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In Re: Jai Dayal Madan Gopal Of ... vs Unknown

High Court Of Judicature at Allahabad|22 April, 1932

JUDGMENT / ORDER

JUDGMENT Sulaiman, C.J.
1. The question referred to the High Court by the Commissioner is in the following words:
Whether having regard to the deed of partnership, dated 16th April 192S, and to other relevant evidence on the record, the finding that the registered firm Jai Dayal Madan Gopal of Benares is in its corporate capacity a partner in nine other firms bearing the same name was a legal and proper finding ?
2. It is obvious that the Commissioner has assumed that a registered firm can under the law be a partner in another firm in its corporate capacity, and he has asked to answer the question whether having regard to the deed of the partnership and to other relevant evidence on the record, the firm Jai Dayal Madan Gopal of Benares is a partner' in the other firms. Strictly speaking the question of law that one firm cannot' legally be a partner in another firm in its corporate capacity has not been referred to us. This would be clear if we see the. grounds in the petition of the assessee for reference to the High Court. The first three grounds did not refer to this question at all. The fourth ground was confined to the proper construction of the instrument of partnership, and the fifth ground was whether the income from various partnership concerns mentioned in the assessment order referred to in the appellate order is the exclusive income of the applicant firm or the individual income of the partners of the applicant firm under the instrument of partnership read with the proviso to Section 55 of the Act.
3. The question of the impossibility of one firm being a partner in another firm was not asked to be referred to. It is however clear from the way in which the question has been put by the Commissioner, challenging, as it does, the legality and propriety of the Income Tax Officer it may well be said to include the question of law as stated above. We have power to reframe the question so as to answer it correctly. But when reframing it we must take care that we do not answer the new question in a way which would lead the income tax department to imply an answer to another question, not directly included. The real matter with which the department is concerned is whether the income received by the Benares firm from the various partnership concerns in other places is a part of the taxable income of the Benares firm or not. It is in a proceeding relating to the assessment of tax on the income of the Benares firm that the question whether the Benares firm can legally be a partner in the other firms arises. The instrument of the partnership begins as follows:
Whereas a partnership firm in the name of the head of our family Seth Jai Dayal Madan Gopal is carried on at Kashi (Benares) and other places, in which we are share-holders of half and half, etc.
4. If the question had turned entirely on an interpretation of the instrument of the partnership, I would have said that it means that there is one partnership firm in the name of Seth Jai Dayal Madan Gopal carrying on business at Kashi (Benares) and other places in which the two persons are partners to the extent of a half share each. If an answer were sought as to whether the Benares firm is a partner in the other firms on the basis of the deed of. the partnership and other relevant evidence on the record, I would decline to answer the question because that is not a question of law at all but one of fact. Where the evidence is both oral and documentary in ! addition to the deed of partnership 11 would not say that the matter is merely one of legal inference from found facts, but I would say that it is a question of fact itself. But if a question was asked whether one firm can legally be a partner in another firm, then I would unhesitatingly proceed to answer it.
5. There is authority for the view that one firm cannot legally be a partner in another firm. Section 239, Contract Act, defines a partnership as the relation which subsists between persons who have agreed to combine their property, labour or skill in some business, and to share the profits thereof between them. The view has been expressed that the word "person" in this section does, not include a firm. I may refer to the case of Seodayal Khemka v. Joharmull Manmull A.I.R. 1924 Cal 74 at p. 558 (of 50 Cat.), where Page, J., remarked that a firm is not a person; it is not an entity but is merely a collective name for the individuals who are members of the partnership. This case was followed by a Division Bench of the Calcutta High Court in Brojo Lal Saha v. Budh Nath Pyari Lal & Co. A.I.R. 1928 Cal 148, where it was held that a partnership entered into by two or more persons is not a legal person and that a firm is not a person within the meaning of Section 239, Contract Act. A Bench of our own High Court in Basanti Bibi v. Babu Lal Poddar A I.R 1931 All 328, expressed a similar view that the owning of a five annas share in the factory could not be regarded as forming a separate partnership, but that there was only one partnership owning the whole factory. The facts of the lastmentioned case were however peculiar.
6. But it may be pointed out that the definition of the word "person" as given ? in the General Clauses Act, 1868, which was in force when the Contract Act was passed, and which definition has been reproduced in the Act of 1897, was not expressly considered in the above cases. According to that definition a person includes any company or association or body of individuals, whether incorporated or not Section 2(3) of 1868 and Section 3(39) of 1897. In Kader Bux v. Bukt Behari A.I.R. 1931 Cal 768., another learned Judge of the Calcutta High Court when considering the argument that a partnership which purports to exist between a firm and an individual is unlawful according to Indian, law, pointed out the fallacy that conceding that a firm is not a legal person, a person within the meaning of Section 239 may yet be a combination of persons, but pointed out that "person" is not denned in the Contract Act, and the definition of "person" in the General Clauses Act permits of this being the case; the terms of the section do not render unlawful or impossible a partnership between an association of persons, although unregistered, and an individual. But the learned Judge went on to say:
