HOTCHAND CHATTARAM Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) ONE Hotchand Chattaram, his son, Bherumal, and the three sons of Bherumal, namely, Kishoredas, Harishchand and Hashmat-raj, constituted a Hindu undivided family. They migrated from Pakistan at the time of partition of India and had settled down in Madras. 'They brought with them only the available cash of Rs. 30,000 when they left Pakistan out of which a sum of Rs. 13,000 belonged to Muli Bai, the wife of Bherumal. Bherumal had also preferred a claim to the Evacuee Settlement Officer for a sum of Rs. 33,832 in respect of the movable and immovable properties left in Pakistan. There was a business by name "Hotchand Chattaram, Madras". Bherumal had been contending that this business belonged to him individually but the department did not accept it and assessed the income from the business as a Hindu undivided family consisting of Hotchand, his son, Bherumal, and Bherumal's sons. Muli Bai had advanced her money of Rs. 13,000 as a loan in the name of her minor son, Harischand, and that was repayable to her. A return of income for this business was filed accordingly for the previous year relevant for the assessment year 1954-55, in the status of a Hindu undivided family. On March 31, 1954, a partition deed was executed. Under this partition, the business concern including its goodwill was allotted to Bherumal and his two minor sons, Harishchand and Hashmatraj. The business was valued at Rs. 8,000 and Bherumal was directed to pay Rs. 5,000 to Muli Bai, Rs. 1,500 to Hotchand and Rs. 500 to Kishoredas. Bherumal and his minor sons were to take Rs. 1,000. It is seen from the balance-sheet of the joint family as on March 31, 1954, that the liabilities of the business amounted to Rs. 28,764-14-5 while the assets were valued at only Rs. 21,995-8-10, leaving a sum of Rs. 7,209-11-1 as the excess of liabilities over the assets. ONE of the liabilities shown is a sum of Rs. 15,814-2-3 in the name of Harishchandra payable, to Muli Bai. It is not clear how the sum of Rs. 13,000 stated to have been advanced by Muli Bai as a loan swelled to Rs. 15,814-2-3. The partition deed recites that Muli Bai agreed to receive Rs. 5,000 from the parties and offered to take back the balance of Rs. 8,000 with interest at 6% when the claim amount from the Evacuee Settlement Officer is received. It is further stated that she agreed to relinquish her claim if no amount is received from the Evacuee Settlement Officer as the business was not in a position to repay the entire debt due to her. When this sum of Rs. 15,814-2-3 is taken out thus from the liabilities, the business showed a net asset of Rs. 8,605 which was rounded off to Rs. 8,000 and that is how the business came to be valued at Rs. 8,000 in the partition deed. On April 1, 1954, Bherumal, as one of the partners, and Kishoredas, major son of Bherumal, as the second partner, entered into partnership for carrying on the business of "Hotchand Chattaram" as a partnership business with equal rights and liabilities. In this partnership deed it was recited that Hotchand and the son, Bherumal, were divided in status even in 1944, that Bherumal was carrying on the business of Hotchand Chattaram as a sole proprietary concern though he adopted the name of his father out of affection and respect for him, that Muli Bai had agreed to help Bherumal to the extent of a sum of Rs. 10,000 on condition that Kishoredas was taken as a partner and, accordingly, they were entering into a partnership. This partnership was registered with the Registrar of Firms as seen from the certificate of registration dated April 14, 1954, issued by the Registrar of Firms, Madras. A current account was opened in the name of Hotchand Chattaram with Bherumal and Kishoredas as partners with the Bank of Bikaner on April 7, 1954, as seen from the certificate issued by the Bank of Bikaner Ltd.

