Firm of Bhagat Ram Mohanlal v. The Commissioner of Excess Profits Tax, Madhya Pradesh, Nagpur and Another.

AyyarJ. years ending 1943 and 194.4, it made profits on which

it was ·assessed to excess profits tax respectively of Rs. 10,023-5-0 and Rs. 13,005-5-0. During the year 1944-1945 it sustained a loss of Rs.15,771, and adding it to the sum of Rs. 37,800 which was the standard profits for the business, the Excess Profits Tax Officer determined the deficiency of profits for the year at Rs. 53,571. Section 7 of the Excess Profits Tax Act, hereinafter referred to as the Act, provides that when there is a deficiency of profits in any chargeable accounting period in any business, the profits of that business during the previous years shall be deemed to be reduced eo extanti, and that the relief necessarv to give effect to the reduction shall he given by re-payment of the tax paid or otherwise. Acting under this section, the Excess Profits Tax Officer passed an order on 23-12-1946 whereby after setting off the pro-fits of the firm for the years ending 1943 and 1944 against the deficiency of profits during the year end-ing 1945, he directed a refund of Rs. 23,028-10-0 which had been paid by the appellant as excess profits tax for those years.

It should be mentioned that at the commencement of the assessment year 1944-1945 there was a parti-tion in the joint family of which Mohanlal was the erstwhile karta, as a result of which he and his brothers, Chhotelal and Bansilal, became divided in status. Consequent on this disruption of the joint family, the appellant firm was reconstituted under an agreement dated 17-10-1944. Under this agreement, the partners of the firm were five in number, Richpal, Gajadhar, Mohanlal, Chhotelal and Bansilal, the two former being entitled to 5 annas share each and the 1956 latter three to 2 annas each. There was thus a re-constitution of the firm both with reference to the Firm of Bhcrgat persons who were its partners and the shares which Ram Mohanlal v. were allotted to them. Now, section 8(1) provides, The Commissioner omitting what is not material, that ''as from the date of Excess Profits of any change in the persons carrying on a business, Tax, Madhya the business shall he deemed to have been disconti-Pradesh, Nagpur and another nued a.nd a new business commenced". If this sec-tion applied, then no relief could have been granted Venkatarama to the appellant under section 7 of the Act. AyyarJ.

The facts relating to the reconstitution of the firm having come to the knowledge of the Commissioner of Excess Profits Tax on examination of the record, he issued a notice on 19-2-1948 calling upon the ap-pellant to show cause why the order of the Excess Profits Tax Officer dated 23-12-1946 should not be set aside on the ground of mistake. This notice was issued under section 20 of the Act, which confers on the Commissioner authority to rectify "any mistake apparent. from the record". Tpe mistake, according to the Commissioner, consisted in the Excess Profits Tax Officer failing "to take into consideration the change in the constitution of the firm which took place on 17-10-1944, consequent on the disruption of the joint Hindu family of one of the partners". The appellant appeared in response to the notice, and contended that on the facts the. proceedings under section 20 were misconceived. The facts on which the proceedings were taken were not themselves dis-puted. By his order dated 15-3-1950 the Commissioner held that on the facts disclosed on the record, there was a change in the persons carrying on the business, and that the award of relief under section 7 by the Excess Profits Tax Officer was a mistake. He, how-ever, maintained the order dated 23-12-1946 with reference to Richpal and Gajadhar, and set it aside only so far as "Bhagat Ram ,Mohanlal, Hindu un-divided family" which was registered as partner on 23-8-1940, was concerned. He further directed that Rs. 11,514-5-0 which had been refunded to it should be collected.

1956 The appellant thereupon moved the High Court of

Nagpur under article 226 fbr a writ of certiorari FirmofBhagal quashing the order of the Commissioner dated Ram Mohanlal 15-3-1950 and for a writ of prohibition restraining

v.

