Commissioner of Wealth-tax vs J.K.K. Angappa Chettiar

V. Ramaswami, J.—The assessee was a member of the HUF consisting of himself and his two minor sons up to the assessment year 1961-

The HUF had interest in various partnership firms. There was a partition on March 31, 1961, in the presence of panchayatdars as a result of

which the capital account of the family in the various partnership firms was equally divided between the assessee and his two minor sons,

Kandaswami and Ashokan. The claim of partition was also accepted and an order u/s 25A of the Indian I.T. Act, 1922, was also made by the

ITO. In respect of the assessment years 1962-63 and 1963-64, the assessee on September 18, 1963, filed his wealth-tax returns. In these

returns, the entire interest in the various partnership firms was shown as belonging to the assessee and the only liability claimed was to the sons as

shown in the balance-sheet representing the amounts due to the sons in the capital account according to the panchayatdar''s award. This amounted

to Rs. 1,26,574 and Rs. 1,34,168, respectively, for the assessment years 1962-63 and 1963-64 in favour of the minor, Kandaswami, and Rs.

1,25,354 and Rs. 1,32,875, respectively, for the assessment years 1962-63 and 1963-64 in favour of the minor, Asokan. The profits in the

various partnership firms received by the assessee for the assessment year 1962-63 was Rs. 9,86,258, for the assessment year 1963-64 Rs.

7,85,166 and for the assessment year 1964-65, Rs. 15,67,609. For the assessment years 1962-63 and 1963-64, the assessee filed revised

returns contending that in the total wealth is included the share of profits from the partnership firms and since 2/3rds of the capital account in the

firm belonged to his two minor sons by virtue of the partition their share in the profits should be excluded in the computation of his net wealth. The

amount to be excluded was worked out at Rs. 6,57,506 for the assessment year 1962-63 and Rs. 5,23,442 for the assessment year 1963-64.

For the assessment year 1964-65; the assessee submitted a return on the same basis dividing the profits and investments in partnerships between

himself and his two minor sons. The WTO came to the conclusion that the capital standing to the credit of the assessee in the books of the various

partnership firms in which he was originally a partner as the karta of the HUF was divided equally among the assessee and his sons under the

partition deed dated March 31, 1961. 3ut all the same he held, relying on certain recitals in the partition deed, that the sons had no further interest

in the partnership business, that the assessee was exclusively entitled to the interest in the partnership and that, therefore, the entire share of profits

in the business belonged to the assessee. In support of this conclusion, the WTO also relied on the Income Tax assessments where the full share of

income from the firm was shown by the assessee till the assessment year 1964-65 and also the fact that in the original wealth-tax returns filed by

the assessee for the assessment years 1962-63 and 1963-64, the assessee had disclosed the full interest of the partnership firms as belonging to

him.

On appeal by the assessee, the AAC held that a reading of the partition deed shows that only the capital invested in the various partnership firms

had been divided and nothing has been mentioned regarding the right to profits and that, therefore, the minor sons of the assessee had no right to

claim a share in the profits from the partnership firms. All the same, the AAC held that the minor sons of the assessee are entitled to the amount

awarded to them by the panchayatdars with 6% of the amount in the capital account in the partnership firms which is referable to the minors''

2/3rds share. On a further appeal, the Tribunal held :

There was a division of the capital account among the coparceners of the joint family. The interest in the various partnership firms belonging to the

joint family was to be held by the assessee and his two sons as tenants-in-common with a right to division of profits of the partnership firms.

Since there has been a partition of the family capital account in the four partnership firms between the assessee and his two minor sons and since

the assessee was exclusively receiving income from the partnership firms, there is a legal liability to account for the minors'' share in the profits.

It further held that since the assessee had gained an advantage in derogation of the rights of the minor sons in the capital account and by taking

advantage of the position gained something exclusively for himself, he has a legal liability to share the profits u/s 90 of the Indian Trusts Act. On

these findings the Tribunal was of the view that the profits, assets, accretions and investments made out of the profits from the ""partnership firms

attributable to the minors'' share can no longer be considered as the wealth of the assessee and consequently they have to be excluded in the

computation of the, net wealth of the assessee. At the instance of the revenue, the following questions of law have been referred u/s 27(1) of the

W. T. Act, 1957:

Whether, on the facts and in the circumstances of the case and having regard to the terms of the partition deed dated March 31, 1961, the right

to share the future profits of the firms was held both by the assessee and his divided sons and was not vested in the assessee wholly and exclusively

?

Whether, on the facts and in the circumstances of the case, Clause 5 of the partition deed cannot override the legal rights and obligations created

under the document and, therefore, it should not be interpreted to mean that the profits from the partnership firms exclusively belonged to the

assessee ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the profits and accretions attributable to the

share of the assessee''s sons in the partnership firms should be excluded from the wealth-tax assessments made on the assessee as individual for

assessment years 1962-63 to 1964-65 ?

