Firm Of Bhagat Ram Mohanlal vs The Commissioner Of Excess Profits Tax

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 139 of 1953

Decision Date: 15 February 1956

Coram: Venkatram Ayyar

In the matter of Firm of Bhagat Ram Mohanlal versus the Commissioner of Excess Profits Tax, the Supreme Court of India delivered its judgment on the fifteenth of February, 1956. The decision was authored by Justice Natwarlal H. Bhagwati, who sat on the bench alongside Justices T. L. Aiyyur and Das Sudhi Ranjan Bhagwati. The petition was filed by the Firm of Bhagat Ram Mohanlal as the petitioner and the Commissioner of Excess Profits Tax, Madhya Pradesh, as the respondent. The case is reported in the 1956 volume of the All India Reporter at page 374 and in the Supreme Court Reports at page 143. The legal provisions relied upon include Section 26‑A of the Indian Income‑Tax Act, 1922 (XI of 1922), Sections 7, 8(1) and 20 of the Excess Profits Tax Act, 1940 (Act XV of 1940), and the relevant provisions concerning registration of the appellant firm, its composition as a Hindu undivided family with a karta and his two brothers together with two other partners, as well as the matters of profit assessment, loss, set‑off under Section 7, and the question of whether a change in the persons carrying on the business under Section 8(1) rendered a prior order under Section 20 a mistake apparent on the record.

The firm of Bhagat Ram Mohanlal was originally constituted on the twenty‑third of August, 1940, and was duly registered under Section 26‑A of the Indian Income‑Tax Act. The registration certificate listed three partners: Bhagat Ram Mohanlal, identified as a Hindu undivided family; Richpal; and Gajadhar. Their respective shares were recorded as eight annas for the family, and four annas each for Richpal and Gajadhar. Within the family, Mohan Lal held the position of karta, and the family comprised him and his two brothers, Chhotelal and Bansilal. The firm earned profits in the accounting years ending in 1943 and 1944, which were assessed for excess profits tax at Rs 10,023½ and Rs 13,005½ respectively. In the subsequent year, 1944‑1945, the firm incurred a loss of Rs 15,771. When the standard profit of Rs 37,800 for the business was added to this loss, the Excess Profits Tax Officer determined a deficiency of Rs 53,571 for that year. Acting under Section 7 of the Excess Profits Tax Act, the Officer issued an order on 23 December 1946 that allowed the firm to set off the profits of 1943 and 1944 against the deficiency for 1944‑45, and consequently directed a refund of Rs 23,028½, which the appellant had previously paid as excess profits tax. At the beginning of the assessment year 1944‑45, the joint family of which Mohan Lal had been the karta underwent a partition, resulting in Mohan Lal and his two brothers becoming separate entities. Following this partition, the appellant firm was reconstituted by an agreement dated 17 October 1944, expanding its partnership to five members, namely the former karta, his two brothers, and the two earlier partners, with a corresponding adjustment of the partners’ shares.

According to section 8(1) of the Excess Profits Tax Act, a change in the persons who carry on a business is treated as the termination of the old business and the start of a new one; therefore, if that provision applied, the appellant could not have received relief under section 7 of the same Act. When the Commissioner of Excess Profits Tax learned of the reconstitution of the firm, he issued a notice under section 20 of the Act asking the appellant to explain why the order dated 23‑12‑1946 issued by the Excess Profits Tax Officer should not be set aside on the ground of mistake, since the Commissioner considered that the notice had failed to take into account the alteration in the firm’s constitution that occurred on 17‑10‑1944. After hearing the appellant, the Commissioner decided, by order dated 15‑3‑1950, that the facts disclosed showed a change in the persons involved and that the relief granted under section 7 of the Act by the Excess Profits Tax Officer had been accorded in error. The Commissioner therefore set aside the earlier order only with respect to Bhagat Ram Mohan Lal, while leaving the relief intact for the two other partners. The appellant sought a writ of certiorari and a writ of prohibition under article 226 of the Constitution, and the High Court affirmed the Commissioner’s order. On appeal to the Supreme Court by way of special leave, the Court held that, because of the partition of the joint family and the reconstitution of the firm by deed dated 17‑10‑1944, there was indeed a change in the persons carrying on the business within the meaning of section 8(1) of the Act. The Court observed that if all five individuals named as partners in the 1944 deed had also been partners of the earlier firm, merely reshuffling their shareholdings would not constitute a change in the persons under section 8(1). The crucial issue, therefore, was whether Chhotelal and Bansilal were partners in the firm that had been formed on 23‑8‑1940. The Court noted that it was not contested that Mohan Lal was the karta of the joint Hindu family and that he entered the partnership on 23‑8‑1940 in his capacity as karta. It is well settled that when the karta of a joint Hindu family contracts a partnership with outsiders, the other family members do not automatically become partners in that firm; they have no right to participate in its management nor to sue for its dissolution. Creditors may, however, pursue the joint family’s assets, including the shares held by non‑partner coparceners, to satisfy debts, because under Hindu law the karta is empowered, when bona fide conducting business, to pledge the joint family’s credit up to the value of its assets, not because the junior family members become partners. The liability of those junior members arises from their status as coparceners, not from any partnership contract.