Th• Com•nissioner the authorities from collecting Rs. 11,514-5-0 under ofBxcessProfils that order. By their judgment dated 22nd August

Ta•, Muahya 1950, the learned Judges agreed with the Commis-Pra":.;'":::,.gpur sioner that by reason .of the partition there was a

0 change in the persons who carried on the business, a "

Vcnkalarama and that the order dated 23-12-1946 was contrary to

AyyarJ. section 8(1) of the Act. They also held that as the

mistake appeared on the face of the record, the Commissioner had jurisdiction under section 20 of the Act to pass the order which he did. In the result, the writs were refused. Against this judgment, the appellant prefers this appeal by special leave.

Two questions have been raised for our determina-tion in this appeal: (1) whether by reason of the partition of the joint family and the reconstitution of the firm under the deed dated 17-10-1944 there was a change in the persons carrying on business within section 8(1) of the Act; and 12) whether the order of i the Commissioner dated 15-3-1950 is bad on the ground that there was no mistake apparent from the record, as required by section 20 of the Act. On the first question, the contention of the appellant is that when Mohanlal entered into partnership with Richpal and Gajadhar on 23-8-1940 as karta of the joint family, the other members of that family, Chhotelal and Bansilal, also became in substance partners of the firm, and that when they were mentioned eo nominee as partners in the deed dated 17-10-1944 the change was more formal than substantial, and that further the fact that there was a re-allotment of shares among the partners would not amount to a change in the persons who carried on the business. We agree that if all the five persons who were men-tioned as partners in the deed of 1944 were partners of the old firm, there would be no change in the per-sons carrying on the business within section 8(1) of the Act by the mere fact ofreshuffiing of shares among them. But the real question that has to be decided is whether Chhotelal and Bansilal were partners in 1956 the firm, which was constituted on 23-8-1940. The appellant contends that they were, both according to Firm of Blia gat Ram Molian/al the Hindu law and even apart from it, under the v. general law relating to partnerships. The Co11111tijsfouer

It is not in dispute that Mohanlal was the karta of of Excess Profits the joint family, and that he entered into the part-Tax, Madhya nership on 23-8-1940 as such karta. It is well settled Pradesh, Nagp11r that when the karta of a joint Hindu family enters and a11ot!tcr into a partnership with strangers, the members of the Venkatarn111a family db not ipso facto become partners in that firm. Ayyar,J. They have no right to take part in its management or to sue for its dissolution. The creditors of the firm would no doubt be entitled to proceed against the joint family assets including the shares of the non-partner co-parceners for realisation of their debts.

But that is because under the Hindu law, the karta has the right when properly carrying on business to pledge the credit of the joint family to the extent of its assets, and not because the junior members be-come partners in the business. In.short, the liability of the latter arises by reason of their status as co-parceners and not by reason of any contract of part-nership by them. It would therefore follow that when Mohanlal became a partner of the firm on 23-8-1940, Chhotelal and Bansilal could not be held by reason of that fact alone, to have become partners therein.

It is argued that when that firm was constituted on 23-8-1940 the persons who entered into the contract of partnership were not merely Mohanlal as karta of the joint family but also Chhotelal and Bansilal in their individual capacity, and that therefore they became partners under the ordinary partnership law.

But the registration certificate of the firm while showing "Bhagat Ram Mohanlal, Hindu undivided family" as a partner, makes no mention of either Chotelal or Bansilal as partners. The contention that they also became in their individual capacity partners appears therefore to be an afterthought, and is opposed to the findings of the learned J uges of the High Court. This is sufficient, without more, to dis-pose of this contention. But even apart from this1

19,5 it is difficult to visualise the situation which the ap-

pellant contends for, of a Hindu joint family enter-Ffrm of Bhagat ing into a partnership with strangers through its Ram Mohanlal karta and the junior members of the family also be-

v.

