Income Tax Appellate Tribunal - Amritsar
Income-Tax Officer vs Jagdish Rai on 22 July, 1994
ORDER
U.S. Dhusia, Judicial Member
1. These two appeals are filed by the Revenue for the assessment years 1978-79 and 1980-81.
2. The only issue in these appeals that has been pressed, vide several grounds for both the years, is whether the share of income from the firms devolving on the wife and the minor son, Ravinder Kumar, is liable to be included in the total income of the assessee for these years or not. The facts which are noted, in this connection, are that the assessee was the karta of a joint Hindu family and he represented the joint family in five firms, whose details are given in the order of the Income-tax Officer. There was a partial partition, effected on August 9, 1973, in the joint family. As a result of the partial partition, brought about, the capital of the joint family invested in the partnership firms, in which the assessee had been a partner, representing the Hindu undivided family, was partitioned in the books of the joint family. The partition of the capital was effected only in the books of the joint family, but was not communicated to the partnership firms. Therefore, the capital sum invested on behalf of the erstwhile joint Hindu family and, after the partition, pertaining to the five members of the family amongst whom the capital was partitioned, remained intact. It was further agreed that the assessee would continue to be a partner for all the five members in the five firms and the capital now partitioned amongst the five members will remain the capital invested in those firms on their behalf. As a result of this arrangement, Jagdish Rai, the assessee, found that he was entitled to a share of profit of Rs. 6,463. Similarly, his wife, Smt Saraswati Devi, and his minor son, Ravinder Kumar, were each entitled to receive their share of profit amounting to Rs. 6,463. For the assessment year 1978-79, the Income-tax Officer not only assessed the assessee in respect of his share of income, Rs. 6,463, but also included the shares of income devolving on Smt. Saraswati Devi and Ravinder Kumar, aggregating to Rs. 12,527. In the assessment year 1980-81, the assessee was not only found assessable in respect of his share of income of Rs. 9,193, but also the shares of income devolving on Smt. Saraswati Devi and Ravinder Kumar, aggregating to Rs. 18,386. The assessee represented this approach, but the Income-tax Officer did not agree and he completed the assessment by including the shares of income pertaining to Smt. Saraswati Devi and the minor son, Ravinder Kumar. We would like to reproduce a part of the order of the Income-tax Officer containing his finding in this behalf below :
"After partition, the members of the erstwhile family became individual and entered into agreement to share the profit or loss received by Shri Jagdish Rai in his capacity as partners in various firms equally. Thus, by this agreement, they formed a partnership, hereinafter called a sub-partnership for convenience. Thus, the share received by the assessee's wife and minor children from this sub-partnership is to be included in the income of Shri Jagdish Rai under Section 64(1)(i).
The above view is supported by the decision of the Gujarat High Court in the case of CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938."
3. The assessee took this matter in appeal before the Appellate Assistant Commissioner and pointed out to him that in a Punjab and Haryana High Court decision in the case of CIT v. Ram Narain [1980] 126 ITR 267, on almost identical facts, their Lordships did not support a finding of the sub-partnership. Moved by this plea, the Appellate Assistant Commissioner struck down the additions. The Revenue has felt aggrieved and has brought the issue in appeal before the Tribunal.
4. According to the Departmental Representative, the Appellate Assistant Commissioner did not reach a finding after a proper appraisal of facts. His finding, on the face of it, is misconceived. He had not paused to consider that it was only by virtue of an agreement between the members that the share of income, received from the five firms by the assessee, as a partnership, was divided among the five members. On the other hand, learned counsel for the assessee placed heavy reliance on the aforesaid Punjab and Haryana High Court decision. According to him, there was no sub-partnership resulting from the partial partition effected in the joint family. He also tried to distinguish the decision of the Gujarat High Court, which has been relied upon by the Income-tax Officer and which was in CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938. According to him, in the Gujarat decision, the minors were not made liable for loss and, according to him, this was a material feature appearing in the facts of the present case, which distinguished the facts of this case from those considered by the Gujarat High Court.
