- (1.) THIS is a statement of a case by the Commissioner of Income Tax, C.P. and U.P., under Section 66(2) of the Indian Income-tax Act. The reference was made at the instance of Sardar Bahadur Dr. Sir Sundar Singh Majithia, C.I.E. who is the head of an undivided Hindu family consisting of himself and his three sons. The Commissioner states that the assessee enjoys large income from property, has deposits in banks and shares in companies, does money and grain-lending business and is interested in a sugar factory styled as the Saraiya Sugar Factory. For several years Sir Sundar Singh was also a member of the Executive Council of the Punjab Government and drew a salary in that capacity. The assessment year with which we are concerned is 1932-33 and the accounting year ended with the 30th September 1931. The members of his family are Jats of the Sher Gill tribe in the Amritsar district in the Punjab and they are, as we have already said, an undivided Hindu family. In previous years the assessee submitted return on the footing that the business of the sugar factory was a joint family concern, but at the assessment to which this case relates it was alleged that the father and the sons had divided this business among themselves, while retaining their status as a joint Hindu family and holding all other properties as properties of the Hindu undivided family. It is said that this partition took place in September 1931, and under it the father received a four-anna share and the three sons a three anna share each, and their mother received the remaining three-anna share for life. On the 12th February 1933, these five persons executed an instrument of partnership which is printed at page 13 and the following pages of our record. On the 13th February an application was made to the Income-tax Officer under Section 26-A of the Act for registration of the firm which was said to have come into existence under this deed of partnership and for separate assessment on its basis. On the 18th April 1933, the application was allowed and assessment was made accordingly, but on the 20th September, 1933, the Commissioner set aside that assessment and directed that a fresh assessment be made. Accordingly on the 16th December 1933, the Income-tax Officer made a fresh assessment, treating the assessee as an individual and including the profits from the sugar factory and the firm was not registered under Section 26-A of the Act. Two appeals were filed to the Assistant Commissioner, one being against the refusal to register the alleged firm under Section 26-A and the other being against the assessment. The Assistant Commissioner upheld the order of the Income Tax Officer refusing to register the firm, but modified his assessment order by directing that the assessment should be that of a Hindu undivided family and by granting an abatement in respect to super-tax.
(2.) THEREAFTER an application for review was preferred to the Commissioner under Section 33 and also an application under Section 66(2) requiring the Commissioner to refer certain questions for the decision of this Court. The Commissioner rejected the application for review, but has stated a case for our decision. The question referred to us is as follows :- In all the circumstances of this case, having regard to the personal law governing the assessee and the requirements of the Transfer of Property Act (IV of 1882) and the Stamp Act (II of 1899) has the deed of partnership (Appendix A) dated 12-2-1933, brought into existence a genuine firm entitled to registration under the provisions of Section 26-A of the Act ? Two alternative positions were taken by the assessee, one being on the basis that the sugar factory was self-acquired property of Sir Sundar Singh and the other being that it was joint ancestral property until it was partitioned preparatory to the deed of partnership. The Commissioner, in agreement with the view expressed by the Assistant Commissioner, is of opinion that, if the sugar factory was the self-acquired property of Sir Sundar Singh, the distribution of shares on his part among his sons and his wife required to be effected by a registered instrument and that, if it was joint family property the partition was ineffectual on the ground that the shares allocated thereunder, being unequal in extent, were not legal shares as sanctioned by the Hindu law. We will first consider the matter on the hypothesis that the Sugar factory was the self-acquired property of Sir Sundar Singh. Learned Counsel for the assessee concedes that, if Sir Sundar Singh owned immoveable property and if he wished to include others in that ownership and if in pursuance of such wish he transferred shares in the immoveable property by distribution among his sons and his wife, a registered instrument was necessary, but he pleads that in fact no immoveable property was transferred. He contends that what was conveyed to each son and to the wife was a share in the machinery and the business only, the building or buildings being placed at the disposal of his ownership for the purpose of carrying on the business; the title in such building or buildings was reserved to himself by Sir Sundar Singh. We are referred to certain clauses in the deed of partnership at page 13. It is there recited that whereas the first party has set up machinery for manufacture of sugar and extraction of essential oils in his estate in the Gorakhpur district at village Saraiya...... and sugar and essential oils are manufactured there...... And further on it stated that all the parties to this deed have already entered into a partnership to work the aforesaid sugar and oil manufacturing machinery and to carry on the business of manufacturing sugar and essential oils and to do any other business that all of them may agree to carry on for profit. It is emphasised that there is no mention of buildings in this instrument. Learned counsel for the Department concedes that in India machinery is not treated as immoveable property; but he maintains that a share in the buildings also was transferred to each son and to the wife. Condition No. 2 of the deed of partnership refers to the shares of the aforesaid parties in the capital and we have to determine whether the capital, so referred to, was intended to include any immoveable property such as would attract the provisions of Section 123 of the Transfer of Property Act.
(3.) AS we have already said the firm is styled The Saraiya Sugar Factory. Having regard to the ordinary meaning of factory it seems to us improbable that the ownership rights of the partners of this firm would be confined to the business and machinery and would not include building in which the business is conducted and the machinery is contained. The assessment order of the 18th April 1933 relating to the Saraiya Sugar Factory shows that depreciation was claimed; and an allowance was made by the Income-tax Officer on this account not only in respect to buildings. The amounts so allowed in respect to buildings was Rs. 5,058 - vide page 23 of our record. No objection was apparently made that the buildings did not form part of the property of the firm, but belonged exclusively to Sir Sundar Singh, and presumably, therefore, depreciation had been actually claimed on this account as well as under other heads. It is true that the partnership deed does not specifically mention buildings, but we are clearly of opinion that, since depreciation on account of buildings was claimed by this firm, it must be held that, if the sugar factory was the self-acquired property of Sir Sundar Singh, shares in the buildings as well as in the business and machinery were distributed among the sons and wife of the owner. And such distribution could only be effected by means of a registered instrument. We will now examine the matter on the assumption that the factory was joint family property until it was partitioned for the purpose of entering into a partnership. Learned Counsel for the Department concedes that, if it was joint family property, no question of the Transfer of Property Act or the Stamp Act will arise. He also concedes that there is nothing in the Hindu Law to prevent a joint family from partitioning a portion only of the property while retaining the status of an undivided family and keeping the rest of the property joint. He further concedes that there may be a partition of property in unequal shares by agreement between the members of the family. But he strenuously pleads that for the purposes of the Income-tax Act members of an undivided Hindu family cannot enter into a partnership in respect to a portion of a joint property which they have partitioned among themselves. In the present case the status of the family is admittedly still undivided and the rest of the property - apart from the sugar factory - is still joint. Now Section 25-A (1) of the income-tax Act provides that :- Where, at the time of making an assessment under Section 23, it is claimed by or on behalf of any member of a Hindu family hitherto assessed as undivided that a partition has taken place among the members of such family, the Income-tax Officer shall make such inquiry there into as he may think fit, and if he is satisfied that a separation of the members of the family has taken place and that the joint family property has been partitioned among the various members or groups of members in definite portions he shall record an order to that effect : Provided that no such order shall be recorded until notices of the enquiry have been served on all the members of the family. ;