Before dealing with the questions, it is necessary to set out the terms of the partition deed. The partition deed was executed between the

assessee and his two minor sons, Kandaswami and Ashokan, represented by their mother and guardian. The deed recited that the assessee is

intending to enter the cinema field and also do partnership business in a big way in partnership with third parties and that since the panchayatdars

and well-wishers decided that such business would not be in the interest of the family and desired the minors to be relieved from any possible

liabilities, the parties have decided to divide the HUF and effect the partition. Under para. 3 of the partition deed, the immovable properties of the

joint family were divided among the three sharers, namely, the father and the two minor sons and the properties were allotted to them separately.

Under para. 4, all capital investments in partnership were divided into three equal shares and one share allotted to each one of them. We will deal

with para. 5 a little later. In para. 6, it is stated that, apart from the immovable and movable properties and investments that have been divided,

there are no other properties belonging to the joint family. In para. 5, it is stated that ""all the family business and interest in partnerships shall

hereafter belong to J. K.K. Angappa Chettir (assessee). The investments made in partnerships and the profits received up to date had been

respectively brought into account. The rest shall be taken by J.K.K. Angappa Chettiar "". The WTO and the AAC considered that this clause

entitles the assessee to claim the entirety of the profits arising from investments of capital in the partnership firms though the amount invested as

capital had been divided into three shares among the assessee and his two minor sons. The Tribunal held that the legal right of the minors to claim

the share of profits attributable to their capital cannot be defeated even if there is a stipulation in the partnership deed that in spite of division of the

capital account of the family in the various partnerhip firms, the profits in the firms exclusively belonged to the assessee. As already stated, the

Tribunal took the view that in respect of the profits received by the assessee and referable to the capital of the minors, the assessee was under a

legal liability to share the profits u/s 90 of the Indian Trusts Act.

It is seen from the facts that originally the assessee as the karta of the HUF was a partner in the various partnership firms since the HUF as such

could not be a partner. This was so because, as pointed out by the Privy Council in AIR 1934 192 (Privy Council) .

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 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.

The assessee was receiving his share of profits on behalf of the HUF. When the partition took place, the HUF ceased to exist in so far as the

capital investments were concerned. But since there is no division in metes after the partition, the parties were holding investments as tenants-in-

common and thus they were entitled to the profits arising from such investments in accordance with their shares in the investments. This legal

position has also been held in some decided cases. The Madhya Bharat High Court in Ramchandra v. Pannalal, AIR 1957 M p 113, held that

where a joint Hindu family has been disrupted, there is severance in status and the members of the family cease to be joint tenants ; they become

tenants-in-common and do not remain coparceners. In the words of the Privy Council in Appovier v. Rama Subba Aiyan [1866] 11 MI A 75 :

Nothing can express more definitely a conversion of the tenancy, and with that conversion a change of the status of the family quoad this property.

The produce is no longer to be brought to the common chest, as representing the income of an undivided property, but the proceeds are to be

enjoyed in six distinct equal shares by the members of the family, who are thenceforth to become entitled to those definite shares.

The profits realised by the assessee thus did not belong to him exclusively and he was holding it on behalf of himself and his two sons who were

entitled to the same. With reference to the rights of a divided member against the manager, the following passages from Mayne''s Hindu Law, 11th

edn., at pages 518 and 519, may be quoted ;

As from the date when the right to partition accrues, however, the manager will be bound to render an account of the same nature as would be

demanded from a trustee or agent. The time from which such an account can be demanded would seem to be the date of the severance. It will be

the date of the first unequivocal declaration by a member of the family of his desire to enforce a partition.

Until a severance in status is effected, no member of the coparcenary has a defined share, and consequently he can put forward no claim for mesne

profits or for any share of income from the joint family properties. The moment a severance takes place, whether by mutual agreement, or by

unilateral declaration of intention or otherwise, the right to claim mesne profits as from that moment arises.

It may be seen from these passages that the karta on and from the date of partition becomes liable to render an account of the profits and the

liability to such account is as that of a trustee or agent. Thus, when there is no division by metes and bounds of the capital investments on partition,

a change in the legal liability in respect of accounting takes place. The assessee who was holding the profits as karta before partition holds the same

after partition as a trustee or agent. The Supreme Court considered a similar question in Charandas Haridas and Another Vs. The Commissioner

of Income Tax, Bombay North, Kutch, Saurashtra and Ahmedabad and Another, with reference to the effect of partition upon the position of the

karta of a HUF who was a partner in a partnership. The Supreme Court held (p. 208):