The Court observed that the liability of Chhotelal and Bansilal arose solely from their status as coparceners and not from any partnership agreement; consequently, when Mohanlal became a partner of the firm on 23‑8‑1940, the two brothers could not, by that fact alone, be deemed partners of the firm. The Court further explained that irrespective of whether the issue was examined under Hindu law principles or under the Excess Profits Tax Act, a change in the firm’s personnel occurred on 17‑10‑1944, bringing the matter within the scope of section 8(1) of the Act. The Court held that a mistake apparent on the record, as required by section 20 of the Act, existed and that the Commissioner possessed the jurisdiction to issue the order dated 15‑3‑1950, which he duly did.

The Court rejected the argument that the only document in the Excess Profits Tax proceedings was the order dated 23‑12‑1946 and that the facts underlying the proceedings under section 20—namely, the firm’s constitution on 23‑8‑1940 and the personnel changes on 17‑10‑1944—were not mentioned in that order. The Court clarified that, although the 23‑12‑1946 order did not expressly recite those facts, they were evident from the income‑tax record, which included the registration certificate of the firm filed under section 26‑A of the Income‑Tax Act and the firm’s returns that disclosed the names of the partners and their respective shares. The Court further noted that the proceedings under the Excess Profits Tax Act and the Income‑Tax Act are interdependent, and therefore the material in the income‑tax file was sufficient to support the Commissioner’s order. The Court cited several earlier decisions, including Lachman Das v. Commissioner of Income‑Tax ([1948] 16 I.T.R. 35), Sundar Singh Majithia v. Commissioner of Income‑Tax ([1942] 10 I.T.R. 457), Shanmugavel Nadar and Sons v. Commissioner of Income‑Tax ([1948] 16 I.T.R. 355) and Shapurji Pellonji v. Commissioner of Income‑Tax ([1945] 13 I.T.R. 113) in support of this view.

The Court then set out the procedural posture of the appeal. The appeal, numbered Civil Appeal No. 139 of 1953, was filed by special leave from the judgment and order dated the 22nd day of August 1950 of the Nagpur High Court in Miscellaneous Petition No. 67 of 1950. Counsel for the appellant represented the firm, while counsel for the respondents appeared on behalf of the Commissioner. The judgment was delivered on 15 February 1956 by Justice Venkatramana Ayyar. In his judgment, the Court reiterated that the firm of Bhagat Ram Mohanlal had been constituted on 23‑8‑1940 and registered under section 26‑A of the Indian Income‑Tax Act. The registration certificate listed the partners as (1) Bhagat Ram Mohanlal, a Hindu undivided family, (2) Richpal, and (3) Gajadhar, with share allocations of eight annas, four annas and four annas respectively. The Court noted that Mohanlal, who was the karta of the joint family comprising himself and his two brothers Chhotelal and Bansilal, entered the partnership in his capacity as karta.

