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PETITIONER:

COMMISSIONER OF INCOME TAX,KERALA-II, ERNAKULAM

Vs.

RESPONDENT:

M/S. KANDATH MOTORS

DATE OF JUDGMENT: 04/03/1997

BENCH:

B.P. JEEVAN REDDY, SUHAS C. SEN

ACT:

HEADNOTE:

JUDGMENT:

[With Civil Appeals Nos.3338/84, 8601-12/83, 411-16/84,

1570-71/93, 3867/92, 7745/95 and Special Leave Petitions (C)

Nos.19919-20/95 & 12744/91].

J U D G M E N T

SEN, J.

This case relates to assessment year 1972-73 for which

the relevant previous year was the year commencing on

1.7.1970.

Initially, the assessee firm was constituted by a

Partnership Deed dated 13.9.1966 and consisted of six

persons :-

1. K.K. Sudevan

2. K.S. Krishnadas

3. K.A. Jayapalan

4. K.S. Haridas

5. K.A. Mohandas

6. K.A. Haridas

The partnership had been granted registration under the

Income Tax Act. Clause 13 of that Partnership Deed provided

that the death or retirement of any one of the partners

shall not have the effect of dissolving the firm, but the

firm may be continued by the surviving or remaining partners

on such terms and conditions as may be agreed upon in

writing between them.

On 9.2.1970 Sudevan, one of the partners, died. Sudevan

had executed a will on 28th January, 1970 by which his

properties devolved upon his three adult sons, K.S.

Krishnadas, K.S. Haridas and K.S. Bhagavandas.

On 20th February, 1970 a fresh Partnership Deed was

executed. The partners were :-

1. K.S. Krishnadas (No.2 above -

also heir under

the will),

2. K.A. Jayapalan (No.3 above),

3. K.S. Haridas (No.4 above -

also heir under

the will),

4. K.A. Mohandas (No.5 above),

5. K.A. Haridas (No.6 above),

6. K.S. Krishnadas (No.2 above but

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described in

the

partnership as

Krishnadas

representing

the heirs of

late Shri K.K.

Sudevan as per

the registered

Will No.10 of

1970 and being

the Attorney of

the heirs

hereinafter

called the six

partners).

All these six partners had signed the Partnership Deed.

K.S. Krishnadas signed it twice. in his individual capacity

and also in his representative capacity.

The Income Tax Officer initially granted registration

to the newly constituted partnership firm for the assessment

year 1971-72 (accounting year ending on 30th June, 1970).

But for the assessment year 1972-73 (accounting year ending

on 30th June, 1971), the Income Tax Officer in exercise of

his powers under Section 186(1) of the Income Tax Act, 1961

cancelled the registration. The Income Tax Officer was of

the view that Krishnadas had joined the firm in two

capacities - (1) his individual capacity and (2) as

representing the heirs of late K.K. Sudevan. According to

the Income Tax Officer, no genuine partnership firm was in

existence and registration could not be granted to such a

firm. The Appellate Assistant Commissioner upheld the view

of the Income Tax Officer. The Tribunal, however, was of the

view that the partnership was genuine and the Income Tax

Officer was in error in cancelling the registration of the

firm Commissioner of the firm merely because Krishnadas had

signed the Partnership Deed twice in two capacities. At the

instance of the Commissioner of Income Tax, the following

question of law was referred to the High Court :-

"Whether there was during the year

(commencing from 1.7.1970 and

ending with 30.6.1971) relevant to

assessment year 1972-73, a genuine

firm in existence as registered?"

The High Court answered the question in the affirmative

and against the Revenue. The High Court was of the view that

merely because had signed the Partnership Deed twice, once

in his individual capacity and again as representing the

three heirs under the will of Sudevan, would not invalidate

the partnership agreement.

The important point to note is that in the partnership,

there were four other partners apart from Krishnadas.

Krishnadas might not have constituted a partnership with

himself in another capacity. But if a partnership exists

between Krishnadas and several other persons, there is no

legal bar to Krishnadas's joining the partnership in the

capacity of a nominee of others. On the question whether a

trustee or personal representative or nominee can join as

partner, the law stated in "Lindley and Banks on

Partnership", 16th Edition is "A trustee or personal

representative may clearly enter into partnership, although

he will be personally liable for any debts and liabilities

thereby incurred."

If a partner dies, the surviving partners may carry on

the business by forming another partnership. In such a case,

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they will have to account for the share of the deceased

partner to his legal representatives. But if a partner dies,

his legal representative may be admitted to the new

partnership by the surviving partners. The only question in

such a case will be whether any share of profit received by

him qua partner belongs to him personally or to the estate

which he represents. The answer will inevitably depend on

the facts and circumstances of the case.

