SUBBA RAO, - (1.) The following Judgment of the court was delivered by :
(2.) These two appeals by certificate arise out of the judgment of the High court of Madhya Pradesh, Jabalpur, in Miscellaneous Case No. 63 of 1961 from a reference under s. 66(2) of the Indian Income-tax Act, 1922, made by the Income-tax Appellate tribunal, Bombay. To appreciate the contention of the parties the following genealogy will be useful: JUDGEMENT_24_AIR(SC)_1966Image1.jpg After the death of Kalooram Todi, his two sons by name Govindram and Gangaprasad constituted a joint Hindu family which owned extensive property in Jaora State and a sugar mill called 'Seth Govindram Sugar Mills' at Mahidpur Road in Holkar State. In the year 1942 Bachhulal filed a suit for partition against Govindram and obtained a decree therein. In due course the property was divided and a final decree was made. We are concerned in these appeals only with the Sugar Mills at Mahidpur Road. After the partition Govindram and Bachhulal jointly worked the Sugar Mills at Mahidpur Road. After the death of Govindram in 1943, Nandlal, the son of Govindram, and Bachhulal, as kartas of their respective joint families, entered into a partnership on 28/09/1943 to carry on the business of the said Sugar Mills. Nandlal died on 9/12/1945, leaving behind him the members of his branch of the joint family, namely, the three widows and the two minor sons shown in the genealogy. After the death of Nandlal, Bachhulal carried on the business of the Sugar Mills in the name of 'Seth Govindram Sugar Mills'. For the assessment year 1950-51, the said firm applied for registration on the basis of the agreement of partnership dated 28/09/1943. The Income-tax Officer refused to register the partnership on the ground that after the death of Nandlal the partnership was dissolved and thereafter Bachhulal and the minors could be treated only as an association of persons. On that footing he made another order assessing the income of the business of the firm as that of an association of persons. Against the said orders, two appeals-one being Appeal No. 21 of 1955-56 against the order refusing registration and the other being Appeal No. 24 of 1955-56 against the order of assessment-were filed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed both the appeals. In the appeal against the order of assessment, the Appellate Assistant Commissioner exhaustively considered the question whether there was any partnership between the members of the two families after the death of Nandlal and came to the conclusion that in fact as well as in law such partnership did not exist. Two separate appeals, being Income-tax Appeal No. 8328 of 1957- 58 and Income-tax Appeal No. 8329 of 1957-58, preferred to the Income-tax Appellate tribunal against the orders of the Appellate Assistant Commissioner were dismissed. The assessee made two applications to the tribunal for referring certain questions of law to the High court, but they were dismissed. Thereafter, at the instance of the assessee the High court directed the tribunal to submit the following two questions for its decision and it accordingly did so: '(1) Whether on the facts and in the circumstances of the case, the status of the assessee, 'Seth Govindram Sugar Mills, Mahidpur Road, Proprietor Nandlal Bachhulal, Jaora', is an Association of Persons or a firm within the meaning of Section 16(1)(b) of the Income-tax Act.' '(2) Whether the order of the Appellate tribunal is illegal on account of the tribunal having committed an error of record and having omitted to consider the relevant material in the case.' The High court, for reasons given in its judgment, held on the first question that in the assessment year 1949-50 the status of the assessee was that of a firm within the meaning of s. 16(1),(b) of the Income-tax Act and on the second question it held that the tribunal misdirected itself in law in reaching the conclusion that the parties could not be regarded as partners. The present two appeals are preferred against the said order. At the outset we must make it clear that the question of registration could not be agitated in these appeals, as that question was not referred to the High court. We shall, therefore, only consider the points raised by the questions referred to the High court and held by the High court against the appellant. Indeed, the only effective question is whether during the assessment year 1950-51 the assesee was a firm or an association of persons. The first question raised by the learned Attorney General is that on the death of Nandlal the firm of Seth Govindram Sugar Mills was dissolved and thereafter the income of the said business could only be assessed as that of an association of persons. To appreciate this contention some more necessary facts may be stated. The deed of partnership dated 28/09/1943, was executed between Nandlal and Bachhulal. It is not disputed that each of the said two partners entered into that partnership as representing their respect;,-- joint families. Under cl. (3) of the partnership deed, 'The death of any of the parties shall not dissolve the partnership and either the legal heir or the nominee of the deceased partner shall take his place in the provisions of the partnership'
(3.) The question is whether on the death of Nandlal his heirs, i.e., the members of his branch of the family, automatically became to partners of the said firm. The answer to the question turns upon s. 42 of the Indian Partnership Act, 1932 (Act 9 of 1932). the material, part of which reads: 'Subject to contract between the partners a firm is dissolved by the death of a partner.' While for the appellant the leaned Attorney General contended that s. 42 applied only to a partnership consisting of more than two partners, for the respondent Mr. Karkhanis argued that the section did not impose any such limitation and that on its terms it equally applied to a partnership comprising only two partners. It was argued that the contract mentioned in the over-riding clause was a contract between the partners and that, if the parties to the contract agreed that in the event of death of either of them his successor would be inducted in his place, the said contract would be binding on the surviving member. On the death of one of the partners, it was said, his heir would be automatically inducted into