should be sufficient material. The mere actual fact that the ITO, 'A' Ward has passed an order under Section 143(1) and that too taking the share from the assessee-firm subject to rectification does not, in our opinion, amount to any option either on behalf of himself or on behalf of the Income-tax Department. Further, as held by the Supreme Court in MM. Ipoh's case (supra) which was not considered by the Madras High Cotirt in R. Dhandayutham's case (supra) and Venkatakrishna Rice Co.'s case (supra) primarily the return of income would be filed by an association of persons where the association has earned income and the ITO would also call upon the association to subject a return of its income and would ordinarily proceed to assess the tax on the return so made. The duty of the ITO is to administer the provisions of the Act in the interest of public revenue and to prevent evasion or escapement of tax legitimately due to the State. The ITO's discretion to bring to tax either the income of the association collectively or the shares of members of association separately is not final, it is subject to appeal to the AAC and the Tribunal. Exercise of this power is, from its very nature, contemplated to be governed not by consideration arbitrary but judicial. The nature of the authority exercised by the ITO in proceeding to assess the tax income and his duty to prevent evasion or escapement of liability to pay tax legitimately due to the State, constitute adequate enunciation of principles and policy for the guidance of the Income-tax Officer in exercising his option, under Section 3. There is therefore, no force in the contention of Shri Sathe on this point. Subject to these remarks, the appeal is dismissed.