Commissioner of Income-Tax v. Shantilal Keshavlal — 1991 DIGILAW 214 (GUJ)

JUDGMENT : R. C. Mankad, J. The assessee is a Hindu undivided family ("assessee-HUF" for short) and the assessment year under reference is 1972-73, the year of account being S. Y. 2027. The assessee-Hindu undivided family was carrying on the business of purchase and sale of gold and silver ornaments as well as bullion in the name of Messrs. Shantilal Keshavlal. This business was taken over by a partnership firm consisting of (1) Chokshi Shantilal Keshavlal, karta of the assessee-Hindu undivided family, (2) Chokshi Vinodchandra Shantilal, (3) Chokshi Rohitkumar Shantilal, and (4) Chokshi Krishnakant Shantilal on April 10, 1967. The deed of partnership was executed on May 11, 1967. All the four partners are coparceners of the assessee-Hindu undivided family. Chokshi Vinodchandra Shantilal, Chokshi Rohitkumar Shantilal and Chokshi Krishnakant Shantilal are sons of Chokshi Shantilal Keshavlal, karta of the assessee-Hindu undivided family. In other words, the assessee-Hindu undivided family consisted of the father and his three sons. The said partnership firm carried on business in the name and style of Chokshi Shantilal Keshavlal. Chokshi Shantilal Keshavlal, karta of the assessee-Hindu undivided family, has a 40% share and his sons, Vinodchandra, Rohit Kumar and Krishnakant have a 20% share each in the profit and loss of the partnership firm. The partnership firm applied for registration under section 185 of the Income-tax Act, 1961 ("the Act" for short). The Income-tax Officer assessing the partnership firm, however, held that the partnership firm was not genuine and that the business, which was alleged to be carried on by the partnership firm, belonged to the assessee-Hindu undivided family. The Income-tax officer, therefore, refused to grant registration to the partnership firm for the assessment year 1968-69 and in the income-tax assessment of the assessee-Hindu undivided family, he included the entire income from the business, which was alleged to be partnership business, in the hands of the assessee-Hindu undivided family for the assessment year 1968-69. In the subsequent assessment years also, the Income-tax Officer included the business income alleged to belong to the partnership firm in the total income of the assessee-Hindu undivided family. The Appellate Assistant Commissioner of Income-tax having confirmed the view taken by the Income-tax Officer, the assessee-Hindu undivided family and the partnership firm preferred appeals before the Income-tax Appellate Tribunal ("the Tribunal" for short). 2. The Appellate Assistant Commissioner of Income-tax having confirmed the view taken by the Income-tax Officer, the assessee-Hindu undivided family and the partnership firm preferred appeals before the Income-tax Appellate Tribunal ("the Tribunal" for short). 2. The Tribunal, in its common order passed in the partnership firm's appeals for the assessment years 1968-69, 1969-70 and 1971-72 to 1973-74 held, on appreciation of the evidence, that the partnership firm is genuine and directed the Income-tax Officer to grant registration to the partnership firm for the assessment year 1968-69 and to renew the registration for the subsequent years. The Tribunal held that under clause 4 of the deed of partnership, all the partners had agreed to all the debts, assets and stock of the business of the assessee-Hindu undivided family, which were taken over by the partnership firm and under clause 6 of the said deed the net profit or loss of the partnership has to be divided in the manner laid down therein. The Tribunal further held that while Chokshi Shantilal Keshavlal the karta of the assessee-Hindu undivided family, and his son, Vinodchandra, had contributed capital to the partnership-firm, the other two partners, namely, Rohitkumar and Krishnakant, were working partners. Therefore, according to the Tribunal, the partnership was a valid partnership. In this view of the matter, it gave a direction for registration of the partnership firm, as stated above. In view of the above direction given by the Tribunal, the income-tax assessment was made on the partnership firm as a registered partnership firm. 3. Since the Income-tax Officer held that the partnership was not a genuine partnership and that the business alleged to be run by the partnership firm belonged to the assessee-Hindu undivided family, as observed above, he included the income earned from the said business in the hands of the assessee-Hindu undivided family. The Revenue's contention was that the 20% share of each of the sons of Chokshi Shantilal Keshavlal belonged to the assessee-Hindu undivided family and, therefore, the entire income earned from the business of the partnership is liable to be included in the hands of the assessee-Hindu undivided family. The Tribunal, however, held that the partnership firm is genuine and granted it registration. The Tribunal, however, held that the partnership firm is genuine and granted it registration. In this view of the matter, in the income-tax assessment of the assessee-Hindu undivided family for the assessment year 1972-73, it held that only the 40% share of Chokshi Shantilal Keshavlal who was partner in the partnership firm as karta of the assessee-Hindu undivided family was liable to be included in the total income of the assessee-Hindu undivided family. In other words, according to the Tribunal, the 60% share in the income of the said business belonging to Vinodchandra, Rohitkumar and Krishnakant was not includible in the total income of the assessee-Hindu undivided family. The Revenue sought reference and, at its instance, the following two questions have been referred to us for our opinion under section 256(1) of the Act: "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the income of the firm of Messrs. Shantilal Keshavlal was assessable in the hands of the assessee-Hindu undivided family to the extent of 40% only ? 