Appeals Nos
2200 2200A and 2200B of 1968
Appeals from the judgment and order dated November 30 1967 of the Allahabad High Court in Income tax Reference No 366 of 1963
M C Chagla and P N Tiwari for the appellant in all the appeals
B Sen G L Sharnia and R N Sachthey for the respondent in all the appeals
239 The judgment of the Court was delivered by Hegde J
In these appeals by certificate the question that falls for decision is whether oil the facts and in the circumstances of the case registration under section 26A of the Indian Income Tax Act 1922 to be hereinafter referred to as the act was rightly refused to the appellant firm on the ground that the partnership in question violated the provisions of section 4 of the Indian Companies Act 1913
The authorities under the Act as well as the High Court of Allahabad have answered that question in the affirmative
The assessee challenges that conclusion
The above appeals relate to different assessment years of the same assessee the relevant assessment years being 1952 53 1953 54 and 1954 55
In all these years the Income Tax Officer had refused to register the appellant firm under section 26A
All the partnership deeds are we are told similar in terms
We have before us the deed executed on July 7 1950
It shows that the firm consists of 18 partners
Ex facie that deed does not show that any of the partners had joined the deed as representatives of their Hindu Undivided Families
From the tenor of the document they appear to be partners in their own right
The Income Tax Officer the Appellate Assistant Commissioner and the Tribunal have come to the conclusion that some of them had joined the partnership as Kartas of their respective Hindu Undivided Families
All the authorities under the Act as well as the High Court have opined that the partnership in question is not lawful in view of section 43 of the Indian Companies Act 1913
The material portion of that provision reads 4
1 2 No company association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any other business that has for its object the acquisition of gain by the company association or partnership or by the individual members thereof unless it is registered as a company under this Act or is formed in pursuance of an Act of Parliament of the United Kingdom or some other Indian law or Royal Charter or Letters Patent
3 This section shall not apply to a joint family carrying on joint family trade or business and where two or more such joint families form a partnership in computing the number of persons for the purpose of this section minor members of such families shall be excluded
240 4 Every member of a company association or partnership carrying on business in contravention of this section shall be personally liable for all liabilities incurred in such business
5   
The Income Tax Officer the Appellate Assistant Commissioner as well as the Tribunal were of the opinion that some partners of the assessee firm having entered into the partnership as representatives of their respective Hindu Undivided Families the adult members of those families should be taken into consideration for determining whether or not the total number of partners exceeded twenty
On that basis they have arrived at the conclusion that the firm has more than twenty partners and the same having not been registered as a company under the Companies Act nor having formed in pursuance of an Act of Parliament of the United Kingdom or some other Indian law or Royal Charter or Letters Patent it must be held to be an unlawful partnership
When the question formulated earlier was referred to the High Court under section 661 of the Act it was heard by Jagdish Sahai and Beg JJ
Jagdish Sahai J was of the opinion that the partnership in question was not lawful
Beg J differed from him and answered the question in favour of the assessee
In view of this difference of opinion the matter was referred to Takru J
He agreed with Jagdish Sahai J By a majority the question referred to the High Court was answered in favour of the revenue
Hence these appeals
Mr Chagla appearing on behalf of the assessee urged that no Hindu joint family as such can Join a partnership and it is now well settled that when a karta of Hindu Undivided Family joins a firm as a partner even if he contributes his share from out of the family funds the other members of his family do not ipso facto become partners of that firm
So far as the partnership is concerned he is the only partner though he may be accountable to the members of his family as regards the profits earned
According to the learned counsel for the purpose of working out the rights and liabilities of the partners inter se one cannot go behind the partnership deed
Proceeding further he urged that in considering whether a partnership should be registered under section 26A or not the Income tax Officer has merely to see whether the requirements of section 26A of the Act and the relevant rules are complied with or not
He is not entitled to investigate into the question as to who are beneficially interested in the partnership
According to him if the requirements of section 26A and the relevant rules are complied with the Income tax Officer is bound to register the partnership
The counsel urged that the second limb of section 43 of the Indian Companies Act 1913 proceeds on the erroneous impression that 241 a joint Hindu family can enter into a partnership which in law it cannot as it has no legal personality