The partnership admitted Mr Mohan lal as its karta. The firm operated as the Government’s agent for purchasing foodgrains at Drug in Madhya Pradesh. In the accounting years that ended in 1943 and 1944, the firm earned profits on which it was assessed to excess‑profits tax in the amounts of Rs 10,023‑5‑0 and Rs 13,005‑5‑0 respectively. In the subsequent year, 1944‑45, the firm incurred a loss of Rs 15,771. When this loss was added to the standard profit figure of Rs 37,800 that was deemed applicable to the business, the Excess Profits Tax Officer calculated a deficiency of profits for the year 1944‑45 amounting to Rs 53,571. Under section 7 of the Excess Profits Tax Act, a deficiency of profits in any chargeable accounting period requires that the profits of the business in earlier years be deemed reduced proportionately, and that the necessary relief be given either by repayment of tax already paid or by some other means. Acting pursuant to that provision, the Officer issued an order on 23‑December‑1946. In that order he set off the profits recorded for the years ending 1943 and 1944 against the 1944‑45 deficiency and directed that a refund of Rs 23,028‑10‑0, which the appellant had previously paid as excess‑profits tax for those years, be made to the firm. It is necessary to note that at the beginning of the assessment year 1944‑45 a partition occurred in the Hindu undivided family of which Mohan lal had been the karta. As a result of that partition, Mohan lal and his brothers, Chhotelal and Bansilal, acquired separate statuses. Following the disruption of the joint family, the appellant firm was reconstituted by an agreement dated 17‑October‑1944. Under that agreement the partnership consisted of five partners: Richpal, Gajadhar, Mohan lal, Chhotelal and Bansilal. The two former partners were each allotted a share of five annas, while the three latter partners each received a share of two annas. Thus both the composition of the partnership and the allocation of shares were altered. Section 8(1) of the Act provides, omitting non‑essential material, that from the date of any change in the persons carrying on a business, the business shall be deemed to have been discontinued and a new business to have commenced. If that provision applied, the relief claimed under section 7 would not be available to the appellant. When the Commissioner of Excess Profits Tax became aware of the firm’s reconstitution from the records, he issued a notice on 19‑February‑1948 requiring the appellant to show cause why the Officer’s order of 23‑December‑1946 should not be set aside on the ground of mistake. The notice was issued under section 20 of the Act, which authorises the Commissioner to correct any mistake apparent from the record. The alleged mistake, according to the Commissioner, was that the Officer had failed to take into account the change in the firm’s constitution that occurred on 17‑October‑1944 as a consequence of the disruption of one partner’s joint Hindu family.

The Commissioner asserted that the error involved the Excess Profits Tax Officer’s failure “to take into consideration the change in the constitution of the firm which took place on 17-10-1944, consequent on the disruption of the joint Hindu family of one of the partners”. The appellant responded to the notice and argued that, on the facts, the proceedings under section 20 were fundamentally misconceived. The factual basis for the proceedings was not contested. By an order dated 15-3-1950, the Commissioner concluded that the record disclosed a change in the persons carrying on the business and that the relief granted under section 7 by the Excess Profits Tax Officer constituted a mistake. Nevertheless, he upheld the order of 23-12-1946 insofar as it related to Richpal and Gajadhar, and set it aside only with respect to “Bhagat Ram Mohanlal, Hindu. undivided family”, which had been entered as a partner on 23-8-1940. The Commissioner further directed that the amount of Rs. 11,514-5-0, which had previously been refunded, should be recovered. Consequently, the appellant instituted proceedings in the High Court of Nagpur under article 226, seeking a writ of certiorari to quash the Commissioner’s order of 15-3-1950 and a writ of prohibition to restrain the authorities from collecting the specified sum. By a judgment dated 22nd August 1950, the learned Judges concurred with the Commissioner that the partition effected a change in the persons conducting the business and that the order of 23-12-1946 contravened section 8(1) of the Act. They also held that, because the mistake was apparent on the face of the record, the Commissioner possessed jurisdiction under section 20 to issue the order in question. Accordingly, the writs were dismissed. The appellant appealed this decision by special leave, raising two questions for determination: (1) whether, by reason of the joint‑family partition and the firm’s reconstitution under the deed of 17-10-1944, there was a change in the persons carrying on the business within the meaning of section 8(1) of the Act; and (2) whether the Commissioner’s order of 15-3-1950 is invalid because no mistake apparent from the record, as required by section 20, existed. On the first question, the appellant contended that when Mohanlal entered into partnership with Richpal and Gajadhar on 23-8-1940 as karta of the joint family, the other family members, Chhotelal and Bansilal, effectively became partners of the firm, and that their inclusion as nominees in the deed of 17-10-1944 represented a formal rather than substantive change, with the re‑allocation of shares among partners not constituting a change in the persons carrying on the business. The Court agreed that if all five individuals named as partners in the 1944 deed were already partners of the original firm, then no change in the persons carrying on the business under section 8(1) would occur.