However, there can be no legal bar to a personal

representative of the deceased partner being admitted to the

partnership by the surviving partners. If the personal

representative of the deceased is also one of the surviving

as a nominee of the legal heirs of the deceased partner.

The only difficulty that is being pointed out in this

case is that the executor, Krishnadas, who was one of the

surviving partners of the erstwhile partnership, has joined

the new partnership individually and also as representative

of the deceased Sudevan. This would have created a problem,

had there been any conflict of interest of Krishnadas as an

individual and as a representative of the legal heirs of

Sudevan. But that is not the case here. The properties of

Sudevan under his will passed on to his three sons all of

whom were adults. Out of the three sons, Haridas and

Krishnadas joined. Having regard to the composition of the

partnership, it is not possible to hold that Krishnadas

could do anything in the partnership which would be in his

interest and against the interests of the other legal heirs

of Sudevan.

Under the Income Tax Act, provisions for registration

of a firm are contained in Sections 184 and 185. In order to

obtain registration under the said Section 184, the

Assessing Officer has to be satisfied that the partnership

is evidenced by an instrument and the individual shares of

the partners are specified in that instrument. The

application for registration has to be signed by all the

partners (not being minors) personally. On receipt of

application for registration, the Income Tax Officer has to

inquire into the genuineness of the firm and its

constitution as specified in the instrument of partnership.

If he is satisfied that there was in existence a genuine

firm with the constitution so specified, he is required by

Section 185 to pass an order in writing registering the

firm. If he is not satisfied about the genuineness of the

firm or its constitution as specified in the instrument of

partnership, he has to pass an order in writing refusing to

register the firm.

It was held by this Court in the case of Commissioner

of Income Tax v. Abdul Rahim, 55 ITR 651, that a partnership

cannot be held to be not genuine or be denied registration

merely because a partner has joined in a representative

capacity, or is a trustee or benamidar for an outsider or

for another partner, or is otherwise nor beneficially

entitled to the whole or part of his share of profits. In

that case, the firm was held entitled to registration

although there was a private arrangement between two of the

partners (to which the other partners were not parties) that

one will pass his share of profits to the other. It was held

by this Court that a firm would be entitled to registration

although a partner may divide his share of profits with

others, e.g. sub-partners or members of another firm.

In the case of Commissioner of Income Tax v.

Bagyalakshmi & Co., 55 ITR 660, this Court held the firm to

be entitled to registration although two partners who had

been members of a joint family were not entitled to the

entire beneficial interest in thier shares of profits but

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had to divide their shares with other members of their

family which was partitioned. Subba Rao, J. observed :

"A 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

karata of a joint Hindu family; he

may be a trustee; 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. The third parties, whom

one of the partners 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 the terms of

agreement, as the case may be."

We were referred to a large number of cases relating to

the problem of genuineness partnership firm.

In the case of Messrs. Hoosen Kasam Dada, (a firm) v.

Commissioner of Income Tax, Bengal, 5 ITR 182, it was held

that a wakf represented by mutawalli could not enter into

partnership. Under the Mohammedan law, the moment a wakf is

created all rights of property vested in the Almighty.

Therefore, the partnership by the mutawalli as a partner was

no partnership in law and could not be registered under the

Indian Income Tax Act, 1922. It was also observed by

Costello, J., "I entirely fail to see how it could be argued

that a man can be at one and the same time a partner in his

individual capacity and a partner, in a representative

capacity. Taking that point alone, it follows, in my

opinion, tat there was no partnership in law of the

description set forth in the application made by the

assessees".

This observation must be confined to the facts of that

case where it was found that there was a possibility of

conflict of interest between Hoosen Kasam Dada as an

individual and as a representative of the two wakfs. A

partnership has to be brought about by a contract between

two persons. A person cannot contract capacities, he may

have power to contract in his representative capacity with

himself as an individual e.g. as an executor, a trustee and

administrator or an agent. (Halsbury's Laws of England, 4th

Edition, Vol. 9, Contract, Article 204).