5. Having heard both the sides and gone through the finding of the two authorities below and also the memorandum of partition, we are not left in doubt that the Appellate Assistant Commissioner had quite misled himself in the matter. He had not been able to appreciate the true purport of the Punjab and Haryana High Court decision and, therefore, his reliance on the said decision to reach a finding on the facts of the present case was misconceived. He did not notice that their Lordships of the Punjab and Haryana High Court were not called upon to decide whether the provision, contained in Section 64(1) was applicable or not. If he had perused the question, which was referred to him, he would have immediately got the point that that question was not before their Lordships. Their Lordships had to reach a finding on the basis of the facts, found by the Tribunal. The Tribunal did not find from the facts of the case that there was any sub-partnership. Their Lordships could not change the facts. When this was pointed out by counsel, Mr. Awasthi, they made the observation that if the statement of the fact was not correct, it was for the Revenue to have objected to this statement of fact being incorporated in the statement. We reproduce that passage from the order, below, to show that the finding of their Lordships was limited to the facts found by the Tribunal (at page 269 of 126 ITR) :
"Shri Awasthy has challenged this finding of fact and has contended that the reading of the deeds of partition would show that the capital of the Hindu undivided family was never shown as a loan in the name of the firm. This contention is without any merit. This fact has been mentioned in the statement of the case and so also a finding has been recorded by the Tribunal in its order dated December 7, 1973. If this statement of fact was not correct, it was for the Revenue to have objected to this statement of fact being incorporated in the statement of the case, but no such objection was taken at any stage."
6. In the present case, we are unable to appreciate the contention of the assessee, when we notice that, after the partial partition of the capital was effected, the assessee was called upon to represent the five members in the five firms. This could not be possible unless there was an agreement. There was an agreement accordingly that the assessee will continue as a partner, as before, which implied that he will be representing the five members in the five firms. There was another agreement and it was that he would use the capital partitioned in the books of the family among the five members kept intact in the books of the firms as the capital invested. We refer to a paragraph from the memorandum of agreement below to illustrate the fact of there being an agreement :
". . . . Jagdish Rai shall continue to represent them in the said five firms and also authorise Shri Jagdish Rai, karta of the family, to invest capital, belonging to the members of the Hindu undivided family, obtained as a result of partition in the said firms."
7. For this reason, we have to hold that there was an agreement between the five members, which the Income-tax Officer was pleased to call a sub-partnership. If these facts do not show that there was an agreement, then we fail to understand what would constitute an agreement. Surely this was made a part of the settlement for partial partition which was brought about in the family as a camouflage. In our opinion, it was incorporated no doubt in the memorandum of partition, but the true nature of the agreement cannot be hidden by the fact of its being incorporated in the memorandum of partition. We are not aware that there is any principle of partition, which goes to the extent of bringing about also an agreement amongst the members seeking partition to remain united or to enable them to act in concert after the partition has been effected. Therefore, we cannot let ourselves be misled by the fact of agreement being incorporated in the memorandum of partition. We have to separate the agreement from the act of partition to appreciate its true nature. That being so, we cannot help finding support for the finding of the Income-tax Officer that five members reached an agreement in the nature of sub-partnership to divide the shares of income earned by the assessee as a partner in the five firms. Or conversely as an agreement among five members to let the assessee be a partner in the five partnership firms and earn the share of profit not only for his share of capital contribution but also for the contribution of capital of the remaining four members. In either case, we cannot see how the application of Sub-section (1) of Section 64 can be defeated. Therefore, whatever way we may look at--either from the angle of sub-partnership where the wife and the minor son were partners together with, the assessee, or from that of their membership of the five members of the family, in the parent five firms, in which the assessee represented the five members, the inclusion of the shares of the wife and the minor son in the income of the assessee cannot be avoided. Whether we proceed from a consideration of the membership of the sub-partnership or from that of the membership of the assessee on behalf of the five members in the five partnership firms, we would not be able to find an alternative to the application of the provision contained in Sub-section (1) of Section 64 to the shares of income of the wife, Saraswati Devi, and the minor son, Ravinder Kumar. We appreciate the contention of the assessee that the sub-partnership results from agreement and not from status. As we have brought out, a sub-partnership has been brought about by agreement only and not by the status of the members of the family. We derive support for our view from the Gujarat High Court decision, relied upon by the Income-tax Officer, whose facts bore likeness to the facts of the present case. In our view, the finding of the Appellate Assistant Commissioner for both the years being palpably erroneous has to be vacated and the finding of the Income-tax Officer restored. We order accordingly.