If the individuals named in the deed of 1944 had already been partners of the earlier firm, then a mere reshuffling of their shares would not have produced a change in the persons who were carrying on the business within the meaning of section 8(1) of the Act. The true issue, however, was whether Chhotelal and Bansilal were partners in the firm that had been constituted on 23‑8‑1940. The appellant argued that both Hindu law and the general law of partnerships recognized them as partners. It was not contested that Mohanlal was the karta of the joint Hindu family and that he entered into the partnership on 23‑8‑1940 in his capacity as karta. Established jurisprudence held that when the karta of a joint Hindu family forms a partnership with strangers, the other members of the family do not automatically become partners in that firm. They possess no right to participate in its management nor to sue for its dissolution. Creditors of the firm could still pursue the assets of the joint family, including the shares of non‑partner co‑parceners, in order to realise their debts. This right arose because, under Hindu law, the properly acting karta may pledge the credit of the joint family to the extent of its assets, not because the junior members became partners in the business. In other words, the liability of those junior members derived from their status as coparceners, not from any contractual partnership with the firm. Consequently, when Mohanlal became a partner on 23‑8‑1940, Chhotelal and Bansilal could not be said to have become partners solely by virtue of that fact. The appellant further contended that the partnership formed on 23‑8‑1940 was entered into not only by Mohanlal as karta but also by Chhotelal and Bansilal in their individual capacities, thereby making them partners under ordinary partnership law. However, the registration certificate of the firm listed “Bhagat Ram Mohanlal, Hindu undivided family” as a partner and made no reference to either Chhotelal or Bansilal. The claim that they had become partners in their personal capacities therefore appeared to be a later addition and conflicted with the findings of the learned High Court judges. That inconsistency was sufficient on its own to reject the contention. Moreover, even setting that aside, it was difficult to conceive the scenario proposed by the appellant, in which a Hindu joint family entered into a partnership with strangers through its karta while the junior family members simultaneously became partners in their personal capacities. In Lachhman Das v. Commissioner of Income‑Tax (1), the Judicial Committee held that the karta of a joint Hindu family could enter into a partnership with an individual member of the coparcenary concerning his separate property.

It was held by the Privy Council in Sundar Singh Majithia v. Commissioner of Income‑tax that the Income‑tax Act contained no provision which prohibited members of a joint Hindu family from dividing certain properties while still retaining their status as a joint family, and from carrying on business as partners with respect to those divided properties, treating those properties as the capital of the partnership. In the present matter, however, the partnership agreement executed in 1940 was based on the premise that the family was joint, that Mohanlal was its karta, and that he entered into the partnership on behalf of the joint family. This arrangement was difficult to reconcile with the claim that Chhotelal and Bansilal were also partners in the firm in their individual capacities, because such individual capacities could exist only with respect to their separate or divided property. If members of a coparcenary were considered to have become partners in a firm with strangers, they would, under the partnership law, also become partners among themselves, thereby contradicting the very concept of a joint undivided family, which holds that coparcenary members can simultaneously be coparceners and partners in respect of coparcenary property. To resolve this apparent difficulty, it was suggested that all three coparceners might be treated as having entered into the partnership contract as kartas of the joint family. Nevertheless, even if that approach could be aligned with Hindu law principles, the pleadings of the appellant expressly denied that such a supposition was intended, affirming that only Mohanlal was the karta and not the others. Consequently, the contention that Chhotelal and Bansilal had become partners in the old firm under the agreement dated 23‑8‑1940 could not be sustained. The question of whether there had been a change in the persons carrying on the business could therefore be examined independently of Hindu law or general partnership law, focusing instead on the provisions of the Indian Excess Profits Tax Act.

Section 2(17) of that Act defined a “person” to include a joint family. Applying this definition, the Court identified the members of the firm at its constitution on 23‑8‑1940 as Richpal, Gajadhar, and “Bhagat Ram Mohanlal, Hindu undivided family,” the latter comprising the three coparceners Mohanlal, Chhotelal, and Bansilal. For the purpose of the present inquiry, it was immaterial whether the family’s karta was solely Mohanlal or all three coparceners. In 1944 the family was partitioned, and as a result the entity “Bhagat Ram Mohanlal” ceased to exist. On 17‑10‑1944 the two surviving partners of the original firm, Richpal and Gajadhar, executed a new partnership contract with Mohanlal, Chhotelal, and Bansilal as individual partners. Since the erstwhile joint family was no longer a legal partner in the new firm because it had been dissolved by partition, there was, under the definition in section 2(17), a change in the persons who carried on the business. This view corresponded with the reasoning adopted in Shanmugavel Nadar and Sons v. Commissioner of Income‑tax, and the Court agreed with it. The analysis then proceeded to consider whether the Commissioner’s order of 15‑3‑1950 was justified under section 20 of the Act, noting that the record in the Excess Profits Tax proceedings consisted only of the order dated 23‑12‑1946 and the facts on which the proceedings under section 20 were based.