Mr B Sen learned counsel for the department did not contest the position that when a karta or a member of a Hindu Joint family joins a partnership the other members of his family do not become partners ipso facto
But according to him it is open to the department to go behind the partnership deed and find out whether the individual who has joined as a partner has joined in his own right or as a representative of any other body
His contention was that in view of section 43 of the Indian Companies Act 1913 once the Income tax Officer comes to the conclusion that one of the partners of a firm is a representative of a joint family he must deem that the adult members of that family are also partners of that firm and on that basis find out whether the total number of partners exceed twenty
If they exceed twenty he cannot register the partnership as such a partnership contravenes section 4 2 of the Indian Companies Act 1913 Section 2 6B of the Act provides that the expression firm  partner  and partnership  in the Act have the same meaning respectively as in the 
Section 4 of the Partnership Act 1932 prescribes Partnership 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
Persons who have entered into partnership with one another are called individually partners and collectively a firm and the name under which their business is carried on is called the firm name 
In view of the aforementioned provision only persons can join as partners
Section 242 of the General Clauses Act says a Person shall include any company or association or body of individuals whether incorporation or not
But this definition applies when there is nothing repugnant in the subject or context
After examining the provisions of the Partnership Act the Privy Council in SenaJi Kapurchand vs Pannaji Devichand1 and this Court in Dulichand Laxminarayana vs Commissioner of Income Tax Nagpur2  have held that an association of persons is not a person within the meaning of that expression in the Partnership Act It is true that section 29 of the Act says that unless the context otherwise requires person includes Hindu Undivided Family This definition cannot be imported into the Partnership Act the provisions of which alone are relevant for finding as to who could join as partners
It is only partnership constituted according to 1 AIR 1930 PC 300
2 242 the provisions of the Partnership Act that can be considered as partnerships under the Act
The definition of person  in the Act is intended for the purpose of levying income tax and for other cognate matters
On the basis of certain observations of the Judicial Committee in Lala Lachman Das vs Commissioner of Income Tax1 it Was contended on behalf of the department that a joint Hindu family can enter into a partnership
Those observations have to be read in the context in which they were made
The department in that case had requested the tribunal to refer the question can there be a partnership within the meaning of section 2 sub section
6B of the Indian Income tax Act 1922 between a Hindu Undivided Family as such on the one part and one of its undivided members in his indi vidual capacity on the other part
 But that question was ultimately not referred as being unnecessary on the facts of the case
But the following observations of the Judicial Committee in its judgment are relevant  It is unnecessary to consider in this case the question relating to the validity of a partnership between a Hindu Undivided family as such of the one part and one of its undivided members in his individual capacity of the other
With reference to the latter kind of partnership there seems to be some authority favouring the view that such a partnership cannot exist under the rules
of Hindu law but their Lordships do not propose to deal with that question in this case
 In that case the partnership was between the karta of a joint Hindu family and an undivided member of that family
Hence the observations in the judgment that the Hindu Undivided family was a partner has really reference to the karta who was a partner as representing the family
In Commissioner of Income tax West Bengal vs Kalu Babu Lal Chand2 this Court observed that it is now well settled that Hindu Undivided Family cannot as such enter into a contract of partnership with another person or persons
Several other decisions have taken the same view
No decision taking a contrary view was  brought to our notice
The concept of a Hindu Undivided Family joining a partnership presents considerable difficulty
A Hindu Undivided Family is a fleeting body
Its composition changes by births deaths marriages and divorces
Such a partnership is likely to have a precarious existence
The assumption in section 43 of the Companies  Act 1913 that a Hindu Joint family can be a partner in a partnership appears to be based on an erroneous view of the law
1 74
IA 277
2 243 The next question is whether when a deed of partnership does not on the face of it show that any Hindu Undivided Family has joined the partnership is it open to the Income tax Officer to behind the deed and find out for the purpose of registration under section 26A whether the ostensible partner is the representative of someone else
The Judicial Committee in P K P section Pichappa Chettiar and Ors
vs Chokalingam Pillai and Ors
1 ruled that where a managing member of a joint family enters into a partnership with a stranger the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by Contract Act
In such a case the family as a unit does not become a partner but daily such of its members as in fact enter into contractual relationship with the stranger