8. Both the appeals are allowed.
P.K. Mehta, Accountant Member
9. I am unable to share the view of my brother, the Judicial Member. Certain relevant facts may be stated. In both the assessment years under appeal, 1978-79 and 1980-81, in the assessee's assessments made in individual status the income clubbed under Section 64(1) is of his wife and a minor son. A partial partition was brought about in the Hindu undivided family of Shri Jagdish Rai by a memorandum executed on August 9, 1973. At that time, the Hindu undivided family consisted of Shri Jagdish Rai, karta, Smt. Saraswati, his wife, and three minor sons, Shri Subhash Chander, Shri Suresh Kumar and Shri Ravinder Kumar. The shares of two sons out of three have not been included under Section 64(1) of the Income-tax Act. The memorandum of partition after reciting the division of the capital invested in the five firms as per the Hindu undivided family books equally amongst the karta, his wife and three minor stems contains the following relevant clauses :
"Whereas it is realised by the parties hereto that it is not possible to partition l/8th, 11 per cent, 8 per cent., 20 per cent, and 8 per cent, partnership interest in Messrs. Sobha Mal Sagan Lal, Muktsar, Tek Chand Mool Chand, Muktsar, Messrs. Mool Chand Raj Kumar, Muktsar, Tek Chand Budh Ram, Muktsar, and Messrs. Muktsar Khad Supply Co., Muktsar, respectively, by metes and bounds due to administrative and other practical difficulties. Parties hereto therefore agree that the said Jagdish Rai shall continue to represent them in the said five firms and also authorise Shri Jagdish Rai, karta of the family, to invest capital, belonging to the members of the Hindu undivided family obtained as a result of partition in the said firms.
The^ only mode left to the parties hereto is to divide the partnership interest in five equal shares, (i.e., l/8th, 11 per cent., 8 per cent., 20 per cent, and 8 per cent, share of profit) receivable from the firms. The said Jagdish Rai agrees to receive the said shares of profits or losses from the above said five firms as on behalf of the said Saraswati Devi, Subhash Chander, Suresh Kumar and Ravinder Kumar and agrees to distribute and hand over their respective l/5th share of profit or loss as stipulated by these .presents. The members will also be fully authorised to withdraw the amount at any time from their accounts.
Whereas it is also agreed that Shri Jagdish Rai may represent the Hindu undivided family in any other firm or firms in future also and any income earned with the help of joint funds will be subject to the condition that profits or losses receivable from such firms by the Hindu undivided family shall also be divided in five equal shares as mentioned above."
10. It may further be mentioned that there appears to be no assessment made on the sub-partnership as such by the Revenue and the share of income of the wife and the minor sons has been taken by totalling up the share of profit from the five firms and dividing it into l/5th share. Finally, it is undisputed that partial partition of the Hindu undivided family funds had been granted by the Income-tax Officer by an order under Section 171 dated March 29, 1977, passed for the assessment year 1974-75.
11. In my opinion, the clauses in the memorandum of partition quoted above are more like the clauses considered by the Gujarat High Court in the case of Addl. CIT v. Chandulal C. Shah [1977] 107 ITR 91 and the situation is not like that in the case of CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938 (Guj). In Mahendrasingh Mohansingh's case [1980] 123 ITR 938 (Guj), the High Court considered clauses not only of an agreement dated December 7, 1967, but also of a partnership deed executed on the same date. No *new partnership deeds appear to have been written in the case of five partnership firms in the assessee's case. In this view of the matter, following the Gujarat High Court decision in CIT (Addl) v. Chandu-lal C. Shah [1977] 107 ITR 91 and several other authorities, I will hold that there was no sub-partnership brought about by the memorandum of partnership and, therefore, the provisions of Section 64(1) were not attracted. I will rely upon a latest decision from the Andhra Pradesh High Court in favour of the assessee in CIT v. Pabbati Sharikaraiah [1984] 145 ITR 702 and the authorities considered therein on the strength of which the High Court held that an overriding obligation was created to make over the income in favour of the minors and, therefore, the income corresponding to the share of each minor right from the inception accrued to each minor, creating thereby a superior title in favour of the minors.
12. I will also like to point out the opinion expressed by the learned commentator in the "Law and Practice of Income Tax" by Kanga and Palkhivala in the Supplement of Seventh edition, at page 1/122. The relevant quotation reads as under :
"According to the Gujarat High Court, Clauses (i) and (iii) apply even to a sub-partnership (CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938). However, in that case the finding of sub-partnership between the assessee and his wife and minor son after a partial partition was, it is submitted, incorrect. The minor could not be a partner in law. On the facts of the case, the assessee should have been held to be a partner in the firm in his personal capacity and as a trustee for his wife and minor son. It was a case of diversion of income by overriding title since the partner was obliged to hand over a portion of his share of income to the two members of his family as in Seth Motilal Manehchand [1957] 31 ITR 735 (Bom)."
