BAGYALAKSHMI AND CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) FOR the assessment year 1952-53, a firm called Messrs. Bhagyalakshmi and Co., which were the managing agents of the Palani Andavar Mills Ltd., Udamalpet, applied for registration. Though the firm was originally constituted in 1934, it remained unregistered. FOR the assessment years 1939-40 and 1940-41, it had sought and obtained registration, but subsequently, there had been no application for renewal of registration. There had been changes in the constitution of the firm in 1941 and 1948. In 1950, a fresh partnership deed was drawn up. According to this document, of the several partners, one Guruswami Naidu was shown as the owner of a 7 annas 6 pies share and one Venkatasubba Naidu of a 2 annas 6 pies share. Each of the three other partners had a 2 annas share. On the basis of this partnership arrangement, the firm sought for and obtained registration for 1952-53. Renewal of registration was also granted by the Income-tax Officer for the assessment years 1953-54 and 1954-55.

(2.) IN the exercise of his revisional powers under section 33B of the Act, the Commissioner of INcome-tax commenced proceedings. Now, it would appear that both Guruswami Naidu and Venkatasubba Naidu were members of a Hindu undivided family and the income derived from this firm in respect of the ten annas share owned by these two persons was treated for income-tax purposes as that of a Hindu undivided family. The Hindu undivided family underwent partition. According to this partition deed executed on August 24, 1950, the ten annas share owned by the Hindu undivided family in the firm was divided among the members of the family in various proportions. Notwithstanding this partition, the share of the family in the firm continued to be represented in the partnership arrangement in the same manner as previously. It would further appear that on the assessment of Guruswami Naidu and Venkatasubba Naidu on their 7 1/2 and 2 1/2 annas share respectively, these two persons contended that their real income from the partnership related only to a two anna and one anna four pies share respectively, the rest of the income derived from the ten anna share owned by the Hindu undivided family going to the other members of the family in accordance with the partition arrangement. This contention, viz., that the real income of these two persons must be computed on the basis of the partition, was rejected by the INcome-tax Officer and the Appellate Assistant Commissioner. The Tribunal, however, upheld the contention of these two persons.

(3.) BEFORE we deal with the position when the joint family becomes divided and its consequent effect upon the partnership, we may consider the case of a sub-partnership. In Commissioner of Income-tax v. Laxmi Trading Co., one of several partners in a partnership entered into an agreement to share the profits derived by him with a stranger. The question arose whether by reason of this arrangement a valid sub-partner was created entitling the latter to registration. The position in law that the creation of such a sub-partnership in no way affects the other members of the principal firm being granted, the learned judges held that the sub-partnership was valid in law and could not be denied registration under section 26A of the Act. A similar conclusion was reached in Commissioner of Income-tax v. Agardih Colliery Co. In that case, A and B were partners in a firm each owing an eight anna share. B subsequently entered into another deed of partnership with five other persons whereby the eight anna share of the profits of the firm was to be divided between them with retrospective effect from the date of the original partnership. A was not a party to this latter partnership. An application for registration of the firm consisting of A and B of the main partnership was rejected. On appeal both the Appellate Assistant Commissioner and the Appellate Tribunal held that the second partnership did not affect the first and that the firm of A and B was entitled to registration, a conclusion which was upheld by the High Court on reference. These two decisions clearly establish that a sub-partnership entered into by one of several partners in the main firm would not affect the registrability of either the firm or the sub-partnership.