JUDGMENT
SHIV DAYAL C.J. – This is a reference under section 66(2) of the Indian Income-tax Act, 1922. The question are :
“(1) Whether there was evidence for the Tribunal to come to the conclusion that there was no ascertainment of the capital assets of the business on October 23, 1957, and there was, therefore, no partial partition on October 23, 1957 ?
(2) Whether, on the finding that there was no ascertainment of the capital assets on October 23, 1957, the Tribunal was justified in its further conclusion that no partnership was brought into existence on October 23, 1957, so as to entitle it for registration under section 26A of the Indian Income-tax Act, 1922 ?”
The assessment years are 1959-60 and 1960-61, the relevant previous years being the years ending Diwali 1958 and 1959 respectively,
Ghewarchand, his wife, Shrimati Gajrabai, and his two sons, Meghraj and Kewalchand, formed a Hindu undivided family. The firm carried on ghee business under the name and style of M/s. Ghewarchand Kewalchand. Until, and inclusive of the assessment year 1958-59, the income from the said ghee business was assessed to tax in the hands of the Hindu undivided family.
On October 23, 1957, which was the last day of the accounting year (assessment year 1958-59), the Hindu undivided family claimed to have effected a partial partition in respect of the said ghee business, and to have formed a assessment under the name and style of Ghewarchand Kewalchand consisting of the following partners who were to share equally profit or loss, as the case may be :
(1) Ghewarchand, s/o Pratapchand, 5 annas and 4 pies in a rupee.
(2) Kewalchand, s/o Ghewarchand, 5 annas and 4 pies in a rupee.
(3) Meghraj, s/o Ghewarchand, 5 annas and 4 pies in a rupee.
In consequence of this, the newly formed firm, M/s Ghewarchand Kewalchand, by an application dated June 26, 1958, under section 26A of the Indian Income-tax Act, 1922, applied for registration of the firm for the year 1959-60 and for continuance of the registration for the year 1960-61.
The terms of the partnership were recorded in an instrument of partition dated October 26, 1957.
The Income-tax Officer rejected the claim of partial partition and refused registration holding that “the status of firm was super-imposed on the family business…. and the members of a Hindu undivided family cannot super-impose any other status in respect of a business carried on by it without destroying that status and by their very nature the status of a Hindu undivided family is totally different from the status of partnership”. Having rejected the claim of partial partition, the income from the said business was included in the total income of the Hindu undivided family; and the interest credit to Shrimati Gajrabai on the amount of her share (which had been credited in her account in the account books of the firm) was disallowed and added back in the assessment as interest paid to self.
Aggrieved by the order of the Income-tax Officer, the assessee preferred an appeal. The appeal was allowed holding that “there was a genuine partial partition made in the family and the business then became a partnership concern as evidenced both by the instrument of partnership as also by the legal formalities duly complied with as per details furnished before the Income-tax Officer and accepted as such by him in this connection.”
On further appeal preferred by the Income-tax Officer, the Tribunal reversed the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. It found that there was no ascertainment of capital account on October 23, 1957, and, therefore, no partial partition was effected on that day. It was also observed :
“If the family business had gone out of the H.U.F. assets, certainly the assessee would not have paid the first instalment of advance tax claimed against the H.U.F. on March 14, 1959.”
In conclusion, the Tribunal held that, “though a partnership firm was formed on October 23, 1957”, there could not be a valid formation of the partnership between the members of H.U.F. in respect of that business.
The assessee-firm applied for a reference to the High Court. It was refused. The assessee came to this court. The Tribunal was directed to refer the above questions. When the matter was heard earlier, a question arose whether the advance tax which was paid for the Hindu undivided family on September 29, 1958, was for the assessment year 1959-60 or for the assessment year 1958-59. If it was made for the year 1958-59, then it could not be a ground for holding that there was no partial partition as alleged by the assessee. The assessee’s contention was that the amount of Rs. 293 which was paid on September 29, 1958, was the second instalment. The matter was sent back to the Tribunal. By an additional statement of the case dated July 30, 1976, it has found as follows :
(i) The notice for advance payment of tax under section 18A(1) was issued to the H.U.F. for the assessment year 1958-59. The notice of demand was for Rs. 893 and it was dated May 1, 1957.
(ii) On November 18, 1957, the H.U.F. deposited Rs. 600 as the first instalment of the advance tax for the year 1958-59.
(iii) On September 29, 1958, the second instalment of Rs. 293 was deposited.
The Tribunal, in the additional statement of the case, says :
“We find that the payment of Rs. 293 was deposited as a part of the advance tax payable for the assessment year 1958-59, and not as a part of advance tax for the assessment year 1959-60. This is the true state of affairs.”