2. If the answer to the above question is in the negative whether the share earned by (a) Vinodchandra, (b) Rohitkumar, (c) Krishnakant from the firm of Messrs. Shantilal Keshavlal or any of them is includible in the assessment of the Hindu undivided family ? 4. It is not disputed that the decision of the Tribunal holding the partnership firm of Chokshi Shantilal Keshavlal to be genuine and directing the registration of the firm has become final. the Revenue did not seek a reference challenging the view taken by the Tribunal. Once this decision has become final, it is not open to the Revenue to seek inclusion of the 60 per cent share in the income of the business of the partnership belonging to Vinodchandra, Rohitkumar and Krishnakant in the hands of the assessee-HUF in the total income of the assessee-HUF. It is clear from the orders of the Income-tax Officer and the Appellate Assistant Commissioner of Income-tax that the only ground on which they included the entire income of the partnership business in the total income of the Hindu undivided family was that the partnership firm was not genuine. It is clear from the orders of the Income-tax Officer and the Appellate Assistant Commissioner of Income-tax that the only ground on which they included the entire income of the partnership business in the total income of the Hindu undivided family was that the partnership firm was not genuine. It is not the case of the Revenue that even if the partnership firm is held to be genuine, shares which Vinodchandra, Rohitkumar and Krishnakant received from the business income of the partnership firm belonged to the assessee Hindu undivided family. In other words, it is not the case of the Revenue that Vinodchandra, Rohitkumar and Krishnakant were mere benamidars and that their share in the partnership firm belonged to the assessee Hindu undivided family. Under the circumstances, once the partnership firm is held to be genuine, the shares of Vinodchandra, Rohitkumar and Krishnakant in the income of the partnership business cannot be included in the total income of the assessee-Hindu undivided family. 5. Several authorities have been cited before us on the question whether the coparceners of a Hindu undivided family can become partners with the karta of the Hindu undivided family in a partnership firm. It was urged on behalf of the Revenue that since Rohitkumar and Krishnakant had not made any contribution to the capital of the partnership firm from their own individual property, there was no genuine partnership. It was urged that the partnership firm would not become genuine merely because Rohitkumar and Krishnakant had agreed to contribute their labour and skill. It was pointed out that the partnership deed was silent as to in what manner the partners had to make contribution towards the capital of the partnership firm. The evidence on record reveals that Chokshi Shantilal Keshavlal, who was the karta of the assessee-Hindu undivided family and Vinodchandra, had made contribution towards the capital of the partnership firm. However, since Rohitkumar and Krishnakant had not made any contribution to the capital of the partnership firm, it was urged, the partnership is invalid. Now all the above contentions which are raised on behalf of the Revenue could be considered and the decisions which are cited would be relevant only if the question arising before us is whether or not the partnership firm is genuine. However, no such question arises for our consideration in this reference. Now all the above contentions which are raised on behalf of the Revenue could be considered and the decisions which are cited would be relevant only if the question arising before us is whether or not the partnership firm is genuine. However, no such question arises for our consideration in this reference. So far as the present reference is concerned, we have to proceed on the basis that the partnership firm is genuine and that it is duly registered. It is not disputed that the registration of the partnership firm is continued till 1983-84, the year in which it was dissolved. 