13. This also brings out that there was an earlier decision of the Bombay High Court in Seth Motilal Manehchand v. CIT [1957] 31 ITR 735, which also took the view about creation of an overriding obligation in the event of partial partition.
14. As a result of the above discussion, I hold that the orders of the Appellate Assistant Commissioner are correct and the appeals of the Revenue do not deserve to succeed.
15. Both the appeals are dismissed.
ORDER OF REFERENCE TO THIRD meMBER
16. As there is a difference of opinion between us on the following point, we refer the case to the President, as provided in Section 255(4) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the share of income of the assessee's wife and a minor son from the five firms can be clubbed in the assessments of the assessee for the years 1978-79 and 1980-81 by invoking the provisions of Section 64(1) of the Income-tax Act.?"
ORDER OF THIRD MEMBER Vimal Gandhi, Judicial Member
17. The following point of difference between the learned Accountant Member and the learned Judicial Member has been referred to me by the Hon"ble President of the Appellate Tribunal under Section 255(4) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the share of income of the assessee's wife and a minor son from the five firms can be clubbed in the assessments of the assessee for the years 1978-79 and 1980-81 invoking the provisions of Section 64(1) of the Income-tax Act?"
18. The facts, in brief, are that Shri Jagdish Rai, as karta of his Hindu undivided family consisting of himself, his wife and three minor sons, namely, Shri Subhash Chander, Shri Suresh Kumar and Shri Ravinder Kumar, was partner in five firms till March 31, 1973. On April 1, 1973, a partial partition of the Hindu undivided family was effected and the total capital of the Hindu undivided family in the firms was divided equally among the members. Each member was allocated a sum of Rs. 21,194.13. Suitable entries were made in the books of account of the Hindu undivided family and a memorandum of the above partition was subsequently drawn on August 9, 1973. In relation to the share of profit/loss belonging to the Hindu undivided family prior to and after the partition, the following provisions as reflected in the memorandum, were made :
"Whereas it is realised by the parties hereto that it is not possible to partition l/8th, 11 per cent., 8 per cent., 20 per cent, and 8 per cent, partnership interest in Messrs. Sobha Mal Sagan Lal, Muktsar, Tekchand Moolchand, Muktsar, Messrs. Moolchand Raj Kumar, Muktsar, Tek Chand Budh Ram, Muktsar, and due to administrative and other practical difficulties, parties hereto therefore agree that the said Jagdish Rai shall continue to represent them in the said five firms and also authorise Shri Jagdish Rai, karta of the family, to invest capital belonging to the members of the Hindu undivided family obtained as a result of partition in the said firms.
The only mode left to the parties hereto is to divide the partnership interest in five equal shares, (i.e., l/8th, 11 per cent., 8 per cent., 20 per cent and 8 per cent, share of profit) receivable from the firms. The said Jagdish Rai agrees to receive the said shares of profits or losses from the above said five firms as on behalf of the said Saraswati Devi, Subhash Chander Suresh Kumar and Ravinder Kumar and agrees to distribute and hand over their respective l/5th share of profit or loss as stipulated by these presents. The members will also be fully authorised to withdraw the amount at any time from their accounts.
Whereas it is also agreed that Shri Jagdish Rai may represent the Hindu undivided family in any other firm or firms in future also and any income earned with the help of joint funds will be subject to the condition that profits or losses receivable from such firms by the Hindu undivided family shall also be divided in five equal shares as mentioned above."
19. The claim of partition was put forward before the Assessing Officer and a finding, accepting the partial partition was recorded under Section 171(3) of the Act on March 29, 1977. Subsequently, while completing the assessments of Shri Jagdish Rai for the assessment years 1978-79 and 1980-81, now in appeals, the Assessing Officer added the share of profits allotted to his wife and minor children on the above partition by invoking the provisions of Section 64(1)(i) of the Income-tax Act. He held that after the partition, the members agreed to share the profit or loss receivable by Shri Jagdish Rai. They thus formed a sub-partnership. Having regard to the provisions of Section 64(1)(i), the share received by his wife and minor children was held to be liable to be assessed in the hands of Shri Jagdish Rai. For the aforesaid action, the learned Income-tax Officer derived support from the decision of the Gujarat High Court in the case of CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938.