Th• Commissioner coming at the same time its partners in their personal of Excess Profits capacity. In Lachhman Das v. Commissioner of Income-

Tax, Madhya tax('), it was held by the Judicial Committee that the Prad•t· Nt~gpur karta of a joint Hindu family could enter into part-

an ano " nership with an individual member of the coparcenary Venkatarama quoad his separate property. It was also held by the

;lyyarJ. Privy Council in Sundar Singh Majithia v. Commis-

sioner of Income-tax(') that there was nothing in the Income-tax Act to prohibit the members of a joint Hindu family from dividing some properties, while electing to retain their joint status, and carrying on business as partners in respect of those properties treating them as its capital. But in the present case, the basis of the partnership agreement of 1940 is that the family was joint and that Mohanlal was its karta and that he entered into the partnership as karta on behalf of the joint family. It is difficult to reconcile this position with that of Chhotelal and Bansilal be-ing also partners in the firm in their individual capa-city, which can only be in respect of their separate or divided property. If members of a coparcenary are to be regarded as having become partners in a firm with strangers, they would also become under the partnership law partners inter se, and it would cut at the very root of the notion of a joint undivid-ed family to hold that with reference to coparcenary properties the members can at the same time be both coparceners and partners.

To get over this difficulty, it was suggested that all the three coparceners might be regarded as having entered into the contract of partnership as kartas of the joint family. But even if that could be done consistently with the principles of Hindu law, the very pleadings of the appellant are against such a supposition being made, affirming as they do that it was only Mohanlal that was the karta, not the others. The contention, therefore, that Chhotelal and Bansi-1956 lal should be held to have become partners in the old firm under the agreement dated 23-8-1940 cannot be Firm of Bhagat Ram Mohanlal maintained. v.

The question whether there was a change in the The C-Ommissioner persons carrying on the business may now be consi-0f Excess Profits dered independently of the principles of Hindu Law P Ta;, ~aihy';.. or the general law of Partnership and with special '";n:sa~oti7!. ,. reference to the provisions of the Indian Excess Profits Tax Act. Section 2(17) of the Act defines a Venkatarama 'person' as including a joint family. Applying this AyyarJ. definition, who were the members of the firm when it was constituted on 23-8-1940? Rich pal, Gajadhar and "Bhagat Ram Mohanlal, Hindu undivided family"

consisting of three coparceners, Mohanlal, Chhotelal and Bansilal, it being immaterial for the present purpose whether the karta of the family was only Mohanlal, or all the three of them. Then, the family became divided in 1944, and the result of it was that one of the three persons who were partners in the old firm, "Bhagat Ram Mohanlal" ceased to exist. On 17-10-1944, the two surviving partners of the old firm, Richpal and Gajadhar, entered into a contract of partnership with Mohanlal, Chhotelal and Bansilal.

The erstwhile joint family of which they were mem-bers not being a partner in the new firm, it h!J,ving ceased to exist by reason of the partition, there was, having regard to the definition in section 2(17) of the Act, a change in the persons who carried on the busi-ness. That was the view taken in Shanmugavel Nadar and Sons v. Commissioner of Income-tax(1), and we agree with it. Whether the question is considered on the principles of Hindu law or on the provisions of the Excess Profits Tax Act, there was a change in the personnel of the firm on 17-10-1944, and the matter falls within section 8(1) of the Act.

(2) The next question for determination is whether the order of the Commissioner dated 15-3-1950 is not justified by the provisions of section 20 of the Act for the reason that there was no mistake apparent from the record. The argument in support of this conten-

!ll [1948J 16 I.T.R. 355.

1956 tion is that the record in the Excess Profits Tax pro-

ceedings consisted in the present case of only the Firm of Bhagat order dated 23-12-1946, that the facts on which the Ram Mahan/al proceedings were taken under section 20, namely, the

v.