In the case of Rai Bahadur Lokenath Prasad Dhandhania

v. Commissioner of Income Tax, Bihar and Orissa, 8 ITR 369,

a deed of partnership was drawn up between A in his

individual capacity, of the one part, and the joint Hindu

family consisting of A and his two sons of which A was the

Karta, of the other part. An application for registration of

the firm was refused by the Income Tax Officer. It was held

by a Division Bench of the Patna High Court that the

decision of the Income Tax Officer was correct. After

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referring to the following passage from Mayne's Hindu Law

(9th Edn.) at page 398 :

"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 of the business so

as to cloths them with all the

rights and obligations of a partner

as defined by the Indian Contract

Act. In such a case the family as a

unit does not become a partner, but

only such of its members as in fact

enter into a contractual relation

with the stranger : the partnership

will be governed by the Act."

it was observed in that case :

"it appears to me that the

partnership which was sought to be

entered into on the 24th of

February, 1936, was between

Lokenath on the one hand and

Lokenath on the other as the

managing member of the joint Hindu

family as a unit did not become a

partner; in words that the

partnership could be only treated

to be in fact between the member of

the joint Hindu family and the

Karta as the other contracting

party which in this case is the

same person. The result inevitably

follows that there is no

partnership in law which could have

been registered by the Income tax

Officer."

The case before us is not of a partnership between the

Karta of an H.U.F. with himself in another capacity.

The case of Agarwal and Co. v. Commissioner of Income

Tax, U.P., 77 ITR 10, dealt with a partnership where the tow

Kartas of two Hindu Undivided Families had formed a

partnership. The question was because the capital of the

firm came out of the family funds, whither the members of

the family ipso facto became partners of the firm. It was

held in tat case after referring to the case of Commissioner

of Income Tax v. Kalu Babu Lal Chand, 37 ITR 23 (SC) that it

was well settled that an HUF could not as such enter into a

contract of partnership with another person or persons. An

HUF is a fleeting body. Its composition changed by births,

deaths, marriages and divorce. The assumption that a Hindu

Joint Family could be a partner in a partnership firm was

based on an erroneous view of law. It was held that the

persons who were shown as partners in the deed must be taken

by the Income Tax Officer to have joined the same in their

individual capacity. It was not open to the Income Tax

Officer to go behind the deed and find out whether the

partners mentioned in the deed have joined in their own

right or representing others. It was held :

"Hence, the partnership must be

held to have been validly formed as

the law did not at the relevant

time prohibit anyone, otherwise

competent to contract, from

entering into a contract of

partnership, even though the

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beneficial interest in his share

may vest in others."

In the case of Commissioner of Income Tax, Bombay City

II v. Raghavji Anandji & Co., 100 ITR 246, the firm

consisted of eleven partners. The deed was signed by one of

the partners in two capacities - as an individual and as the

Karta of the HUF. It was held that the partnership was valid

and entitled to registration. It was held in that case that

the partnership agreement was a contract between a person in

one capacity and the same person in different capacity only,

but it was a contract between a person in two capacities and

nine other persons.

We were also referred to a decision of this Court in

case of Chandrakant Manilal Shah and another v. Commissioner

of Income Tax, (1992) 193 ITR 1, where the question of

genuineness of partnership between the Karta of an HUF and

an undivided member of the family, was considered. This

Court following of the decision of the Privy Council in the

case of Lachman Das v. Commissioner of Income Tax, (1948) 16

ITR 35 (PC), held that if a stranger can enter into a

partnership, with reference to his own property, with a

joint Hindu family through its Karta, there is no sound

reason to withhold such opportunity from a coparcener in

respect of his separate and individual property.

In this case before us, there are as many as six

partners. Krishnadas signed the partnership agreement on his

behalf as well as representing the heirs of Sudevan. The

only problem is Krishnadas was himself one of the heirs.

But, having regard to the principles laid down by the

Judicial Committee of the Privy Council and the decisions of

this Court in the cases of Firm Bhagat Ram Mohanlal and

Chandrakant Manilal Shah (supra), where it was held that a

Karta could enter into a partnership with a coparcener of

the same Hindu undivided family, we do not see why the

validity of this partnership agreement should be doubted,

especially, in view of the fact that there were four other

partners and Krishnadas was holding a power of attorney on

behalf of the other legal heirs. There is nothing in the

Partnership Act or the Contract Act which prevents an

agreement of this nature being entered into by the six

partners.

In our view the Kerala High Court has come to a right

decision in this case. The appeal is dismissed. There will

be no order as to costs.

Civil Appeals Nos.3338/84, 8601-

02/83, 411-16/84, 1570-71/93,

4675/84, 3867/92 7745/95 and

Special Leave Petitions (C)

Nos.19919-20/95 & 12744/91.

In view of our decision in Civil Appeal No.3069 of

1980, the above Appeals and Special Leave Petitions are

also dismissed. There will be no order as to costs.