20. On appeal, the learned Appellate Assistant Commissioner accepted the plea that the issue in the light of the decision of the Punjab and Haryana High Court in the case of CIT v. flam Narain [1980] 126 ITR 267 should be decided in favour of the assessee. He further held that sharing of profits and losses by the five members of the erstwhile Hindu undivided family did not result into a contract to create a sub-partnership. The decision of the Gujarat High Court relied upon by the Assessing Officer was distinguishable as in the said case, the members after the partition, were to share profits only and not losses and further in the event of loss, the karta was to pay Rs. 1,000 per annum to the other members. Thus, by following the decision of the Punjab and Haryana High Court, the Appellate Assistant Commissioner held that no sub-partnership came into existence among the members of the Hindu undivided family after the partition. Therefore, the income of other members could not be clubbed in the hands of the assessee under Section 64(1) of the Act. The aforesaid decision was applied by the learned Appellate Assistant Commissioner in the assessment year 1980-81.
21. The Revenue being aggrieved, brought the issue in appeal before the Amritsar Bench of the Appellate Tribunal. After hearing the parties, both the learned Members proposed different orders. The learned Judicial Member was of the view that the decision of the Punjab and Haryana High Court was given on the facts found by the Tribunal that in that case there was no sub-partnership. To substantiate the above view, the learned Judicial Member quoted a portion of the decision in the case of Ram Narain [1980] 126 ITR 267 (P & H). On a consideration of the memorandum of partition, the learned Judicial Member held that there was an agreement between the members to use the capital partitioned in the books by keeping it intact in the books of the firm as capital invested. He agreed with the Assessing Officer that the five members after the partial partition reached an agreement to divide the share of income earned by the assessee as a partner. Conversely, he found an agreement among the five members to let the assessee be a partner in five partnership firms and earn share of profit not only for his share of capital but also for the contribution of capital of other four members. There was, therefore, a sub-partnership among the members of the Hindu undivided family and the provisions of Section 64(1)(i) were applicable. For his conclusion, the learned Judicial Member drew support from the decision of the Gujarat High Court in the case of Mahendrasingh Mohansingh [1980] 123 ITR 938.
22. The learned Accountant Member was unable to share the view expressed by the learned Judicial Member. After considering the recitals of the memorandum of partition, he held that the clauses of the memorandum, in question, were more like the clauses considered by the Gujarat High Court in the case of Addl CIT v. Ckandutol C. Shah [1977] 107 ITR 91, and not like that in the case of CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938 (Guj). In the later case, the High Court had considered clauses not only of the agreement between the members but also of the partnership deed executed on the same day. But in the case in hand, no new partnership deed appears to have been written nor any assessment on sub-partnership was made by the Revenue. The learned Accountant Member was of the view that an overriding obligation was created to make over the income in favour of the minors and no sub-partnership was created. Thus separate income accrued to each member by virtue of superior title created in their favour on account of partial partition. The learned Accountant Member relied upon the decision in the case of CIT v. Pabbati Shankaraiah [1984] 145 ITR 702 (AP). He also referred to comments of the learned commentator in the "Law and Practice of Income Tax" by Kanga and Palkhivala, Seventh edition, page 1-122, wherein the learned author has observed that decision in the case of CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938 (Guj) was incorrect. Having regard to the overriding title created in favour of the Members prior to the partition, the Accountant Member held that no sub-partnership came into existence. He directed that appeals of the Revenue be dismissed.
23. In the aforesaid background, the difference has been referred to me under Section 255(4) of the Income-tax Act.
24. I have heard both the parties on the question referred to me. The learned Departmental Representative Shri J. S. Arora read out and relied upon the proposed order of the learned Judicial Member. He contended that the matter in issue was fully covered in favour of the Revenue as per the decision in the case of Chandu Lal C, Shah [1977] 107 ITR 91 (Guj). He accordingly prayed that the proposed order of the learned Judicial Member be followed. Shri Sudarshan Kapur, learned counsel for the assessee, on the other hand, supported the proposed order of the learned Accountant Member. Apart from relying upon the decisions cited in the above proposed order, Shri Kapur brought to my notice the decision of the Punjab and Haryana High Court in the case of CIT v. Narinder Kumar [1989] 177 ITR 515. The above binding decision was submitted to be on all fours and accordingly it was contended that the proposed order of the learned Accountant Member should be endorsed.