In our opinion, here there are three different branches of law to notice. There is the law of partnership, which takes no account of a Hindu

undivided family. There is also the Hindu law, which permits a partition of the family and also a partial partition binding upon the family. There is

then the Income Tax law, under which a particular income may be treated as the income of the Hindu undivided family or as the income of the

separated members enjoying separate shares by partition. The fact of a partition in the Hindu law may have no effect upon the position of the

partner, in so far as the law of partnership is concerned, but it has full effect upon the family in so far as the Hindu law is concerned. Just as the fact

of a karta becoming a partner does not introduce the members of the undivided family into the partnership, the division of the family does not

change the position of the partner vis-a-vis the other partner or partners. The Income Tax law before the partition takes note, factually, of the

position of the karta, and assesses not him qua partner but as representing the Hindu undivided family. In doing so, the Income Tax law looks not

to the provisions of the Partnership Act, but to the provisions of Hindu law. When once the family has disrupted, the position under the partnership

continues as before, but the position under the Hindu law changes. There is then no Hindu undivided family as a unit of assessment in point of fact,

and the income which accrues cannot be said to be of a Hindu undivided family. There is nothing in the Indian Income Tax law or the law of

partnership which prevents the members of a Hindu joint family from dividing any asset. Such diviion must, of course, be effective so as to bind the

members ; but Hindu law does not further require that the property must in every case be partitioned by metes and bounds, if separate enjoyment

can otherwise be secured according to the shares of the members. For an asset of this kind, there was no other mode of partition open to the

parties if they wished to retain the property and yet hold it not jointly but in severalty, and the law does not contemplate that a person should do the

impossible. Indeed, the result would have been the same, even if the dividing members had said in so many words that they had partitioned the

assets, because in so far as the firms were concerned, the step would have been wholly inconsequential.

A Division Bench of the Calcutta High Court in Commissioner of Income Tax Central Vs. Dudwala and Co., had to consider the nature of the

liability of the manager after partition with reference to the capital invested in a partnership firm. In that case, the partners of a firm consisted of the

manager of a joint Hindu family representing the family and a stranger. A suit for partition of the family was instituted by one of the members of the

family which resulted in a compromise. The consent decree passed provided the shares of each of the members and further stated that the parties

had twelve annas share in the firm which would remain joint and they would be entitled thereto according to the shares mentioned in the decree.

When an application u/s 26A of the I.T. Act for registration of the firm was filed, it was refused by the ITO on the ground that as the joint family

had come to an end it could not form a partnership with a stranger as such until and unless the separate members of the family along with the

stranger formed themselves into a partnership and applied for registration. It was held that the fact that there was a disruption of the joint family had

no effect at all on the constitution of the firm or the manager''s status as a partner of the firm and, therefore, the partnership firm should be

registered u/s 26A of the Indian I.T. Act. It was further held that on such partition only the nature of the liability of the manager vis-a-vis his

coparceners was changed. In the words of the learned judges (p. 659):

After the partition decree was passed, the Rai Bahadur would be liable to render account in respect of the twelve annas share on a different basis.

But still he would continue to be a member of that firm and the partnership would not be in any way affected by the passing of that decree in the

partition suit......

Vis-a-vis the members of the family the Rai Bahadur might be liable to account, as I said before, on a different footing. But he did not cease to be

a partner of the firm and as such the application was rightly made u/s 26A on behalf of the firm......

These authorities clearly show that on and from the date of the partition the assessee was not entitled to the profits in its entirety and that he

was entitled to only that portion of the profit referable to his share in the capital investment and the minors are entitled to the profits referable to

their shares.

But what is contended by the learned counsel for the revenue is that Clause 5 enabled the assessee to appropriate the entirety of the profits to

himself. We are unable to read anything in this clause as entitling the asses-see to appropriate the entirety of profits received from the investments in

the partnership to himself. The original partition deed is in vernacular. We have given a true translation of the same above. The second sentence in

that clause clearly shows that the investments made in partnerships and the profits received up-to-date had been respectively brought into account.

This could only mean that the capital had been divided and brought to the account. All the profits up-to-date also had been brought to the account

and divided. In fact, this is the finding of all the authorities. The first sentence, namely, that all the family business and interest in partnerships shall

hereafter belong to J.K.K. Angappa Chettiar (assessee) shall be read in the context of a division of the capital and the necessity for disrupting the

family itself. As already pointed out, the earlier portion of the partition deed mentions that the assessee was trying to enter into a partnership with

third parties in a big way and also enter into cinema field taking a grave risk. The panchayatdars and the well-wishers of the family did not wish the

family itself to take the risk and the assessee was to be left to himself. It is under those circumstances they mentioned in the first part of Clause 5

that anything which he does thereafter would be his liability, but it has nothing to do with the profits arising from the investments of joint family funds

already made. The third sentence in para. 5 extracted above is in the nature of a residuary clause to the effect that whatever that is not dealt with

under the partition shall belong to the assessee. We are unable to read anything in Clause 5 as suggesting that though the capital investment had

been divided between the members of the joint family, the profits arising from them should exclusively belong to the assessee. We are of the view

that Clause 5 does not in any way affect the legal right of the sons to the profits arising from the partnership firms and other, investments.

Accordingly, we hold that the share of future profits from the firms was held by the assessee and his two divided sons and was not vested in the

assessee wholly and exclusively and Clause 5 of the partition deed did not in any way affect this right. Accordingly, the profits attributable to the

interest of the assessee''s two minor sons in the various partnership firms have to be treated as their wealth and consequently they have to be

excluded in computing the net wealth of the assessee. Accordingly, we answer the three questions in the foregoing terms and against the revenue.

The assessee will be entitled to his costs. Counsel''s fee Rs. 500.