the partnership, though after such entry he might opt to get out of it. This conclusion the argument proceeded was also supported by s. 31 of the Partnership Act. Section 31 of the Partnership Act reads: '(1) Subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners.' Converting the negative into positive, under s. 31 of the Partnership Act if there as a contract between the partners, a person other than the partners could be introduced as a partner of the firm without the consent of all the existing partners. A combined reading of ss. 42 and 31 of the Partnership Act, according to the learned counsel, would lead to the only conclusion that two partners of a firm could by agreement induct a third person into the partnership after the death of one of them. There is a fallacy in this argument. Partnership, under s. 4 of the Partnership Act, 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 said Act says that the relation of partnership arises from contract and not from status. The fundamental principle of partnership, therefore, is that the relation of partnership arises out of contract and not out of status. To accept the argument of the learned counsel is to, negative the basic principle of law of partnership. Section 42 can be interpreted without doing violence either to the language used or to the said basic principle. Section 42(c) of the Partnership Act can appropriately be applied to a' partnership where there are more than two partners. If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced therein and, therefore, there is no scope for applying cl. (c) of s. 42 to such a situation. It may be that pursuant to the wishes of the directions of the deceased partner the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new partnership. In this light s. 31 of the Partnership Act falls in line with s. 42 thereof. That section only recognizes the validity of a contract between the partners to introduce a third party without the consent of all the existing partners: it presupposes the subsistence of a partnership; it does not apply to a partnership of two partners which is dissolved by the death of one of them, for in that event there is no partnership at all for any new partner to be inducted into it without the consent of others. There is a conflict of judicial decisions on this question. The decision of the Allahabad High court in Lal Ram Kumar v. Kishori Lal(1) is not of any practical help to decide the present case,. There. from the conduct of the surviving partner and the heirs of the deceased partner after the death of the said partner, the contract between the original partners that the partnership should not be dissolved on the death of any of them was inferred. Though the partnership there was only between two partners, the question of the inapplicability of s. 42(c) of the Partnership Act to such a partnership was neither raised nor decided therein. The same criticism applies to the decision of the Nagpur High court in Chainkaran Sidhakaran v. Radhakisan Vishwanath Dixit(2). This question was directly raised and clearly answered by a division bench of the Allahabad High court in Mt. Sughra v. Babu(3) against the legality of such a term of a contract of partnership consisting of only two partners. Agarwala, J., neatly stated the principle thus: 'In the case of a partnership consisting of only two partners, no partnership remains on the death of one of them and, therefore, it is a contradiction in terms to say that there can be a contract between two partners to the effect that on the death of one of them the partnership will not be dissolved but will continue ....... Partnership is not a matter of status, it is a matter of contract. No heir can be said to become a partner with another person without his own consent, express or implied.' This view accords with that expressed by us earlier. In Narayanan v. Umaval(4). Ramachandra Iyer J., as he then was, said much to the same effect when he observed thus: '.............. if one of the partners died, there will not be any partnership existing to which the legal representatives of the deceased partner could be taken in. In such a case the partnership would come to an end by the death of one of the two partners, and if the legal representatives of the deceased partner joins in the business later, it should be referable to a new partnership between therein.' But Chatterjee J., in Hansraj Manot v. Messrs. Gorak Nath Pandey(5) struck a different note. His reasons for the contrary view are expressed thus: 'Here the contract that has been referred to s the contract between the two partners Gorak Nath and Champalal Therefore, it cannot be said that the contract ceased to have effect because a partner died. The contract was there. There was no new contract with the heirs and there was no question of a new contract with the heirs because of the original contract, and by virtue of the original contract the heirs become partners as soon as one of the partners died.................. As soon as there is the death, the heirs become the partners automatically without any agreement between the original Partners by virtue of the original agreement between the Partners while they were surviving. there is no question of interregnums. As soon as the death occurs the right of somebody else occurs. The question of interregnums does not arise. The heirs become partners not because of a contract between the heirs on the one hand and the other partners on the other but because of the contract between the original partners of the firm.' With great respect to the learned Judge, we find it difficult to appreciate the said reasons. The learned Judge seems to suggest that by reason of the contract between the original partners, the heirs of the deceased partner enter the field simultaneously with the removal by death of the other partner from the partnership. This implies that the personality of the deceased partner projects into that of his heirs, with the result that there is a continuity of the partnership without any interregnums. There is no support either on authority or on principle for such a legal position. In law and in fact there is an interregnums between the death of one and the succession to him. We accept the view of the Allahabad and Madras High courts and reject the view expressed by Nagpur and Calcutta High courts, ;