(2.) FOR the assessment year 1955-56, a return of income was filed by the assessee herein in the status of a firm of partnership with Bherumal and Kishoredas as partners. An application for grant of registration of the firm under Section 26A of the Indian Income-tax Act, 1922, was also filed before the Income-tax Officer. The Income-tax Officer rejected this claim on the ground that there was no partition in the family. FOR the assessment year 1956-57 also a return was filed in the status of a partnership firm with an application under Section 26A. The application was rejected for the above reasons as well as for the reasons that the application was belated. The appeals preferred to the Appellate Assistant Commissioner against the rejection of the registration of the firm under Section 26A for the above two assessment years were also dismissed on the ground that the applications were belated. FOR the assessment years 1957-58 and 1958-59, the assessee applied for registration of the firm under Section 26A, contending that there was a partition in the joint family on March 31, 1954, and the partnership came into existence on April 1, 1954, in respect of the business. In addition to producing the partnership deed dated April 1, 1954, the partition deed dated March 31, 1954, the certificate of registration issued by the Registrar of Firms and the letter of the Bank of Bikaner showing opening of a current account by the firm, the assessee also produced sales tax assessment orders on the firm for 1954-55 onwards, import quota obtained by the firm, account books of the firm showing separate capital account of partners and allocation of profits during the year and accounts for the disposal of old stock of the erstwhile family business separately and unconnected with the firm. It may be mentioned that though the old stock-in-trade of the erstwhile family business was allotted to Bherumal, that stock was not brought into account as the opening stock of the partnership firm but it was claimed that they were sold separately and the sundry debtors of the old business of the family were paid off with that money. According to the auditor's letter, dated 26th September, 1958, the capital contributed by Bherumal was Rs. 1,000 and that of Kishoredas was Rs. 700 and these were stated to have been obtained as loans from friends. The Income-tax Officer was of the view that the statement of assets and liabilities in the status of a Hindu undivided family as on March 31, 1954, narrated in the partition deed is not correct with reference to the balance-sheet of the family as on March 31, 1954. Since the partition deed was not in consonace with the balance-sheet of the family, according to him, "it cannot be said that there has been a partition of the Hindu undivided family in the manner contemplated by law. If there has been no partition of the family, it cannot be said that the partnership deed which follows subsequent to the partition of the family is a genuine document which is to be acted upon. On this ground alone, the assessee's claim for registration of the firm stated to have come into existence on April 1, 1954, consequent on the dissolution of the family is to be rejected as no genuine firm has come into existence". In this view, he rejected the application for registration of the firm under Section 26A and also held that, in view of the scheme of the Income-tax Act, the Hindu undivided family will have to be assessed as such until it was established that a partial or full partition had taken place by metes and bounds. He concluded by stating: " It is held that no genuine firm came into existence as there was no partition of the family as on March 31, 1954." FOR 1958-59 also, he rejected the application under Section 26A on the ground that there was no partition of the Hindu undivided family in the manner contemplated by law as on March 31, 1954. Against the rejection of the application under Section 26A and the assessments made on the Hindu undivided family in respect of the assessment years 1957-58 and 1958-59, four appeals were preferred by the assessee to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the refusal of the Income-tax Officer to register the firm was misconceived both on facts and law. He found that the closing stock of the business of the erstwhile Hindu undivided family was not handed over to the new firm but instead sold gradually by the persons to whom it was allotted, viz., Bherumal and his minor son, Harishchandra. It will not, therefore, find a place as an opening stock in the partnership firm. He also held that even assuming that there was a discrepancy between the assets and liabilities of the erstwhile Hindu undivided family and the new firm, it would not be sufficient ground for rejecting the appellant's claim for registration of the partnership firm. In this connection he also relied on the decision of this court in Meyappa Chettiar v. Commissioner of Income-tax, 1950 18 ITR 586. He referred to the evidence produced by the assessee the details of which were referred to above and came to the conclusion that there was substantial evidence showing complete partition of the family and constitution of the partnership firm.' He accordingly set aside the orders of the Income-tax Officer under Section 26A and directed him to register the firm and to apportion its profits or losses amongst its partners. In that view he also set aside the assessments on the Hindu undivided family with a direction to pass fresh assessment orders de novo in the status of a registered firm. The department preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal set aside the orders of the Appellate Assistant Commissioner on the following grounds : Though the balance-sheet of the joint family as on March 31, 1954, showed a liability of Rs. 7,209, that liability was not divided in the partition deed but by some sort of strange adjustment it was valued at Rs. 8,000, Whereas the partition deed proceeded on the footing that the business belonged to the Hindu undivided family and the figures are worked out on that basis, the partnership between Bherumal and his sons had stated that the business was the individual business of Bherumul and Hotchand was not possessed of any property. The partnership deed recited that Mali Bai agreed to advance a sum of Rs. 10,000 to the firm if Kishoredas was also taken as a partner, but there was no proof that the sum of Rs. 10,000 was given by Muli Bai and this was invested in the business of the firm. On the other hand, the auditors in their letter dated September 25, 1958, stated that Rs. 1,000 was invested by Bherumal and Rs. 700 was invested by Kishoredas. The department had already held prior to the alleged partition that the business was that of a Hindu undivided family. Therefore, if the concept of the firm had to take shape, the Hindu undivided family which was in the way had to be got out. This has not been done. The assets and liabilities of the erstwhile family business which were allotted to Bherumal's share were kept separate and distinct from the new partnership. There are variations in the figures and statements. Therefore, there was no partnership and no genuine-firm came into existence.

(3.) AS seen from the facts in that case, with respect to a joint family business which was one of the assets of the joint family, the Privy Council held that there is nothing in the Hindu law which prohibits the members of a Hindu undivided family while remaining joint from entering into a partnership in respect of a business which they have partitioned and the registration of the firm shall not be refused. But the question in this case is whether the business was partitioned or remained a joint family asset. If the business was partitioned, then there is nothing preventing the constitution of a partnership firm. But, the Income-tax Officer and the Tribunal were of the view that there was no genuine partnership on the ground that there was no legal or genuine partition. If the Tribunal's findings were to be accepted, the decision is not applicable to this case.