1977 (3) TMI 21 - HC - Income Tax

High Court validates partnership despite lack of capital ascertainment, allows registration under Indian Income-tax Act, 1922

Ghewarchand Kewalchand Versus Commissioner Of Income-Tax, MP

Ghewarchand Kewalchand Versus Commissioner Of Income-Tax, MP - [1978] 111 ITR 391, 1977 CTR 157 Issues Involved:1. Evidence for the Tribunal's conclusion on the non-ascertainment of capital assets and partial partition on October 23, 1957.2. Justification of the Tribunal's conclusion regarding the non-formation of a partnership on October 23, 1957, and its entitlement for registration under section 26A of the Indian Income-tax Act, 1922.Issue-wise Detailed Analysis:1. Evidence for the Tribunal's Conclusion on Non-ascertainment of Capital Assets and Partial Partition on October 23, 1957The Tribunal concluded that there was no ascertainment of capital assets on October 23, 1957, and hence no partial partition occurred on that date. The Hindu undivided family (H.U.F.) consisting of Ghewarchand, his wife, and two sons claimed a partial partition of their ghee business and formed a partnership. The Income-tax Officer rejected this claim, stating that the status of the H.U.F. could not be superimposed with a partnership status without destroying the former. The Tribunal supported this by noting the absence of capital account ascertainment and the payment of advance tax by the H.U.F. on March 14, 1959, indicating the business remained within the H.U.F. assets.However, the High Court found this reasoning flawed. The Tribunal's finding was based on a misconception of facts, as the advance tax payment on September 29, 1958, was actually the second installment for the assessment year 1958-59, not 1959-60. The High Court emphasized that the instrument of partnership, which was not disputed for its genuineness, itself served as evidence of the partial partition on October 23, 1957. Additionally, corroborative evidence included the registration of the firm under the Partnership Act, opening a bank account, changes recorded by the Sales Tax Officer, and profit division among partners.2. Justification of the Tribunal's Conclusion Regarding Non-formation of a Partnership on October 23, 1957The Tribunal concluded that no partnership was formed on October 23, 1957, due to the non-ascertainment of capital assets. However, the High Court disagreed, noting that the Tribunal had already acknowledged the formation of the partnership on October 23, 1957, based on the partnership deed dated October 26, 1957. The High Court highlighted that the intention to sever joint status is crucial for determining partition, not the physical division of assets. The law allows for partial partition of joint family property while retaining joint family status for other properties.The High Court cited several precedents, including Rewun Persad v. Radha Beeby and Ramalinga Annavi v. Narayana Annavi, affirming that partial partition can occur without physical division if there is an intention to sever. The High Court further referenced Sundar Singh Majithia v. Commissioner of Income-tax, which clarified that members of an H.U.F. can form a partnership with partitioned assets without affecting the assessment of the H.U.F.The High Court concluded that the absence of capital ascertainment did not negate the partial partition or the formation of the partnership. The partnership firm, M/s. Ghewarchand Kewalchand, was entitled to registration under section 26A of the Indian Income-tax Act, 1922.Conclusion:1. Even if there was no evidence of capital asset ascertainment on October 23, 1957, it did not necessarily mean there was no partial partition on that date.2. The Tribunal was not justified in concluding that no partnership was formed on October 23, 1957, based solely on the non-ascertainment of capital assets. The partnership was indeed formed, and the assessee firm was entitled to registration under section 26A of the Indian Income-tax Act, 1922.The parties were directed to bear their own costs for the proceedings.