(1.) THIS is a reference under section 66(2) of the Income-tax Act, 1922, and the question referred runs thus "Whether there were materials on record to justify the conclusion of the Tribunal that there was no effective partition on July 24, 1954, with reference to any or all the assets mentioned in the Tribunal's order?" *The assessee is Kuppiah Mudaliar as the karta of an undivided Hindu family consisting of himself and his son, Balasubramanian. He seeks to exclude the income from certain sources as not income of the undivided Hindu family, setting up a completed partition of the related items on July 26, 1954, pursuant to an agreement for partition entered into on June 14, 1954. The assessment orders involved in the references are for the assessment years 1955-56, 1956-57 and 1957-58. An order under section 25A(1) has been refused, but that does not preclude the assessee from contending that there has been partial partition in respect of particular movable items. The sources of income of the family were taken to be: (1) a dwelling house, (2) Government promissory notes, and (3) shares the family had in three partnerships: (a) Haridranathi Rice Mill, Mannargudi, (b) Dhanalakshmi Rice Mill, Thiruthuraipundi, and (c) Dhanalakshmi Rice Trade, Thiruthuraipundi.
(2.) THE assessee seeks exclusion of the income from the partnerships and the Government promissory notes as not income of the Hindu undivided familyTHE agreement for partition dated June 14, 1954, is shown as annexure "A" to the agreed statement of the case. It refers to the division of movable properties of the Hindu undivided family and division of outstandings receivable by and payable to the family and sets out that the rice mill business of the Hindu undivided family would thereafter be conducted as co-owners. Provision is made for a registered deed of partition dividing the family properties by metes and bounds and the agreement ends with a declaration that the father and son, the two coparceners, shall thereafter have no relation in properties but only in blood. A regular registered deed of partition followed on July 26, 1954, and this sets out that the parties were members of an undivided Hindu family till June 14, 1954, and in accordance with the memorandum of agreement dated June 14, 1954, and, oral agreement they had divided the movable and immovable properties belonging to the Hindu undivided family as and from that date. In the Tribunal's order, which is a common order for all the three assessment years, it is noticed that by the memorandum dated June 14, 1954, followed by a regular deed of partition dated July 26, 1954, all the agricultural lands and assets of the family were purported to have been partitioned. It is stated further that in the books maintained the capital was mutated by necessary entries on July 26, 1954, and the son opened his own books for the share of capital so received, while the father continued to hold the family books for his share. Referring to the division, the Appellate Assistant Commissioner in his order finds that, besides the agricultural lands, as regards which there was no dispute that there was a completed division, the family had the following assets: (1) capital, Rs. 2, 25, 539-15-4 (2) insurance policy on the life of the son (3) share income in the three registered firms set out above and (4) the dwelling house. THE division of the above assets is stated to have been effected according to the Appellate Assistant Commissioner thus: A capital of Rs. 1, 11, 169 had been credited to the account of the son and this included the Government bonds of the value of Rs. 55, 960, the character of income from which is now in question.
(3.) THE contention of the assessee is that after July 26, 1954, these income bearing assets have ceased to belong to the Hindu undivided family and even if there had been no reconstitution of the partnership firms vis-a-vis his son, the father was not a partner in the firm as karta of the undivided family. While under the income-tax law the undivided family is as such a unit of assessment, the partnership law as such does not treat the Hindu undivided family as a person who could enter into a contract of partnership. THE contract of partnership may no doubt be with the head of the family but he enters into the partnership contract as an individual. By the karta becoming a partner, the other members ipso facto do not become partners of the firm. No doubt the creditors of the firm would be entitled to proceed against the joint family assets including the shares of the other coparceners, but that is by reason of the personal law which. entitles the karta in certain circumstances to pledge the credit of the joint family to the extent of its assets. THE partition in the family has no effect upon the relationship of the parties inter se under the partnership law. But so far as the family is concerned, the effect of disruption is that the karta will cease to represent the other members in that capacity and an effective partition will efface the family as a unit for assessment of income-tax. Where the asset of the family in question which is subjected to division is a share in a partnership concern, there need be no immediate change in the partnership concern by the division in the family and the erstwhile karta may continue to be the partner. THE partnership may refuse to take the several shares of the family's interest in the partner ship as partners. But qua the members of the family, there will be change in the character in which the share is held.