In this case, the Court observed that because the joint family was partitioned, the definition of “person” in section 2(17) of the Excess Profits Tax Act meant that the individuals carrying on the business had changed. The Court noted that this conclusion was identical to the view expressed in Shanmugavel Nadar and Sons v. Commissioner of Income‑Tax (1). The Court affirmed that whether the issue is examined under Hindu law principles or under the provisions of the Excess Profits Tax Act, the personnel of the firm were altered on 17‑10‑1944. Consequently, the change fell within the scope of section 8(1) of the Act.

The next question for determination was whether the order of the Commissioner dated 15‑3‑1950 could be justified under section 20 of the Act, given the claim that no mistake was apparent from the record. The appellant argued that the record in the excess‑profits‑tax proceedings consisted only of the order dated 23‑12‑1946, and that the facts on which the section‑20 proceedings were based – namely the constitution of the firm on 23‑8‑1940 and the changes made on 17‑10‑1944 – were not set out in that order. Accordingly, the appellant contended that there were no materials on which an order could have been passed under section 20. While it is true that the order of the Excess Profits Tax Officer dated 23‑12‑1946 does not mention those facts, the Court observed that the facts appear in the record of the income‑tax proceedings, which includes the registration certificates of the firm filed under section 26‑A of the Income‑Tax Act and the returns filed by the firm that disclose the names of the partners and their respective shares. The appellant further submitted that such income‑tax records were inadmissible for purposes of a section‑20 proceeding because the record contemplated by that section must be the record of the excess‑profits‑tax proceedings, and that income‑tax records could not be used. The Court was unable to accept that contention. Section 22(1) of the Excess Profits Tax Act states that, notwithstanding anything contained in the Indian Income‑Tax Act, 1922, all information contained in any statement or return made or furnished under that Act or obtained for its purposes may be used for the purposes of the Excess Profits Tax Act. Section 22(2) similarly makes the record of the excess‑profits‑tax proceedings admissible in income‑tax proceedings. The Court emphasized that the proceedings under the two Acts are interdependent, with assessments under the Excess Profits Tax Act, subject to its special provisions, being made on the basis of assessments under the Indian Income‑Tax Act. The same officers conduct the proceedings under both enactments. Moreover, the order of the Excess Profits Tax Officer dated 23‑12‑1946 expressly refers to the order dated 28‑9‑1946 passed in the income‑tax proceedings.

The Court noted that the assessment of income‑tax on the appellant and the calculation of the profit deficiency were based on a loss of Rs 15,771 as determined in the earlier proceedings, and it found no merit in the appellant’s contention on that basis, consequently rejecting it. The appellant finally argued that the particulars set out in the registration certificate regarding the partners of the firm were not conclusive, and maintained that even on 23‑8‑1940 the true partners were the five individuals identified in the deed dated 17‑10‑1944, relying on the decision in Shapurji Pellonji v. Commissioner of Income‑tax (1) to support this position. The Court held that it is settled law that income‑tax authorities are not estopped by a registration certificate from investigating beyond that document to determine the real partners of a firm, and it questioned whether a taxpayer whose own statement formed the basis of the registration and who may have benefited from it could now deny the correctness of that statement when the recorded facts turn out to be disadvantageous to him. The Court considered it unnecessary to pursue this point further because, on the facts pleaded by the appellant, it had already concluded that Chhotelal and Bansilal could not be regarded as partners in the earlier firm. The Court added that the appellant had not raised this contention before the Commissioner when a notice under section 20 of the Act was issued; had it been raised at that stage, the Commissioner would have been entitled to act under section 19 of the Act. In the result, the Court held that the appeal failed, dismissed it with costs, and recorded the citation to Shapurji Pellonji v. Commissioner of Income‑tax (1) [1945] 13 I.T.R. 118.