Kshetra Mohan-Sannyasicharan vs Commissioner Of Excess Profits

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 173 of 1952

Decision Date: 20 October, 1953

Coram: M. Patanjali Sastri, Vivian Bose, Ghulam Hasan, Natwarlal H. Bhagwati

In the case titled Kshetra Mohan-Sannyasicharan versus the Commissioner of Excess Profits, the judgment was delivered on 20 October 1953 by the Supreme Court of India. The bench that heard the matter comprised Justice M. Patanjali Sastri, Justice Vivian Bose, Justice Ghulam Hasan and Justice Natwarlal H. Bhagwati. The petitioner was Kshetra Mohan-Sannyasicharan Sadhukhan and the respondent was the Commissioner of Excess Profits Tax for West Bengal. The decision is reported in the 1953 AIR 516 and the 1954 SCR 268, with subsequent citations recorded as R 1960 SC 1147 (9), R 1966 SC 24 (11), RF 1970 SC 1343 (14) and R 1972 SC 2315 (13).

The operative statute in the dispute was the Excess Profits Tax Act of 1940, specifically section 8(1), which deals with partnerships between the kartas of two Hindu undivided families, the impact of the death of the kartas, the continuation of the partnership by their sons, the nature of such a partnership, the effect of the separation of members of each branch, and the requirement to carry forward any deficiencies. The headnote of the judgment explained that, although a partnership entered into by the kartas of two Hindu undivided families is commonly described as a partnership between two families, the law treats it as a partnership solely between the two kartas; the other family members do not automatically become partners. It further stated that individual members of one Hindu undivided family may partner with individual members of another family, but such an arrangement cannot be termed a partnership between two Hindu undivided families. The headnote referred to earlier authorities dated 1937, 1939 and 1952 for support.

The factual matrix involved two brothers who were governed by the Dayabhaga school of Hindu law and who acted as kartas of their respective families. These brothers founded a business carried on as a partnership and continued it for several years. In 1932 the first brother died; his four sons, who were themselves undivided among themselves, were subsequently admitted to the partnership. The second brother died in 1934, leaving four sons of his own, and the sons of both brothers thereafter continued the partnership, each branch of the family constituting a separate joint family among its members. On 13 April 1943 a severance occurred within both families, and from 14 April 1943 the business was conducted by the eight sons who formed a new partnership among themselves.

The Appellate Tribunal examined the situation and concluded that, before 14 April 1943, the partnership was properly characterised as one between two Hindu undivided families, whereas from that date onward the partnership consisted of eight individual members of the two disrupted families. The Court held that, because the Tribunal’s determination was a finding of fact, the assessee could not contend that the partnership existing before 14 April 1943 was also a partnership of eight individuals. Moreover, on the basis of the Tribunal’s factual findings, the Court affirmed that the change on 14 April 1943 represented a alteration in the persons carrying on the business within the meaning of section 8 of the Excess Profits Tax Act, and consequently the deficiencies that had arisen before that date could not be carried forward to the succeeding chargeable accounting periods.

The Court recorded that the appeal concerned Civil Appeal No 173 of 1952, which challenged a judgment and order dated 20 June 1951 issued by a two-judge Bench of the Calcutta High Court, namely Justices Chakravarti and S R Das Gupta. The High Court judgment had arisen out of Income-Tax Reference No 64 of 1950, which itself stemmed from a common order dated 25 July 1949 of the Income-Tax Appellate Tribunal in Excess Profits Tax Assessments Nos 550, 551 and 552 of 1948-49. The appellant was represented by counsel N C Chatterjee, assisted by A K Dutt, while the respondent was represented by C K Daphtary, Solicitor-General for India, assisted by G N Joshi. The judgment of the Supreme Court was delivered by Justice Das on 20 October 1953. The appeal arose from the High Court’s answer, given on reference from the Income-Tax Appellate Tribunal under section 66(1) of the Income-Tax Act read with section 21 of the Excess Profits Tax Act, that there was a change in the persons carrying on the business within the meaning of section 8(1) of the Excess Profits Tax Act 1940, effective from 14 April 1943, when the business, previously conducted as a partnership between two Dayabhaga Hindu undivided families, continued as a partnership of the separated male members of those families.

