1952 (3) TMI 51 - HC - Income Tax

HUF Cloth Business Converted to Partnership Asset, Valid Partnership Established with Minor's Benefits

Jakka Devayya & Sons Versus Commissioner of Income-tax

The court determined that the cloth business ceased to belong to the Hindu undivided family (HUF) and became a partnership asset. It was concluded that a ... - Issues Involved:1. Whether the cloth business continued to belong to the Hindu undivided family (HUF) post-partition.2. Whether there was a valid partnership in respect of the cloth business that could be registered under Section 26A of the Income-tax Act.Detailed Analysis:Issue 1: Whether the cloth business continued to belong to the Hindu undivided family (HUF) post-partition.- Facts: The assessee, a Hindu undivided family, claimed a partition of family properties in June 1942. The Income-tax Officer held that the division occurred on 4th April 1943. The assessee argued that the cloth business was a firm consisting of former HUF members and sought registration under Section 26A.- Legal Principles: The court discussed the difference between 'partition' under Hindu law and under Section 25A of the Income-tax Act. Under Hindu law, partition can mean either a division of status or a physical division of properties. Under Section 25A, it must be shown that family property was partitioned into definite portions.- Court's Reasoning: The court referred to previous judgments, including Meyyappa Chettiar v. Commissioner of Income-tax and Sundar Singh Majithia v. Commissioner of Income-tax, to conclude that a business can be partitioned by specifying shares in accounts without a physical division. The court found that the necessary entries in the accounts and the partnership deed indicated a division of the business into definite portions.- Conclusion: The court concluded that the business ceased to belong to the HUF and became a partnership asset. The Appellate Tribunal's view was deemed erroneous. The question in Referred Case No. 1 of 1950 was answered in the affirmative and against the Commissioner of Income-tax.Issue 2: Whether there was a valid partnership in respect of the cloth business that could be registered under Section 26A of the Income-tax Act.- Facts: The partnership deed included a minor, Subba Rao, who was represented by his father-in-law. The assessee argued that the partnership should be registered under Section 26A.- Legal Principles: The court noted that a minor cannot be a partner but can be admitted to the benefits of a partnership under Section 30 of the Partnership Act. The court also referred to Section 2(6B) of the Income-tax Act, which includes minors admitted to the benefits of a partnership as partners for tax purposes.- Court's Reasoning: The court acknowledged that the partnership deed incorrectly made the minor liable for losses, which is not permissible. However, it was argued that the intention was to admit the minor to the benefits of the partnership. The court cited cases like Muhammad Rafiq v. Khawaja Qamar Din and Lachami Narain v. Beni Ram to support the view that a valid partnership could exist between the two adult brothers, with the minor admitted to the benefits.- Conclusion: The court found that there was a valid partnership between the two adults, and the minor was admitted to the benefits of the partnership. The question in Referred Case No. 2 of 1950 was answered in the affirmative and in favor of the assessee.Summary:The court addressed two main issues: whether the cloth business continued as a Hindu undivided family asset and whether the partnership could be registered under Section 26A of the Income-tax Act. The court concluded that the business was effectively partitioned and became a partnership asset, thus ceasing to be an HUF asset. Additionally, the court found that a valid partnership existed between the two adult brothers, with the minor admitted to the benefits of the partnership, allowing for registration under Section 26A. Both questions were answered in favor of the assessee.