Where partners joined in individual capacity, ITO was bound to register the firm

1. As per partnership deed, the assessee-firm consisted of 18 partners. Ex-facie that deed did not show that any of the partners had joined the deed as representatives of their Hindu undivided families. From the tenor of the document, they appeared to be partners in their own right. The Income-tax Officer refused to register the assessee-firm under section 26A (of Income Tax Act, 1961) for the assessment years 1952-53 to 1954-55.

2. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal came to the conclusion that some of them had joined the partnership as kartas of their respective Hindu undivided families.

3. The High Court held that the partnership in question was not lawful in view of section 4(3) of the Indian Companies Act, 1913, inasmuch as the total number of the partners and the adult coparceners in the joint families exceeded twenty.

4. On appeal the Supreme Court held as under:

In view of the aforementioned provision only "persons" can join as partners. Section 2(42) of the General Clauses Act says a "person" shall include any company or association or body of individuals whether incorporated or not. But this definition applies when there is nothing repugnant in the subject or context. After examining the provisions of the Partnership Act, the Privy Council in Senaji Kapurchand v. Pannaji Devichand AIR [1930] PC 300, and this court in Dulichand Laxminarayan v. Commissioner of Income-tax [1956] 29 ITR 535 (PC), have held that an association of persons is not a person within the meaning of that expression in the Partnership Act. It is true that section 2(9) (of Income Tax Act, 1961) says that unless the context otherwise requires "person" includes Hindu undivided family. This definition cannot be imported into the Partnership Act, the provisions of which alone are relevant for finding as to who could join as partners. It is only partnerships constituted according to the provisions of the Partnership Act that can be considered as partnerships under the Act. The definition of "person" in the Act is intended for the purpose of levying income-tax and for other cognate matters.

In that case the partnership was between the karta of a joint Hindu family and an undivided member of that family. Hence, the observations in the judgment that the Hindu undivided family was a partner has really reference to the karta who was a partner as representing the family. In Commissioner of Income-tax v. Kalu Babu Lal Chand [1959] 37 ITR 123 (SC), this court observed that it is now well-settled that a Hindu undivided family cannot as such enter into a contract of partnership with another person or persons. Several other decisions have taken the same view. No decision taking a contrary view was brought to our notice. The concept of a Hindu undivided family joining a partnership presents considerable difficulty. A Hindu undivided family is a fleeting body. Its composition changes by births, deaths, marriages and divorces. Such a partnership is likely to have a precarious existence. The assumption in section 4(3) of the Companies Act, 1913, that a Hindu joint family can be a partner in a partnership appears to be based on an erroneous view of the law.The conditions of registration prescribed in this section and the relevant rules are : (1) on behalf of the firm, an application should be made to the Income-tax Officer by such person and at such times and containing such particulars, being in such form and verified in such manner as are prescribed by the rules ; (2) the firm should be constituted under an instrument of partnership; (3) the instrument must specify the individual shares of the partners, and (4) the partnership must be valid and genuine and must actually exist in the terms specified in the instrument. If all the above conditions are fulfilled, the Income-tax Officer is bound to register the firm unless the assessee has contravened section 23(4) (of Income Tax Act, 1961).

As mentioned earlier, the persons who are shown in the partnership deed with which we are concerned in these appeals as partners, appeared to have joined the same in their individual capacity. There is nothing in the partnership deed to indicate that they have joined the partnership as kartas of their respective families. It was not open to the Income-tax Officer to go behind the deed and find out for the purposes of registration under "section 26A (of Income Tax Act, 1961), whether the partners mentioned in the deed have joined the partnership in their own right or as representing others. 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 beneficial interest in his share may vest in others. The application made for registration complies with the requirements of section 26A (of Income Tax Act, 1961) and the rules framed there under. Therefore, the Income-tax Officer was bound to register the partnership.

For the reasons mentioned above, we allow these appeals, set aside the order made by the High Court and answer the question referred to the High Court in the negative and in favour of the assessee. The department shall pay the costs of the assessee in this court as well as in the High Court.