The dispute centred on the assessment of the appellant firm for excess profits tax for three successive chargeable accounting periods: 14 April 1943 to 13 April 1944, 14 April 1944 to 13 April 1945, and 14 April 1945 to 31 March 1946. Throughout these periods the assessee was a firm registered under section 26-A of the Indian Income-Tax Act. In the period ending 13 April 1944 the firm recorded no profit in excess of the standard profit but incurred a deficiency of Rs 12,804. The assessee argued that deficiencies totalling more than Rs 84,000, which had been carried forward from earlier years up to the period ending 13 April 1943, should be added to the Rs 12,804 and that the whole sum should be carried forward under section 7 of the Excess Profits Tax Act. The Excess Profits Tax Officer rejected this argument, holding that a change in the persons carrying on the business meant that the earlier business was deemed discontinued and a new business had commenced under section 8 of the Excess Profits Tax Act; consequently only the Rs 12,804 could be carried forward. In the subsequent period ending 13 April 1945 the firm earned a profit of Rs 88,652 over the standard profit, yet the Officer allowed only the previously carried forward deficiency of Rs 12,804, thereby limiting the assessable excess-profits amount.

The assessing authority brought forward the accounts of the firm and computed a net excess profit of Rs 75,848. The authority rejected the assessee’s claim that a deficiency which had arisen before 14 March 1943 could be set off against the excess profit for that chargeable accounting period. For the chargeable accounting period ending 31 March 1946, the authority allowed no deduction whatsoever for the deficiency that was alleged to have accrued up to the period ending 13 April 1943. The assessee lodged three separate appeals before the Appellate Assistant Commissioner challenging each of the three orders issued by the Excess Profits Tax Officer. The Appellate Assistant Commissioner affirmed the assessments and dismissed all three appeals. The matter was then taken to the Income-tax Appellate Tribunal, which by an order dated 25 July 1949 dismissed the three appeals. Subsequently, the assessee filed three applications before the Appellate Tribunal invoking section 66(1) of the Indian Income-tax Act read with section 21 of the Excess Profits Tax Act. The Tribunal prepared a statement of case and referred the question to the High Court for its opinion. The High Court, agreeing with the Tribunal’s view, answered the question affirmatively. Accordingly, the present appeal is made under a certificate issued by the High Court pursuant to section 66-A(2) of the Indian Income-tax Act.

According to the counsel representing the appellant, the business was originally founded by two brothers, Kshetra Mohan Sadhukhan and Sannyasi Charan Sadhukhan, who were governed by the Dayabhaga school of Hindu law and had been separated from each other many years earlier. Acting as the heads (kartas) of their respective Hindu undivided families, the brothers entered into a partnership known as Kshetra Mohan Sadhukhan and Sannyasi Charan Sadhukhan, each holding an eight-annas share in the profit and loss of the enterprise. Sannyasi Charan Sadhukhan died in 1932, after which his sons were admitted to the partnership and the business continued to be operated by Kshetra Mohan Sadhukhan together with the sons of Sannyasi Charan Sadhukhan. Kshetra Mohan Sadhukhan died in 1934, and from 17 June 1934 onward the sons of Kshetra Mohan Sadhukhan and the sons of Sannyasi Charan Sadhukhan carried on the partnership. Although the enterprise functioned as a partnership, each branch of the family retained its distinct Hindu undivided family status up to 13 April 1943, when a severance occurred between the two families. The partnership between the members of the two branches nonetheless persisted. A deed of partnership was executed by eight partners on 19 September 1943, and a subsequent deed was executed on 28 December 1944. The counsel’s contention is that the firm began as a partnership of two Hindu undivided families represented respectively by Kshetra Mohan Sadhukhan and Sannyasi Charan Sadhukhan, and that from 17 June 1934 the sons of each brother became individual partners in the continuing business.