The Conunissioner constitution of the firm on 23-8-1940 and the changes of Excess Profits effected therein on 17-10-1944 were not recited there-

Tax, Madhya in, and that, in consequence, there were no materials Pradesh, Nagpur on which an order could have been passed under that

and another section. It is true that the order of the Excess Pro-Venkatarama fits Ta.x Officer dated 23-12-1946 does not mention

Ayyar J. these facts, but they appear from the record of the

income-tax proceedings which included the registra-tion certificates of the firm under section 26-A of the Income-tax Act and the returns made by the firm discl.osing the names of the partners and their res-pective shares. It is argued for the appellant that these records were inadmissible for the purpose of proceedings under section 20 of the Act, because the record referred to and contemplated by that section must be the record of the excess profits tax proceed· ings, and that the records of the income-tax proceed-ings could not be used under that section. We are unable to agree with this contention. Section 22(1) of the Act provides that:

"Notwithstanding anything contained in the Indian Income-tax Act, 1922, all information con-tained in any statement or return made or furnished under the provisions of that Act or obtained or col-lected for the purposes of that Act may be used for the purposes of this Act".

Section 22(2) similarly makes the record of the excess profits tax proceedings admissible in proceedings under the Indian Income-tax Act. The fact is that the proceedings under the two Acts are interdepen-dent. Assessments under the Excess Profits Tax Act are, subject to the special provisions of that Act, made on the basis of the assessments made under the provisions of the Indian Income-tax Act. The same officers are in charge of the proceedings under both the enactments. The order of the Excess Profits Tax Officer dated 23-12-1946 refers in terms to the order dated 28-9-1946 passed in the proceedings for assess-ment of income-tax on the appellant, and the defic-1956 iency of profits is worked out on the basis of the loss of Rs. 15,771 as ascertained therein. We see no sub-Firm of Bhagat Ram Mohanlal stance in this contention, which must accordingly be v. rejected. The Commissioner

It was finally contended that the particulars recited of Exec ss Profits in the registration certificate as to who were all part-Tax, Madhya ners of the firm were not conclusive, and that the Pr«desh, Nagpur appellant was not estopped from proving that even and another on 23-8-1940 the real partners were all the five per-Venkatarama 13ons mentioned in the deed dated 17-10-1944, and the AyyarJ. dec;iision in Shapurji R&llonji v. Commissioner of ln-come-taxe) was relied on in support of the position.

It is undoubted law that the income-tax authorities are not estopped by the fact of registration from go-ing behind the certificate, and deciding who the real partners of the firm are. But can the assessee whose statement is the basis on which the registration is made and who has possibly been benefited thereby deny its correctness, when the facts mentioned therein turn out to his disadvantage? It is unnecessary to consider this point, in view of our decision that on the facts as pleaded by the appellant, Chhotelal and Bansilal could not be regarded as partners in the old firm. We may add t.hat this contention does not appear to have been put forward before the Commissioner when notice was issued to the appellant under section 20 of the Act. If any such contention had been raised, it would have been open to the Commissioner to have taken action under section 19 of the Act.

In the result, the appeal fails, and is dismissed with costs.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 139of1953.

Appeal by special leave from the judgment and order dated the 22nd day of August 1950 of the Nag-pur High Court in Miscellaneous Petition No. 67 of 1950.

Radhey Lal Agarwala and B. P. Maheshwari, for the appellant.

0. K. Daphtary, Solicitor-General of I rulia ( G. N.

Joshi and R.H. Dhebar, with him) for the respon-dents.

1956. February 15. The Judgment of the Court was delivered by. .

VENKATARAMA AYYAR J.-The firm of Bhagat Ram Mohanlal, which is the appellant before us, was con-stituted on 23-8-1940, and registered under section 26-A of the Indian Income-tax Act. The partners of

1956 the firm, according to the registration certificate, were

(1) Bhagat Ram Mohanlal, Hindu undivided family, Firm of Bhagat (2) Richpal and (3) Gajadhar, their shares being Ratn Mohanlal

v. respectively 8 annas, 4 aunas and 4 annas. Mohanlal The Commissioner was the karta of the aforesaid joint family, which of Excess Profits consisted of himself and his two brothers, Chhotelal Tax, Madhya and Bansilal, and he entered into the partnership as Pradesh, Nagpur such karta. The firm carried on business at Drug in

·and another

Madhya Pradesh as the agent of the Government for Venkatarama the purchase of foodgrains, and during the accounting