that a firm is nothing, but an association of individuals, and that when such an association under a firm name enters into a partnership with another individual or another association of individuals, it is not the aggregate that combines with the individual, but the individuals composing that aggregate.
7. If the definition of "person" as given in the General Clauses Act were to be applied to the word "person" in Section 239 there would be absolutely no reason to exclude a firm, from the scope of that word. No doubt the definitions in the General Clauses Act apply only when there- is nothing repugnant in the subject or text. But it would be difficult to; say that there is something repugnant in Section 239 itself to the applicability Of that definition of person. No doubt there' are Other sections in Ch. 11 of the Contract Act dealing particularly with the death or disability of partners which would not be applicable to a firm. There is nothing absolutely incongruous in holding that a firm is a legal person. Indeed such a conception exits in some systems of law. The English Partnership Act of 1890 (53 & 54 Vict. C. 39), Section 4, Sub-section (2) lays down that in Scotland a firm is a legal person distinct from the partners of whom it is composed. The question is not free from difficulty but having regard to the previous authorities, particularly of this Court, I am not prepared to dissent from the view that the word "person' in Section 239, Contract Act, should not be interpreted so as to include a firm. Such an interpretation avoids complications in dissulution of partnerships and may well be accepted. But the question whether a firm cannot be legally a partner in another firm so as to be able to enforce all rights of a partner and be burdened with all the liabilities of a partner, is entirely different from the question whether the income received by a firm which was wrongly admitted as a partner paid over to that firm is not legally money belonging to that firm.
8. The question before us arises under the Income-tax Act. The firm Jai Dayal Madan Gopal of Benares is the asses-see in this case. According to Section 2(2) of that act an assessee means a person by whom income-tax is payble. The present reference under Section 66 arises in the course of an assessment and has been made at the request of the assessee. We must for the purposes of the Income-tax Act regard the assessee, namely, the Benares firm, as a "person," otherwise the department cannot tax the assessee at all. Under Section 239, Contract Act, the firm of Benares is a partnership firm. It can own property and have its own income. It' can have a manager authorized to act on its behalf and to dispose of its funds. The Income-tax Act recognizes a firm which got itself registered under Section 2 6-A, Income-tax Act. It therefore seems tome that the firm of Benares is a, distinct legal entity recognized by law, separate from the two individuals who are its partners or proprietors. If the Benares firm had some funds of its own, and a part of its funds was invested in some other firm' under a mistaken view of the law that the firm can be a partner in the other firm, and some profit was earned on that income and has been paid over to the Benares firm and received by it as its own income, the money belongs to the Benares firm and it is income received by that firm for purposes of the income-tax. It is immaterial whether in the eye of the law the status of the Benares firm was that of a partner_ in the other firm, or not, and quite immaterial whether the Benares firm could have in a Court of law enforced its rights as a partner in the ourer arm or that other firm could have enforced the liability of the Benares firm as a partner. Money that has alredy been paid over to the Benares firm without protest as profits on that firm's own funds has become a part of the income of the Benares firm.
9. If once it is conceded that the Benares firm exists as an entity, separate from the two individuals who own it, it cannot be said that a part of its funds ceases to be the property of the firm as soon as it is invested' in another firm. Surely, even if the relationship of a partner does not legally come into existence, the money so invested continued to be the property of the Benares firm and its return can be claimed. If profit earned on it has been paid to the Beneras firm, the profit must be the property of that firm. In my opinion the question whether such income belongs to the firm or to the partners in their individual capacities is entirely one of fact. If money had been taken by the partners out of the Benares firm and re-invested by them in the other firms, then it is their money and the profits earned on it belonged to them in their individual capacities. If, on the other hand, the money belonged to the Benares firm and was invested by the Benares firm as such and profits on the amount had been received back by the Benares firm, the capital continues to belong to the Benares firm and the income earned thereon is the property of the Benares firm, although the Benares firm cannot in the eye of the law have the status of A partner in the other firms. Subject to the limitation that it does not necessarily follow that the income received by the Benares firm, is no part of its own income, I would answer the question referred by saying that even though the finding may be justified on the evidence, the Benares firm cannot legally be a partner in the nine other firms.
