PITAMBERDAS BHIKHABHAI AND COMPANY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under S. 66(1) of the Indian IT Act, 1922, at the instance of M/s Pitamberdas Bhikhabhai & Co., applicants in R.A. No. 1154 of 1960 61 and Shri Pitamberdas Bhikhabhai, applicant in R.A. No. 1155 of I960 61. At the request of the aforesaid assessees, these two references have been consolidated. These two references related to the asst. year 1958 59, the accounting year being Samvat year 2013, corresponding to the period 3rd November, 1956, to 23rd October, 1957.

(2.) ONE Bhikhabhai Gokaldas was the head male member and Karta of a joint and HUF consisting of himself and his three sons Pitamberdas, Amritlal and Jekisandas. The joint family carried on business in kirana, tea and grains. On 16th November, I939, Pitamberdas and Amritlal separated from the joint family and on separation, became entitled to the entire business owned by the joint family as aforesaid, subject to the liabilities of that business. Thereafter, Pitamberdas and Amritlal continued that business in partnership. On 5th May, 1943, a deed of partnership was entered into between Pitamberdas and Amritlal and the firm so constituted was registered by the IT authorities under the IT Act, 1922, for the years 1943 44 up to 1957 58. Even though the business was acquired by Pitamberdas and Amritlal on separation from the joint family and the share of each of them was therefor held by him on behalf of his joint family, each of them was assessed as an individual in respect of the profit of the business coming to his share. At the end of the Samvat year 2012, i.e. 2nd November, 1956, Amritlal retired from the partnership after receiving his share therein. There was a regular deed of dissolution of the partnership executed on 29th July, 1957. On the said dissolution, as from 3rd November, 1956, Pitamberdas become entitled to the business and the business constituted joint family in his hands. Pitamberdas had at that time seven sons, three of whom were minors, and four unmarried daughters and had a wife living. On 9th November, 1956, Pitamberdas purported to make a gift of Rs. 10,000 to each of his sons, Ramanlal and Jayantilal. The purported gift was made by debiting a sum of Rs. 20,002 in the books of the business to Pitamberdas Bhikhabhai and crediting a sum of Rs. 10,001 to Ramanlal Pitamberdas and a sum of Rs. 10,001 to Jayantilal Pitamberdas. Pitamberdas then took Ramanlal and Jayantilal as partner in the business as from 3rd November, 1956, and a deed of partnership was executed on 18th November, 1956. In the deed of partnership it was recited that Pitamberdas was the absolute owner of all the assets of the business. It was further declared that he had "not acquired any ancestral property of whatsoever nature". It was further recited that whatever capital was credited to his account was earned by him personally in the business and that out of the said capital of his, he had paid as and by way of gift the aforesaid two sums of Rs. 10,001 to Ramanlal and Jayantilal respectively, and that Ramanlal and Jayantilal were the absolute owners of the said amounts. It was further recited that the said amounts had been brought in by Ramanlal and Jayantilal as their respective capital in the business and that the same were credited to their respective accounts in the books of account of the partnership that was formed. Under the terms of the partnership, it was provided that the name of the partnership would be M/s Pitamberdas Bhikhabhai and Co., and that Pitamberdas, Ramanlal and Jayantilal would be entitled to shares of eight annas, four annas and four annas respectively in the profits or losses of the partnership.

(3.) THE ancestral character of the business in the hands of Pitamberdas on retirement of Amritlal is not and cannot be disputed. The question that arises for consideration is whether in respect of such ancestral business, Pitamberdas as the Karta of the HUF or otherwise, had a right to take his two sons, Ramanlal and Jayantilal, who were coparceners of the said HUF, as partners therein. At the time when Pitamberdas sought to taken them as partners there were, as already stated, two other adult sons of Pitamberdas who were coparceners of the said HUF and three minor sons who also were members of the said coparcenery. He had four daughters and wife who were also members of the said HUF. When he purported to enter into the deed of partnership, he did so on the footing that the business belonged to him absolutely and that no other person had any share or interest therein. This stand taken by him in the deed of partnership was obviously wrong. The business did not belong to Pitamberdas absolutely as his separate self acquired property, but was an asset of the HUF of Pitamberdas, his wife and his sons and daughters. Even the sums of Rs. 10,000 purported to have been gifted by Pitamberdas to Ramanlal and Jayantilal belonged to the said HUF. The controversy thus boilsi down to the narrow question whether in respect of a business belonging to an HUF, the coparceners can be taken as partners in the business in their individual capacity with specific shares. The question is covered by certain observations of the Supreme Court to which we shall presently refer. But before we do so, we will examine one decision of the Privy Council on which considerable reliance was place by Mr. S. P. Mehta on behalf of the assessees.