In Kshetra Mohan Sannyasi Charan Sadhukhan vs Commr of Excess Profits Tax West Bengal1 this Court laid down that a Hindu Undivided Family is included in the expression person as defined in the Indian Income tax Act but it is not a juristic person for all purposes when two kartas of Hindu Undivided Families
enter into a partnereship agreement the partnership though popularly known as one between two Hindu Undivided Families in the eye of the law it is a partnership between the two kartas and the other members of the families do not ipso facto become partners there is however nothing to prevent the individual members of one Hindu Undivided Family from entering into a partnership with the individual members of another Hindu Undivided Family and in such a case it is a partnership between the individual members and it is wholly inappropriate to describe such a partnership as one between two Hindu Undivided Families
In Firm Bhagat Ram Mohan Lal vs Commissioner of Excess Profits Tax Nagpur and anr3 this Court ruled that when the karta of a joint family enters  into a partnership with the stranger the members of the family do not ipso facto become partners in that firm
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 H credit of the joint family to the extent of its assets and not because the junior members become partners in the business
The liability 1 AIR 1934 PC 192
3 21953 244 of the latter arises by reason  of their status as coparceners and not by reason of any contract of partnership by them
In Commissioner of Income tax Bombay City vs Nandlal Gandalal1 this Court again observed that the position in Hindu law with regard to a coparcener even when he is the karta entering into partnership with others in carrying on a business is well settled
The partnership that is created is a contractual partnership and is governed by the provisions of the 
The partnership is not between the family and the other partners it is a partnership between the _coparcener individually and his other partners
The coparcener is undoubtedly accountable to the family for the income received but the partnership is exclusively one between the contracting members including the individual coparcener and the strangers
On the death of the coparcener the surviving members of the family cannot claim to continue as partners with the others or institute a suit for dissolution of partnership nor can the stranger partners sue them as partners for the coparcener s share of the loss
Therefore so far as the partnership is concerned both under partnership law and under Hindu law the control and management is in the hands of the individual coparcener who is the partner and not in the family
In Commissioner of Income tax Madras vs Bagyalakshmi and Co Udamalpet2 this Court observed that contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership
it only regulates the rights and liabilities of the partners
A partner may be the karta of a joint Hindu family he may be a trustee he may enter into sub partnership with others he may under an agreement express or implied be the representative of a group of persons he may be a benamidar for another
In all such cases he occupies a dual position qua the partnership he functions in his personal capacity qua the third parties in his representative capacity third parties whom one of the partner represents cannot enforce their rights against the other partners nor can the other partners do so against the said third parties
Their right is only to a share in the profits of their partner representative in accordance with law or in accordance with the terms of the agreement as the case may be
The law of partnership and Hindu law function in different fields
A divided member or some of the divided members of the erstwhile joint family can certainly enter into a partnership with third parties under some arrangement among the members of the divided family
Their shares in the partnership depend on the terms of the partnership the shares of the members of the divided 1 1960 40 ITR1
2  245 family in the interest of their representative in the partnership depend upon the terms of the partition deed
From these decisions it follows that for the purpose of finding out as to who are all partners of
a firm one has only to look to the partnership deed and not to go behind it
Another contention urged by Mr Chagla was that the scope of the enquiry I under section 26A is a limited one if the application made for registration complies with the requirements of that section and the rules framed thereunder
 then it is not open to the income tax Officer to refuse to register the firm
Section 26A says  1 Application may be made to the Income7tax officer on behalf of any firm constituted under an instrument of partnership specifying the individual shares of the partners for registration for the purposes of this Act and of any other enactment for the time being in force relating to the Income tax or super tax
2 The application shall be made by such person or persons and at such times and shall contain such particulars and shall be in such form and be verified in such manner as may be prescribed and it shall be dealt with by the Income tax Officer in such manner as may be prescribed