Shri Chitaley, learned counsel for the assessee, states before us that the second ground relied on by the Tribunal was the substantial ground, because if it had been true, the deposit of advance tax for the year 1958-59 on behalf of the Hindu undivided family in respect of the ghee business would have negatived assessee’s case of partial partition having taken place on October 23, 1957. That ground was not correct; it was based on misconception of facts which has now been admitted by the Tribunal. The advance tax which was paid on September 29, 1958, was not the first instalment (as stated by the Tribunal in its appellate order), but was the second instalment for the year 1958-69, the first instalment having been paid on November 18, 1957, for the assessment year 1958-59. It was emphatically urged before us that it strikes at the root. The only ground which remains is that there was no evidence of ascertainment of capital account.
Shri Chitaley urged that the instrument of partnership which has not been held to be not genuine is itself evidence of partial partition having taken place on October 23, 1957. Neither the Income-tax Officer nor the Tribunal disbelieves the genuineness of the instrument of partnership. There was no evidence to controvert the statement made in it that partial partition had taken place on October 23, 1957. Furthermore, there is strong corroborative evidence :
(i) Application for registration of the firm under the Partnership Act was made as early as on October 30, 1957, which application was granted and a certificate was issued by the Registrar of Firms on February 25, 1959.
(ii) As early as January 8, 1958, an account was opened by the partnership firm with the Bank of Nagpur.
(iii) The change of status from H.U.F. to partnership with effect from October 24, 1957, was recorded by the Sales Tax Officer, Durg, by reference to both the M.P. State General Tax and Central Sales Tax.
(iv) Profits had been divided between the partners (Ghewarchand, Kewalchand and Meghraj) in making the return for the year 1959-60.
Shri Tamaskar, learned counsel for the department, strongly argued that since the case pleaded by the assessee was division of accounts on October 23, 1957, which could not be proved and for that reason partial partition could not be upheld, it was rightly held by the Tribunal that the status of Hindu undivided family continued and, consequently, no partnership could be super-imposed on the Hindu undivided family. The learned counsel further argued that we could not proceed on surmises and conjectures and it was not permissible to hold that, even if there was no partial partition on the 23rd October, 1957, the very recital in the instrument of partnership brought about disruption of the Hindu undivided family in the eye of law. This is because that instrument of partnership came into existence on the 26th October, and not on the 23rd October of that year. It was emphasised by Shri Tamaskar that in the present proceedings we could not travel outside the questions referred to us.
It is an outstanding feature of this case that the Tribunal has found that the partnership was formed on October 23, 1957. This is very significant. The basis for this finding is the instrument of partnership dated October 23, 1957. In other words, the Tribunal believed and relied on the instrument of partnership which was admittedly executed by partners on October 26, 1957. It contains the following unequivocal statements :
“WHEREAS party Nos. 1 to 3 (Ghewarchand, Kewalchand, Meghraj) along with Gajrabai w/o Ghewarchand formed the Hindu joint family, Ghewarchand Kewalchand, Durg, were carrying on the business under the name and style of Ghewarchand Kewalchand, Durg.
WHEREAS on 23-10-1957 party Nos. 1, 2 and 3 and Gajrabai decided to partition the assets and liabilities of the business of Ghewarchand Kewalchand, Drug, as it existed on 23-10-1957; and
WHEREAS party Nos. 1, 2, and 3 decided on 23-10-1957 to form a partnership firm under the name and style of Ghewarchand Kewalchand, Drug, and further decided to succeed the running business of Ghewarchand Kewalchand, i.e., business assets and liabilities of these partners (disrupted Hindu joint family) as it existed on 23-10-1957.”
It is undoubted law that factum of disruption of joint status is the crux to determine whether there was “partition” of the joint Hindu family. Partition can be total or partial. The partition between corparceners may be partial either in respect of the property or in respect of the persons making it. This was settled as far back as in Rewun Persad v. Radha Beeby [1846] 4 MIA 137, 168 (PC). It was held in Ramalinga Annavi v. Narayana Annavi [1922] LR 49 IA 168; AIR 1922 PC 201, 205 that :
“It is open to the members of a joint family to make a division and a severance of interest in respect of a part of the joint estate, whilst retaining their status as a joint family and holding the rest as the properties of a joint undivided family.”
It is settled and undoubted law that where there is evidence to show that the parties intended to sever, then the joint family status is put an end to. In Appovier v. Rama Subba Aiyan [1866] 11 MIA 75 (PC), it is held that in case where the coparceners with a view to partition executed a writing whereby they agreed to hold joint property under defined shares as separate owners, such a writing operates in law as a partition, though the property is not physically divided. See also Raghavamma v. Chenchamma [1964] 2 SCR 933; AIR 1964 SC 136.