In the present proceedings the assessee asserted that the persons who were partners in the firm had remained the same at all material times, and that, accordingly, there was no variation in the persons carrying on the business within the meaning of section 8 of the Excess Profits Tax Act. The Court observed that this submission represented a new case which the assessee could not now advance. During the assessment the Excess Profits Tax Officer had concluded that, prior to 14 April 1943, the business was conducted by two Hindu undivided families. On 13 April 1943 both families were disrupted, and thereafter the individual members of the two families continued the business by forming a partnership concern. The Officer therefore held that the partners who carried on the business after the disruption were not the same persons who had been in charge of the business up to 13 April 1943. Before the Appellate Assistant Commissioner the assessee maintained that the business had been carried on by the two Hindu undivided families up to 13 April 1943, that a disruption of both families inter se occurred on that date, and that from that day forward the eight individual members of the families had formed themselves into a partnership and were conducting the business. The same position was reiterated before the Appellate Tribunal, namely that up to 13 April 1943 the enterprise was a partnership concern of two Dayabhaga Hindu undivided families – the family of Kshetra Mohan Sadhukhan comprising four adult male members and the family of Sannyasi Charan Sadhukhan comprising four adult male members – and that from 14 April 1943 the eight members of the two families constituted a partnership and continued the business in that form.

The assessee, at one stage, had also contended that although the original partnership agreement had been executed by the two kartas of the families, the effective partnership was between the adult members of the families from the very beginning. However, in the present application under section 66(1) a fresh argument was introduced for the first time, asserting that prior to 13 April 1943 the business had been carried on in partnership by two associations of persons rather than by two Hindu undivided families, thereby implying that the eight individual members were already partners before that date. The Court noted that this contention had never been raised earlier, nor had it ever been suggested that initially there was a partnership of the two kartas which later gave way to a partnership of the eight sons of the two kartas from 17 June 1934 and that such a partnership of eight had continued uninterrupted. Counsel for the assessee insisted that there was no change in the case presented by his client, maintaining that the partnership was, in his view, between the individual members of one Hindu undivided family – the four sons of Kshetra Mohan Sadhukhan – and the individual members of the other Hindu undivided family – the four sons of Sannyasi Charan Sadhukhan.

In this case, the Court observed that the partnership involving the four sons of Sannyasi Charan Sadhukhan could be described as a partnership between two Hindu undivided families. The Court noted that a Hindu undivided family is indeed included in the definition of “person” under both the Indian Income-tax Act and the Excess Profits Tax Act, but it is not a juristic person for all legal purposes. The Court explained that the affairs of a Hindu undivided family are administered by its karta. When the kartas of two such families enter into a partnership agreement, the arrangement is commonly referred to as a partnership between the two Hindu undivided families; however, according to the law as applied by the LB(D)2SCI, the partnership is, in fact, a partnership between the two kartas, and the remaining family members do lot ipso facto become partners. The Court further stated that there is nothing to prevent individual members of one Hindu undivided family from forming a partnership with individual members of another Hindu undivided family, and in such a circumstance the partnership is between those individual members. It would be wholly inappropriate to describe that type of partnership as being between two Hindu undivided families. The Court concluded that there was no need to examine this point further because, in the matter before it, there was no evidence whatsoever to show that all members of the two families had become individual partners in the business at any time prior to 14 April 1943. The documents that the Court was about to refer to did not support the position advanced by counsel for the assessee.

The Court then turned to the statutory framework governing registration of firms under the Income-tax Act. Section 26-A authorises an application to be made to the Income-tax Officer on behalf of any firm constituted under a partnership instrument, specifying each partner’s individual share for registration purposes. Sub-section (2) of that section requires that the application be made by the appropriate person or persons, in the prescribed form, and verified as prescribed. Rule 2 of the Indian Income-tax Rules mandates that such an application be signed personally by all the partners, while Rule 3 requires that the application be presented in the form annexed to that rule. It appears that on 19 October 1943 an application was filed on behalf of Kshetra Mohan Sadhukhan and his sons together with Bijan Kumar Sadhukhan and his brothers, seeking renewal of the firm’s registration under Section 26-A for the assessment year 1942-43. The application asserted that the constitution of the firm and the individual shares of the partners, as set out in the partnership instrument, remained unchanged. The schedule annexed to the application listed the required particulars, and the final column showed that the balance of profit or loss apportioned to Kshetra Mohan Sadhukhan and his sons was Rs 4,370, while the balance apportioned to Bijan Kumar Sadhukhan and his brothers was also Rs 4,370. The instrument of partnership dated