 The conditions of registration prescribed in this section and the relevant rules are  1 on behalf of the firm an application should be made to the Income tax Officer by such person and at such times and containing such particulars being in such form and verified in such manner as are prescribed by the rules 2 the firm should be constituted under an instrument of partnership 3 the instrument must specify the individual shares of the part ners and 4 the partnership must be valid and genuine and must actually exist in the terms specified in the instrument
If all the above conditions are fulfilled the Income tax Officer is bound to register the firm unless the assessee has contravened section 234 of the Act
In Commissioner of Income Tax Madras vs Sivakashi Match Exporting Co 1 this Court held that the combined effect of section 26A and the rules made thereunder was that the Income tax Officer could not reject an application made by a firm if it gave the necessary particulars prescribed by the rules and if there was a firm in existence as shown in the instrument of partnership
A firm is said to be not in existence if it was a bogus and not a 1  Sup
Cl70 2 246 genuine one or if in law the constitution of the partnership was void
The jurisdiction if the Income tax Officer was therefore confined to ascertaining two facts namely 1 whether the application for registration was in conformity with the rules framed under the Act and 2 whether the firm shown in the document presented for registration was a bogus one or had no legal existence
Further the discretion conferred on the Income tax Officer under section 26A was a judicial one and he could not refuse to register a firm on mere speculation
He had to base his conclusion on relevant evidence
Therein this Court further held that there was no prohibition under the Partnership Act against a partner or partners of other firms combining together to form a separate partnership to carry on a different business
The fact that such a partner entered into sub partnership with others in respect of his share did not detract from the validity of the partnership nor was the manner in which he dealt with his share of the profits of any relevance to the question of the validity of the partnership
In Commissioner of Income Tax Gujarat vs A Abdul Rahim and Co 1 this Court ruled that registration of a partnership deed under s26A of the Act could not be refused on the ground that one of the partners was a benamidar for someone else
Therein this Court observed that it is a settled law that if a partnership is a genuine and valid one the Income tax Officer has no power to reject its registration if the other provisions of s26A and the rules framed thereunder are complied with
When a firm makes an application under s26A for registration the Income tax Officer can reject the same if he comes to the conclusion that the partnership is not genuine or the instrument of partnership does not specify correctly the individual share of the partners
But once he comes to the conclusion that the partnership is genuine and a valid one he cannot refuse registration on the ground that one of the partners is a benamidar of another
If the partnership is genuine and legal the share given to the benamidar will be the correct specification of his individual share in the partnership
The beneficial interest in the income pertaining to the share of the said benamidar may have relevance to the matter of assessment but none in regard to the question of registration
His beami character does not affect the benaamidar s capacity as partner or his relationship with the other members of the partnership
If a partner is only a benamidar for another it can only mean that he is accountable to the real owner for the profits earned by him from and out of the partnership
Therefore a benamidar is a mere trustee of the real owner and he has no beneficial interest in the property or the business of the real owner
But in law just as in the case of a trustee he can also enter into a partnership with 1 247 others
The benamidar of a partner qua the other partners has separate And real existence he is governed by the terms of the partnership deed his rights and liabilities are governed by the terms of the contract and by the provisions of the partnership Act his liability to third parties for the acts of the partnership is coequal with that of the other partners the other partners have no concern with the real owner they can only look to him for enforcing their rights or discharging their obligations under the partnership deed
Any internal arrangement between him and another is not governed by the terms of the partnership that arrangement operates only on the profits accruing to the benamidar it is outside the partnership arrangement
If a benamidar possesses the legal character to enter into a partnership with another the fact that he is accountable for his profits to and has the right to be indemnified for his losses by a third party or even by one of the partners does not discharge him of the said character
As mentioned earlier the persons who are shown in the part nership deed with which we are concerned in these appeals as partners appeared to have joined the same in their individual capacity
There is nothing in the partnership deed to indicate that they have joined the partnership as kartas of their respective families
It was not open to the Income tax Officer to go behind the deed and find out for the purposes of registration under section 26A whether the partners mentioned in the deed have joined the partnership in their own right or as representing others