6. Learned counsel for the Revenue sought to rely upon the decision of the Chief Court of Sind in Kirpaldas Motandas v. CIT 1942 (10) ITR 505 (Sin), in support of his contention that even if the partnership firm is held to be genuine, income derived from the business could be assessed in the hands of the assessee-Hindu undivided family. That was a case in which one Bhojraj who was a partner in a firm, Hemandas Bhojraj, had a share of nine annas in the rupee. The firm, on application made for registration, was registered by the Income-tax Officer. The partners, however, were ordered to be separately assessed on the profits received by them and, when investigating the case of Bhojraj, the Income-tax Officer came to the conclusion that although Bhojraj was a partner in the firm of Hemandas, he was a partner by reason of his utilisation of capital belonging to the joint family of which he was a member. The Income-tax Officer, therefore, did not assess Bhojraj on the share of profits received by him in the business, but he assessed the joint family. The joint family contended that, by registering the firm, the income-tax authorities were estopped from further inquiring into the identity of the persons who actually received the share of Bhojraj in the profits. 7. This contention was, however, rejected. The joint family made an application under section 66(3) of the Indian Income-tax Act (11 of 1922). While dealing with this application, the Chief Court of Sind held that although question of estoppel might be a point of law, the Commissioner could not be directed to make a reference inasmuch as it was a point of law to which the answer was very evident. While dealing with this application, the Chief Court of Sind held that although question of estoppel might be a point of law, the Commissioner could not be directed to make a reference inasmuch as it was a point of law to which the answer was very evident. The court observed that there was no provision in the Income-tax Act which lays down that the registration of a firm operates to estop the income-tax authorities from taxing assessees who actually receive the profits of the firm. In this view of the matter, the court declined to direct the Commissioner to make a reference as prayed for. This decision will be of no assistance to the Revenue. In the instant case, it has not been found by the Income-tax Officer that the shares of profit received by Vinodchandra, Rohitkumar and Krishnakant from the partnership belonged to the assessee-Hindu undivided family. It is, therefore, not open to the Revenue to urge that, notwithstanding the registration of the partnership firm, the share income of Vinodchandra, Rohitkumar and Krishnakant was includible in the hands of the assessee-Hindu undivided family. 8. The next decision on which reliance was placed by the Revenue was the decision of the Bombay High Court in Shapurji Pallonji v. CIT 1945 (13) ITR 113 (Bom). In that case, the assessee who was carrying on business in partnership with his brother introduced his son as a partner in the firm in November 1937, and gave him from his share of ten annas and eight pies, a share of four annas. The firm, as constituted, was registered by the Income-tax Officer in 1938-39 under section 26A of the Income-tax Act, 1922, and assessments were made on the firm and partners accordingly. Subsequently, in the course of reassessment proceedings under section 34 in respect of the assessment year 1938-39, the Income-tax Officer found, while proceeding under section 23(5)(a), that the assessee's son was a mere name-lender and that the entire profits representing the share of ten annas and eight pies actually belonged to the assessee. The Tribunal agreed with the finding of the Income-tax Officer. In reference, the Bombay High Court held that the Income-tax Officer was not, by reason of the registration of the firm under section 26A, prevented or estopped from taxing in the hands of the assessee the profits representing the share of ten annas and eight pies. The Tribunal agreed with the finding of the Income-tax Officer. In reference, the Bombay High Court held that the Income-tax Officer was not, by reason of the registration of the firm under section 26A, prevented or estopped from taxing in the hands of the assessee the profits representing the share of ten annas and eight pies. In the instant case, it is not the Revenue's case nor has it been proved that Vinodchandra, Rohitkumar and Krishnakant were mere name-lenders and that their share in the income of the partnership business belonged to the assessee-Hindu undivided family. That being the position, this decision has no application to the facts of the instant case. 9. As already observed above, the Tribunal has, on appreciation of the evidence on record, found that the partnership firm consisting of Chokshi Shantilal Keshavlal and his three sons is a genuine partnership. This finding of the Tribunal is a finding of fact which cannot be disturbed in the present reference. But, apart from that the view taken by the Tribunal appears to be correct. There is sufficient evidence on record to show that Chokshi Shantilal Keshavlal and his son, Vinodchandra, had contributed towards the capital of the partnership firm whereas Rohitkumar and Krishnakant were only working partners in the firm. We are, therefore, not inclined to take a view different from the view taken by the Tribunal. 10. In the light of the above discussion, we answer question No. 1 which is referred to us for our opinion in the affirmative and against the Revenue. Since the answer to question No. 1 is in the affirmative and against the Revenue, question No. 2 does not survive. We, however, hold that the share income earned by Vinodchandra, Rohitkumar and Krishnakant or any of them from the firm of Messrs. Shantilal Keshavlal is not includible in the assessment of the assessee-Hindu undivided family. 11. Reference answered accordingly with no order as to costs.