In Sundar Singh Majithia v. Commissioner of Income-tax [1942] 10 ITR 457, 464 it was urged before the Privy Council that for the purposes in Income-tax, members of an undivided Hindu family cannot enter into a partnership in respect of a portion of the joint property which they have partitioned among themselves. It was held :
“Section 25A contains no warrant for any such prohibition. It has no reference at all to any case in which the Hindu undivided family remains in existence at the time of assessment. No difficult whatever in the assessment of a Hindu undivided family is caused – or was ever thought to be caused – by the facts that in one year it has certain assets and certain income therefrom and that in the next year it is found to have parted with one asset and to be no longer in receipt of the same income. The same assessee has a different income in each year – that is all. It matters nothing whether the particular asset no longer possessed by the undivided family has become the separate property of a member or belongs to a stranger.”
In the present case, the whole ghee business was transferred, lock, stock and barrel, by the Hindu undivided family to the partnership firm. It was, therefore, not significant whether a capital account was made, and assets and liabilities were actually divided between coparceners.
In the first question referred to us, the word “therefore” is mark-worthy. It must be held that even if there was no evidence before the Tribunal to come to the conclusion that there was ascertainment of the capital assets of the business on October 23, 1957, it did not follow as a necessary consequence that there was no partial partition on October 23, 1957. Similarly, with reference to the second question it must be held that even if there was no ascertainment of the capital assets on October 23, 1957, it did not follow as a necessary consequence that no partnership was brought into existence on October 23, 1957. In fact, as we have pointed out above, the Tribunal should have, while making the statement of the case, pointed out that the Tribunal had already reached the conclusion that a partnership was in fact formed on October 23, 1957 (vide the passage at the outset reproduced from the appellate order of the Tribunal). The sum substance of the matter is that incontestably, as evidenced by the deed of partnership dated October 26, 1957, the partnership came into existence.
At the hearing of this reference a question was posed : what substantial difference would it make whether the partnership came into being on the 26th October (the partnership deed indisputable), if not, on October 23, 1957 ? But we do not think it necessary to enter into that question when the Tribunal itself has recorded a clear finding that the partnership was actually entered into on 23rd October and the basis of this finding is no other than the instrument of partnership itself. Now, if the instrument of partnership was believed by the Tribunal, what was there to disbelieve the recital in that instrument that partial partition had taken place on the 23rd October, so that there had been disruption of the joint status on that very day ? The answer was :
(i) Absence of evidence of ascertainment of capital.
(ii) Payment of first instalment of the “advance tax” on September 29, 1958, for the year 1959-60 on the behalf of the Hindu undivided family.
The second ground was misconceived, as subsequently admitted by the Tribunal. The logic behind the first ground is that since there was no ascertainment of capital on the 23rd October, the joint status of the Hindu undivided family continued, and the “super-imposition” of a different status was not permissible in law. If we may say so, this was obviously fallacious. It is not the law that there cannot be partition without ascertainment of capital. The law is that where there is evidence to show that the parties intended to sever, then the joint family is put an end to. (See Mulla’s Hindu law, paragraphas 322, 325, 326, 327 and 328).
In our view, where a partial partition is effected in respect of a business of the joint Hindu family and a partnership is formed by the members of the Hindu undivided family in respect of that business which is transferred, lock, stock and barrel by the Hindu undivided family to the partnership firm, ascertainment of capital is not a necessary requirement of the law to effect the partial partition.
The partnership firm of M/s. Ghewarchand Kewalchand was, therefore, entitled to registration as a partnership firm under section 26A of the Indian Income-tax Act, 1922.
Our answer to the first question is :
Even if there was no evidence before the Tribunal to come to the conclusion that there was ascertainment of capital assets of the business on October 23, 1957, it did not follow as a necessary consequence that there was no partial partition on October 23, 1957.
Our answer to the second question is :
Even on the finding that there was no ascertainment of the capital assets on October 23, 1957, the Tribunal was not justified in its conclusion that partnership was not in the eye of law brought into the existence on October 23, 1957, although as a matter of fact it was. The assessee firm was entitled to registration under section 26A of the Indian Income-tax Act, 1922. The Tribunal did not find that no partnership was brought into existence on October 23, 1957; on the contrary, the Tribunal had recorded a positive finding, in its appellate order, that a partnership was in fact formed on October 23, 1957.
Parties shall bear their own costs of these proceedings.