Mukerji, J.
10. This is a reference under Section 66, Sub-section (2), Income-tax Act, by the Commissioner of Income-tax, U.P. There is a firm in Benares known as JaiDayal Madan Gopal. It consists of two partners with equal shares, one being Lala-Jai Dayal and the other Rai Sahib Ram Ratan Das. There seems to be a slight clerical mistake in the name of the second partner in paragraph 1 of the statement of the case.
11. The firm has an extensive business. Besides owning this firm the two partners have an interest in numerous firms bearing the same name and carrying on business at different parts of the country. In the year, of which the income for the purpose of assessment was under investigation, it was found that the firm made no profits. It was, however, calculated that the other firms in which the two partners at Benares were interested made considerable profits which after a slight correction was declared to be Rs. 1,81,338. On this amount the tax and super-tax leviable has already been realised in the hands of the different firms. It appears that under the proviso to Section 55, Income-tax Act, where profits of an unregistered firm have been assessed to super-tax, no further super-tax can be levied on that sum in the hands of an individual partner of the firm. If the two gentlemen, Mr. Jai Dayal and Rai Sahib Ram Ratan Das be treated as partners of the numerous firms which haveyielded the income described above, they would not be any longer liable to pay super-tax on their individual share in the profits. The firm Jai Dayal Madan Gopal has been registered within the meaning of Section 2(14), Income-tax Act. The view taken by the Income-tax department is that the registered firm Jai Dayal Madan Gopal is a corporate body and as a corporate body is a partner in the nine unregistered firms the profits of which have come to Rupees 1,81,338. If this view be correct, the exemption from super-tax contained in the proviso to Section 55, Income-tax Act, will no longer be applicable to the shares of the two individuals Lala Jai Dayal and Rai Saheb Ram Ratan Das. The contention of these gentlemen is that, as matter of law, the firm Jai Dayal Madan Gopal is not a corporate body and could not be, having regard to the provisions of Section 239, Contract Act, a partner of any other firm. They further contend that as a matter of law they,namely Lala Jai Dayal and Rai Saheb Ram Ratan Das are the partners, in the nine firms mentioned, in their individual capacity and are therefore not liable to be taxed with super-tax on one half of the amount, Rs._ 1,81,338.
12. A preliminary objection was taken by the learned Government Advocate that the reference itself is incompetent because the controversy arises not because any tax is sought to be levied on the firm Jai Dayal Madan Gopal but because of a controversy that arises out of assessment on the individuals Lala Jai Dayal and Rai Saheb Ram Ratan Das. This contention however is not sound because the question has arisen "in the course of the assessment" on the firm Jai Dayal Madan Gopal. The reference is correct and competent. The question that has been referred to us by the learned Commissioner of Income-tax runs as follows:
whether having regard to the deed of partnership, dated 16th April 1928, and other relevant evidence on the record, the finding that the registered firm Jai Dayal Madan Gopal of Benares is in its corporate capacity a partner in nine other firms bearing the same name was a legal and proper finding.
13. In framing this question for determination by the High Court the learned Commissioner has taken it for granted that the firm Jai Dayal Madan Gopal is a corporate body, and it, was possible, under the law as contained in the Contract Act, for a firm like this to be a partner of another firm. The asscssee firm has always contended that the income of Rs. 1,81,338 and odd is their individual income and not the income of the firm Jai Dayal Madan Gopal. The question was very prominently and very clearly put before the Commissioner of Income-tax in para. (4) and (5) at p. 25 of the printed reference. The same questions were raised before the Assistant Commissioner of Income-tax in their appeal by the assessee firm in para. 7 at p. 20 which runs as follows:
Because the finding of the learned Income-tax Officer as treating the registered firm Jai Dayal Madan Gopal partners in other partnerships is illegal and is self-contradictory by treating the registered firm as capitalist partners.
14. It has been held in this Court that when a Commissioner of Income-tax states a case, it is open to this Court to find out for itself what are the question or questions of law that do arise between the parties, namely, the assessee and the Income-tax department for determination by the High Court and to decide those questions: see A.I.R. 1929 All. 819, Sheo Prasad v. Cotnmr. of Income-tax and In re Kajori Mal Kalyan Mal AIR 1930 All 209. This view has been followed in Bombay in the case of Income-tax Commissioner v. National Mutual Life Association Ltd. AIR 1931 Bom 448. In this view of the law this Court has_ to determine first what was the real point of controversy between the parties and then to pronounce an opinion on it. The real controversy between the parties is whether the partners of the nine unregistered firms which yielded profits are Lala Jai Dayal and Rai Sahib Lala Earn Ratan Das individually or whether it is the firm Jai Dayal Madan Gopal, I. e., the partner. This is also clear from para. 3 of the statement of the case. There can be the doubt that under Section 239, Contract Act, a firm cannotbe a partner of another firm. According to the Income-tax Act, the words "firm" "partner" and "partnership" have the same meaning respectively as in the Contract Act, 1872: vide Section 2, Sub-section (6)(a). A partnership as defined in Section 239, Contract Act, is the relation which subsists between persons who are agreed to combine their property, labour or skill in some business and to share the profits thereof between them. Persons who have entered into a partnership with one another are called collectively a firm.