25. I have given careful thought to the rival submissions of the parties and have examined the proposed orders of the learned Members in the light of those submissions. In the case of Narinder Kumar [1989] 177 ITR 515, their Lordships of the Punjab and Haryana High Court distinguished the case of Mahendrasingh Mohansingh [1980] 123 ITR 938 (Guj) and applied the case .of CIT v. Pabbati Shanharaiah [1984] 145 ITR 702 (AP). The latter case has been applied by the Accountant Member. The facts of the said case and the decision given thereon (as per the headnote) are as follows:
"S was the karta of a Hindu undivided family consisting of himself, his major son, his two minor sons and his wife. He was a partner in a firm having 30 per cent, share in it. There was a partial partition in the family in 1963 in respect of the interest of the family in the firm. Division was effected by allotting 12 per cent, share to S and 6 per cent, to each of his sons. The capital standing in the name of S was divided into four equal shares and necessary entries were made in the books of the firm. It was further agreed that S would continue to remain a partner in the firm and the profit derived by him would be divided between himself and the three sons. S's major son was also taken in as a partner in the firm. The Income-tax Officer held that there was a body of individuals consisting of S and his two minor sons which had to be assessed in respect of the 24 per cent, of the share from the firm. The Tribunal held that S and his minor sons did not constitute a body of individuals.
On a reference :
Held, (i) that S and his two minor sons did not constitute a body of individuals.
(ii) S would be holding the income received by him as a constructive trustee under sections 81, 90 and 94 of the Indian Trusts Act in favour of the two minors, for whose benefit he held it. Looking from this angle also it could not be said that S and his two minor sons constituted a 'body of individuals'.
(iii) that the aspect of diversion of income by overriding title could be raised before the court, because it was fairly implicit in the question referred by the Tribunal.
(iv) that the agreement created an overriding obligation on S to make over the income in favour of the minors and, therefore, the income corresponding to the sharp of each minor right from inception accrued to each minor, creating thereby a superior title in favour of the minors. It was not assessable in the hands of S."
26. On the other hand, in the case of CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938, their Lordships of the Gujarat High Court held that after partial partition of the Hindu undivided family, a sub-partnership between the assessee and his wife came into being as all the three elements necessary to constitute a partnership were present. Their Lordships accordingly held that the shares of the assessee's wife and son were liable to be included in the total income of the assessee under Section 64 of the Income-tax Act. The aforesaid decision as noted earlier has been heavily relied upon by the learned Judicial Member. The learned Accountant Member, however, has referred to comments of the learned authors Kanga and Palkhivala on the aforesaid decision but in my view the decision in Makendrasingh Mohansingh's case [1980] 123 ITR 938 (Guj) has been given on its own facts and is distinguishable. This is what has been held by the jurisdictional High Court in the case of Narinder Kumar [1989] 177 ITR 515 (P & H) and I bow to the aforesaid observations rather than subscribe to the views expressed by the learned authors or by the learned Accountant Member in the proposed order.
27. Having regard to the principles laid down in the cited cases in the proposed orders, the answer to the controversy presently before me, lies in determining whether on or after the partial partition, the members agreed to share the profits and losses of the business authorising Shri Jagdish Rai to act on their behalf as agent, thus bring into being a sub-partnership. Only in such a situation, the provisions of Section 64(1)(i) of the Act would be attracted. For considering the above aspects of the case, it is necessary to bear in mind certain basic principles relating to constitution of a partnership as also the well-settled principles of Hindu law.
28. Under Section 4 of the Indian Partnership Act, "Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all". Section 5 of the Partnership Act expressly provided that, "the relation of partnership arises from contract and not from status". It is, therefore, clear that to constitute a valid partnership in law, there must be three elements--
(i) there must be an agreement entered into by two or more persons;
(ii) the agreement must be to share the profits of a business ; and
(iii) the business must be carried on by all or any of those persons acting for all.
29. As regards Hindu law, the following observations in Mayne on Hindu law and usage (1953 edition) (page 264) have been approved by the Supreme Court in umpteen number of cases [Kindly see State of Maharashtra v. Narayan Rao Sham Rao Deshmukh [1987] 163 ITR 31 (SC)] (at pages 35, 36) :
"A joint and undivided family is a normal condition of a Hindu society. The Hindu coparcenary is a much narrower body than the joint family". "Only males who acquire by birth an interest in the joint or coparcenary property can be members of the coparcenary or coparceners. A male member of a joint family and his sons, grandsons and great grandsons constitute a coparcenary. A coparcener acquires right in the coparcenary property by birth but his right can be definitely ascertained only when a partition takes place. When the family is joint, the extent of the share of a coparcenary cannot be definitely predicted since it is always capable of fluctuating. It increases by the death of a coparcener and decreases on the birth of a coparcener. A joint family, however, may consist of female members. It may consist of a male member, his wife, his mother and his unmarried daughters."
