Case: Firm Of Bhagat Ram Mohanlal Vs. The Commissioner Of Excess Profits Tax, Madhya Prades

1. The firm of Bhagat Ram Mohanlal which is the appellant before us, was constituted on 23-8-1940, and registered under S. 26-A, Indian Income-tax Act. The Partners of the firm, according to the registration certificate, were (1) Bhagat Ram Mohanlal, Hindu undivided family, (2) Richpal and (3) Gajadhar, their shares being respectively 8 annas, 4 annas and 4 annas. Mohanlal was the karta of the aforesaid joint family, which consisted of himself and his two brothers, Chhotelal and Bansilal, and he entered into the partnership as suchfirm carried on business at Drug in Madhya Pradesh as the agent of the Government for the purchase of foodgrains, and during the accounting years ending 1943 and 1944, 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 profit for the business, the Excess Profits Tax Officer determined the deficiency of profits for the year at Rs.7, 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 necessary to give effect to the reduction shall be given by repayment of the tax paid orunder this section, the Excess Profits Tax Officer passed an order on 23-12-1946 whereby after setting off the profits of the firm for the years ending 1943 and 1944 against the deficiency of profits during the year ending 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 1944-45 there was a partition 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 datedthis 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 and the latter three to 2 annas each. There was thus a reconstitution of the firm both with reference to the persons who were its partners and the shares which were allotted toS. 8(1) provides, omitting what is not material, that as from the date of any change in the persons carrying on a business, the business shall be deemed to have been discontinued and a new business commenced". If this section applied, then no relief could have been granted to the appellant under section 7 of the Act.3. 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 appellant 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 S. 20 of the Act, which confers on the Commissioner authority to rectify "any mistake apparent from themistake, 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 S. 20 were misconceived. The facts on which the proceedings were taken were not themselveshis 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 S. 7 by the Excess Profits Tax Officer was a mistake. He, however, 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 undivided 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.4. The appellant thereupon moved the High Court of Nagpur under Art. 226 for a writ of certiorari quashing the order of the Commissioner dated 15-3-1950 and for a writ of prohibition restraining the authorities from collecting Rs. 11,514-5-0 under that order. By their judgment dated 22-8-1950, the learned judges agreed with the Commissioner that by reason of the partition there was a change in the persons who carried on the business, and that the order dated 23-12-1946 was contrary to S. 8(1) of thealso held that as the mistake appeared on the fact of the record, the Commissioner had jurisdiction under S. 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.

Court's reasoning:
6. It is not in dispute that Mohanlal was the Karta of the joint family, and that he entered into the partnership on 23-8-1940 as such karta.It is well settled that when the karta of a joint Hindu family enters into a partnership with strangers, 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 itswould 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 partnersthe registration certificate of the firm while showing "Bhagat Ram Mohanlal, Hindu undivided family" as a partner, makes no mention of either Chhotelal or Bansilal ascontention that they also became in their individual capacity partners appears therefore to be an afterthought, and is opposed to the findings of the learned judges of the High Court. This is sufficient, without more, to dispose of this contention. But even apart from this, it is difficult to visualise the situation which the appellant contents for, of a Hindu joint family entering into a partnership with strangers through its karta and the junior members of the family also becoming at the same time its partners in their personalin 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 being also partners in the firm in their individual capacity, which can only be in respect of their separate or divided property.To get over this difficulty, it was suggested that all the three coparceners might be regarded as having entered into the contract of partnership of 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 Bansilal should be held to have become partners in the old firm under the agreement dated 23-8-1940 cannot be maintained.9. The question whetherthere was a change in the persons carrying on thebusiness may now be considered independently of the principles of Hindu Law or the general law of Partnership and with special reference to the provisions of the Indian Excess Profits Taxwas the view taken in - "Shanmugavel Nadar and Sons v. Commissioner of Income-tax, 1949 Mad 228   (AIR V 36) (C), 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 theue that the order of the Excess Profits Tax Officer dated 23-12-1946 does not mention these facts,but they appear from the record of the income-tax proceedings which included the registration certificates of the firm under S. 26-A, Income-tax Act and the returns made by the firm disclosing the names of the partners and their respectiveare unable to agree with thissee no substance in this contention, which must accordingly beis undoubted law that the income-tax authorities are not estopped by the fact of registration from going 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 benefits thereby deny its correctness, when the facts mentioned therein turn out to hisis 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 that this contention does not appear to have been put forward before the Commissioner when notice was issued to the appellant under S. 20 of the Act. If any such contention had been raised, it would have been open to the Commissioner to have taken action under S. 19 of the Act.