15. It is true that under the definition f the word "persons" contained in the General Clauses Act, 1868, a personincludes a number of individuals associated for a purpose, although they may not be a corporate body. But this definition would apply only if any other meaning is not indicated by the context of the law to be interpreted. Now by para. 2 of the definition of "partnership" persons who have entered into a partnership with one another are called collectively a firm. Then if a firm can be a partner, we have this position that in defining a "partnership" the law uses the word "firm" which is hardly to be expected. For the definition ot "partnership" would then run something like this. Partnership is the relation which subsists between individual persons or a firm and another firm or a firm and individual persons who have agreed etc. This way of defining a term of law is hardly satisfactory. Then if we look to the other sections of the Act, we shall find that Ch. 11, Contract Act, never contemplated that an incorporate body like a firm could be a partner. Take for example Section 254, which runs as follows:
At the suit of a partner the Court may dissolve the partnership in the following case: (1) when a partner becomes of unsound mind.
16. Now can a firm become of unsound mind? Then again let us consider Section 253. Almost each of the rules regulating the relations of partners inter se presupposes that the partners are individuals and not an incorporate body like a firm. My own opinion therefore is that a firm cannot be a partner in another firm. This opinion of mine was expressed by my brother Bennett, J. (sitting with me), in Basanti Bibi v. Babu Lal Poddar A.I.R. 1931 All 225. This view has also been taken in Calcutta: see Sheodayal Khemka v. Joharmull Manmull A.I.R. 1924 Cal. 74 which was approved in Brojo Lal Saha Banikya v. Budh Nath Pyarilal & Co. A.I.R. 1928 Cal. 148. The latest Calcutta case leader Bux Omer Hyat v. Bukt Behari A.I.R. 1932 Cal. 768 does not take a contrary view as was urged by the learned Government Advocate. It being then the settled law that a firm cannot be a partner in another firm, the Income-tax Officer was undoubtedly in the wrong when he held that the firm Jai Dayal Madan Gopal was a partner in the nine firms carrying on business at different places under the style Jai Dayal Madan Gopal. The question of law that does arise in this case is "whether as a matter of law the firm Jai Dayal Madan Gopal of Benares could be a partner of the nine unregistered firms of the same name carrying on business at different places and whether or not, it follows also as a matter of law, that the participation in the nine firms by Lala Jai Dayal and Lala Rai Sahib Ram Ratan Das was in their individual capacity." From what I have already stated it seems to me clear that there could be only one answer to this question and that is "that the two gentlemen Lala Jai Dayal and Lala Rai Sahib Ram Ratan Das are partners in heir individual capacity in the nine unregistered firms styled Jai Dayal Madan Gopal."
17. It was argued on behalf of the Income-tax department that the income received from the unregistered firms was credited into the books of the Benares firm, namely, Jai Dayal Madan Gopal (registered), and therefore the income should not be treated as the income of two individual partners. In my opinion this argument has no force. It may be that the two partners who constituted the registered Benares firm Jai Dayal Madan Gopal were not aware of the law and for this reason or for some reason of convenience the money was deposited in the firm account of Jai Dayal Madan Gopal (registered). But this fact and this fact standing by itself could not make the income, the source of which is known, the property of the firm and not the property of the two partners considered individually. In the registered Benares firm the two partners had equal shares, and therefore it was immaterial to themselves whether the amount was recorded as belonging jointly to them or whether one half of the sum received was credited to each of them separately. It is only because of the law of Income-tax that the question has now arisen. But an individual however clever, cannot be expected to take precaution against the language employed by the Income-tax enactment, the provisions of which are so often obscure and exercise the minds of counsel and Judges so much. In any case the Income-tax Act being a fiscal enactment must be liberally construed and administered with leaning always in favour of the subject, where that may be possible. In the result I would frame the question of law as stated above and would answer it also as stated above. In my opinion the assessee has succeeded in this reference and therefore the Crown must pay his costs including the sum of Rs. 100 that was deposited by the assessee for the reference. I would assess the fee of the learned Government Advocate at Rs. 250 as considerable time was occupied in Court in hearing this reference.
18. Subject to the limitation that it does-not necessarily follow that the income received by the Benares firm is no-part of its own income, we answer the question referred to us by saying that even though the finding may be justified on the evidence, the Benares firm-cannot legally be a partner in the nine-other firms. The Crown must pay the costs of the assessee including the sum: of Rs. 100 that was deposited by the assessee for the reference. We assess the fee of the learned Government Advocate at Rs. 250. We assess the costs of the assessee in this Court at the amount certified by his counsel up to Rs. 250.
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Title

In Re: Jai Dayal Madan Gopal Of ... vs Unknown

Court

High Court Of Judicature at Allahabad

JudgmentDate
22 April, 1932