Hence the partnership must be held to have been validly formed as law did not at the relevant time prohibit any one otherwise competent to contract from entering into a contract of partnership even though the beneficial interest in his share may vest in others
The application made for registration complies with the requirements of section 26A and the rules framed thereunder
Therefore the Income tax Officer was bound to register the partnership
For the reasons mentioned above we allow these appeals set aside the order made by the High Court and answer the question referred to the High Court in the negative and in favour of the assessee
The department shall pay the costs of the assessee in this Court as well as in the High Court
One hearing fee
RKPS Appeals allowed


Summary:
A firm consisted of 18 partners
The partnership deed did not show that any of the partners joined the deed as representatives of their Hindu Undivided Families
The firm applied for registration under section 26A of the Income Tax Act 1922
The income tax Officer the Appellate Assistant Commissioner and the Tribunal were of the opinion that some partners of the firm having entered into the partnership as representatives of their respective Hindu undivided families in view of section 43 of the Companies Act 1913 the adult members of these families should be taken into consideration for determining whether or not the total number of partners exceeded twenty
On that basis they arrived at the conclusion that the firm had more than 20 partners and the same having not been registered as a company under the Companies Act the partnership was un lawful
The High Court answered a reference made to it in favour of the revenue
In the appeal to this Court it was contended i Section 43 of the Companies Act 1913 proceeded on the erroneous impression that a joint Hindu Family can enter into a partnership which in law it cannot as it has no legal personality ii it was not open to the Income Tax Officer to go behind the deed for the purpose of registration under section 26A and iii if the application for registration complied with the requirements of that section and the rules made thereunder it was not open to the Income Tax Officer to refuse to register
Allowing the appeal HELD  i It is only partnership constituted according to the provisions of the partnership Act that can be considered as partnership under the Act
Under the Partnership Act only persons can join as partners
An association of persons is not a person within the meaning of that expression in the Partnership Act
The definition of Person in the Income Tax Act including within the definition Hindu Undivided Family is intended for levying income tax and other cognate matters and cannot be imported into the Partnership Act the provisions of which alone are relevant for finding as to who could join as partners
A Hindu undivided family cannot as such enter into a contact of Partnership with another person or persons
The concept of a Hindu undivided family joining a partnership presents considerable difficulty
It is a fleeting body and such a partnership is likely to have a precarious
existence
Therefore the assumption in section 43 of the Companies Act 1913 that a Hindu Joint Family can be a partner in a partnership appear to be based on an erroneous view of the law
241 H 242 G H 238 Senaji Kapurchand V Pannaji Devichand A IR 1930 PC 300 Dulichand Laxminarayana vs Commissioner of income tax Nagpur and Commissioner of Income tax West Bengal vs Kalu Babu Lal Chand  referred to
Lala Lachman Das vs Commissioner of Income Tax 74 IA 277 distinguished 
ii For the purpose of finding out as to who are all partners of a firm one has only to look to the partnership deed and not to go behind it
It is well settled that when a co parcener even when he is the Karta enters into partnership with others the partnership that is created is a contractual partnership that partnership is not between the family and the other partners it is a partnership between the coparcener individually and his other partners
244 B C P K P section Pichappa Chettiar vs Chokalingam Pillai
AIR 1934 PC 192 Kshetra Mohan Sannyasi Charan Sadhukhan vs Commr
of Excess Profits Tax West Bengal  Firm Bhagat Ram Mohan Lal vs Commissioner of Excess Profits Tax Nagpur and And
and Commissioner of Income tax Bombay City vs Nandlal Gandalal  referred to
iii The Income tax Officer has no power to reject an application for registration under section 26A if the provisions of the section and the rules framed thereunder are complied with
The jurisdiction of the Income tax Officer is confined to ascertaining two facts namely 1 whether the application for registration is in conformity with the rules framed under the Act and 2 whether the firm shown in the document as a bogus one or had no legal existence
It is not open to the Income tax Officer to go behind the deed and find out for the purpose of registration whether the partners mentioned in the deed have joined the partnership in their own right or as representing others
In the present cast the application made for registration complies with the requirements of the section and the rules framed thereunder
Hence the partnership must be held to have been validly formed as law did not at the relevant time prohibit anyone otherwise competent to contract from entering into a contract of partnership even though the beneficial interest in his share may vest in others
246 A B 247 E F Commissioner of Income tax Madras vs Sivakashi Match Exporting Co and Commissioner of Income Tax Gujarat vs I Abdul Rahim and Co  referred to