30. Thus under Hindu law, since centuries, a male born in a Hindu family having joint family property, acquires an interest in such property by birth and has a right to claim a partition. (In Punjab, a son cannot claim a partition against the wishes of the father but this aspect is not material for resolving the present controversy). Under the codified law, even female members of a joint family have been given the right to claim partition and have a defined indefeasible share in the property held joint prior to the partition. The share on partition is not allotted on account of any agreement but flows from well-settled principles of Hindu law.
31. Turning now to the facts of the present case, it is seen that on the partial partition of the Hindu undivided family, each member became entitled to receive a l/5th share of profit or loss in the firms as stipulated. The aforesaid l/5th share was not allotted on account of any contract as envisaged under Section 5 of the Partnership Act but flowed from rights of male members acquired by birth and by the female member on account of her relationship with the male member. There was no sharing of profits/ loss of business as partners. The right to take the l/5th share followed from well-accepted principles of Hindu law. Such right was indeterminate prior to the partition. It became defined and determined on the partition. Shri Jagdish Rai as a partner prior to partition had two distinct relationships--(1) with other partners of firms who were not concerned with the status he represented as a partner ; and (2) with other members of the joint family represented by him in the firms. On the partition of the Hindu undivided family, the second relationship underwent a change without affecting the first relationship. Prior to partition, Shri Jagdish Rai had an obligation to pass on/adjust the share of profits or losses of the partnership to the common hotchpotch or funds of the joint family. No member could claim any specified share. After partition and in view of the defined and determined share of partners, Shri Jagdish Rai was obliged to pass on a l/5th share to each member of the Hindu undivided family. The profits (or losses) could not go to the joint family funds which lost its existence and was replaced by the right of each member to take a specified l/5th share. Thus the overriding title of each member came into play resulting in diversion of income. This also brought about a change in the obligation of Shri Jagdish Rai to pass on a l/5th share to each member. The above change occurred as a corollary and consequent to the partition permitted and carried under the Hindu law. It did not follow from any contract. Shri Jagdish Rai by no stretch of imagination can be treated as an agent of other members. His action could not bind the other members of the Hindu undivided family in respect of the partitioned properties. The l/5th share received by each member was received on account of rights acquired by birth and not under any contract. On the facts, therefore, no sub-partnership can be held to have come into being to invoke the provisions of Section 64(1)(i) of the Act.
32. In the case of Mahendrasingh Mohansingh [1980] 123 ITR 938 (Guj), the members after the partition entered into an agreement. Clause (2) of the said agreement provided as under (at page 944) :
"(2) In consideration of the parties of the second and third parts having permitted the party of the first part as aforesaid the said user, the party of the first part agreed to pay annually to each of the parties of the second and third parts l/3rd each of the earning from the said share in the said partnership business subject to a minimum of Rs. 1,000 to each. The said earning shall be the amount credited to the account of the party of the first part in the books of the partnership as his shares in the said partnership. The parties hereto agree to make an arrangement with the firm so that the parties of the second and third parts shall be entitled to withdraw their l/3rd share in the profits as aforesaid directly from the firm."
33. The aforementioned clause clearly reflects a fresh agreement or arrangement among the members which did not follow or was incidental to partition of the joint family. The provision of payment of a minimum amount of Rs. 1,000 to each member was a fresh agreement entered into among the members. The arrangement further cast additional obligation on the karta. The aforesaid arrangement was held to satisfy all the elements necessary to constitute a sub-partnership. However, as noted earlier, the facts in the case are different and no inference of formation of a sub-partnership can be drawn. The case of Mahendrasingh Mohansingh [1980] 123 ITR 938 (Guj)> in my view, is not applicable to the facts before me. The .facts of the present case are parallel to the cases decided by the Punjab and Haryana High Court and by the Andhra Pradesh High Court. For the aforesaid reasons, I agree and concur with the view taken by the learned Accountant Member. The case should now go back to the regular Bench for disposal of the appeal in accordance with law.