In this case, the Court examined a deed dated 19 September 1943 that was described in the application as an agreement between Gosta Behari Sadhukhan and Brothers, identified as the first party, and Bijan Kumar Sadhukhan and Brothers, identified as the second party. Clause 6 of that deed stated that the profits of the partnership should belong to “the partners equally, i.e., eight-annas share each.” Clause 7 referred to “either partner,” and clause 8 referred to “either of the partners.” These expressions, taken together, demonstrated that the deed contemplated only two partners, and the reference to an equal share of eight annas reinforced that conclusion. The Court noted that a later deed of partnership, executed on 28 December 1944, listed eight parties as partners. Counsel for the appellant argued that the first four recitals of that later deed clearly showed that even before 13 April 1943 the eight individual members of the two families were already carrying on business in partnership. The Court found that such a construction conflicted with the fifth recital of the same deed, which expressly declared that from 1 Baisak 1350 B.S. (14 April 1943) the firm was reconstituted as being comprised of eight partners. If the firm had already consisted of eight partners before that date, there would have been no need to recite that it was “reconstituted as constituted of eight partners.” The Court therefore concluded that the appellant’s interpretation of the later deed was inconsistent with its own wording.

The Court further relied on the statement of case prepared by the Appellate Tribunal, which is binding on the assessee, and which indicated that up to 13 April 1943 the business operated as a partnership between two Dayabhaga Hindu undivided families. After that date, the eight individual members of the two families formed a new partnership. The returns filed in the firm’s records for the assessment years up to 1943-44 showed only two partners—Kshetra Mohan Sadhukhan and sons and Sannyasi Charan Sadhukhan and sons—each holding an eight-annas share. From the assessment year 1944-45 onward the returns reflected the presence of eight partners. Moreover, the application dated 19 October 1943 itself indicated that the parties considered the business to be carried on by two partners. The question referred by the Appellate Tribunal, as highlighted by the High Court, implied that the business was initially a partnership of two Hindu undivided families, that a disruption occurred within both families, and that thereafter the partnership was conducted by the separated male members of those families. The Court agreed with the High Court that if the assessee’s claim were that a partnership of eight persons existed before 14 April 1943 and that the Appellate Tribunal had accepted that claim, no legal question would arise. However, because the Tribunal’s findings established that, prior to 13 April 1943, the business was a partnership of two Hindu undivided families, the situation fell within the ambit of a change in the persons carrying on the business under section 8 of the Excess Profits Tax Act, thereby justifying the legal issue raised.

The Court observed that the business originally operated as a partnership between two Kartas, each representing a Hindu undivided family, and that from 14 April 1943 the business transformed into a concern carried on by eight individual members of the two families after they had become disrupted, a change that raised a question of law. The Court held that the assessee could not disregard the factual findings recorded by the Appellate Tribunal in its statement of the case, and, as the question itself implied, there was no doubt that a change had occurred in the persons conducting the business within the meaning of section 8 of the Excess Profits Tax Act, an issue that had not been contested. Accordingly, the Court affirmed that the High Court’s answer to the referred question was correct. In that view, the Court found it unnecessary to examine whether the circumstance that Nandodulal, the youngest son of Sannyasi Charan, was a minor before 13 April 1943 and attained majority on 18 July 1943, as pleaded by counsel for the assessee, would bring the case within the scope of section 8 of the Excess Profits Tax Act. For the reasons stated, the appeal was dismissed with costs. The appeal was dismissed. The agent for the appellant was H N Sen, and the agent for the respondent was G H Rajadhiaksha.