Charandas Haridas and Another v. The Commissioner of Income-Tax, Bombay

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 108 of 1957

Decision Date: 15 March 1960

Coram: M. Hidayatullah, S.K. Das, J.L. Kapur

The case titled Charandas Haridas and Another versus The Commissioner of Income‑Tax, Bombay was decided on 15 March 1960 by a Bench of the Supreme Court consisting of Justice M Hidayatullah, joined by Justices S K Das and J L Kapur. The opinion was reported in the 1960 volume of the All India Reporter at page 910 and also in the Supreme Court Reporter, volume 3, page 296. The citation details include references to subsequent reports and citations of the decision in later cases. In this matter the petitioner, designated as C, served as the Karta of a Hindu undivided family that comprised his wife, three sons and himself. C was a partner in six managing‑agency firms that operated six mills, and the income he received as a partner was being taxed as the income of the Hindu undivided family. On 31 December 1945, C, on behalf of his three minor sons, his wife and himself, entered into an oral agreement to effect a partial partition of the family’s interest, to become effective on 1 January 1946. Under that agreement C allotted a specified share of the managing‑agency commission from two of the six agencies to his daughter, while the remaining share of the commissions from those two agencies together with the shares from the other four agencies were to be divided equally among C, his wife and his three sons, resulting in five equal one‑fifth portions. The agreement was subsequently reduced to writing in a document dated September II 1946, which recorded, inter alia, the following terms: “By this partition we decided that whatever commission fell due till 31‑12‑45 and which is received after 31‑12‑45 should be kept joint and in respect of the commission which accrues from 1‑1‑46 and received after that date each of us become absolute owner of his one‑fifth share and therefore from the date, i.e. from 1‑1‑46 these commissions cease to be the joint property of our family.” For the assessment years 1947‑48 and 1948‑49 C contended that the income derived from the managing‑agency firms should no longer be treated as the income of the Hindu undivided family but should be assessed as the separate income of each of the divided members. The income‑tax authorities rejected this contention, holding that the written document effected only a division of the income and not a division of the assets that generated the income, and that because income‑tax liability arises at the time the income accrues, the income must be regarded as having accrued to the Hindu undivided family. The Court held that, insofar as there was no other effective mode of partitioning the asset and in view of the finding that the partition was not a pretence, the

It was held that the asset must be regarded as divided for the purposes of income‑tax law and that the income could not be assessed as belonging to the Hindu undivided family. The matter came before the Supreme Court on Civil Appeal No 108 of 1957. The appeal was filed by special leave against the judgment and order dated 16 February 1955 of the Bombay High Court in Income‑tax Reference No 35/x of 1954. Counsel for the appellants were senior lawyers representing the two parties, while counsel for the respondents included the Solicitor‑General of India and other advocates. The judgment was delivered on 15 March 1960 by Justice Hidayatullah.

The appeal challenged the High Court’s decision in an income‑tax reference made under section 66(2) of the Indian Income‑tax Act. The appellants were two assessors, Charandas Haridas and Chinubhai Haridas, whose cases were identical. A consolidated reference had been made to the Income‑tax Appellate Tribunal, which was subsequently answered by the High Court. The respondents were the Commissioners of Income‑tax for Bombay North (covering Kutch and Saurashtra) and for Delhi, Ajmer, Rajasthan and Madhya Bharat. Each appellant represented a separate unit of a Hindu undivided family. Charandas Haridas represented his wife, three sons and himself; Chinubhai Haridas represented his wife, one son and himself. Because the question decided by the High Court arose under identical circumstances in the two families, it was unnecessary to set out the facts of both families separately. The only distinction lay in the differing shares held by each family in the managing agencies that would be discussed later. Consequently, the Court confined its factual narrative to the family of Charandas Haridas.

Charandas Haridas was the Karta of his Hindu undivided family, which comprised his wife, his three sons and himself. He was a partner in six managing‑agency firms, each associated with a different mill. In earlier years the income he derived from these partnerships had been assessed as income of the Hindu undivided family. On 31 December 1945, acting on behalf of his three minor sons, himself and his wife Shantaben, Charandas Haridas entered into an oral agreement for a partial partition of the family’s assets. Under that agreement he allotted one share to his daughter Pratima from the managing‑agency commission earned by two of the six agencies owned by the family. The remaining balance, together with the shares in the other managing agencies, was to be divided into five equal shares among Charandas Haridas, his wife and his sons. The agreement was stipulated to become effective from 1 January 1946, which marked the beginning of a new accounting year. Subsequently, on 11 September 1946, Charandas Haridas, again acting for himself and his minor sons, and Shantaben executed a memorandum of partial partition in which the foregoing facts were recited, the document purporting to be a

The memorandum that was executed on September eleventh, nineteen forty‑six was intended to serve as a written record of the oral agreement that had been reached earlier between Charandas Haridas, his wife Shantaben and his three minor sons. In the assessment years nineteen forty‑seven‑48 and nineteen forty‑eight‑49, Charandas Haridas asserted that, because of that agreement, the income from the managing‑agency commissions should no longer be treated as the income of the Hindu undivided family but should instead be assessed as the separate income of each of the divided members. The Income‑Tax Officer rejected this contention and maintained that the income continued to belong to the Hindu undivided family, consequently assessing the income in the same manner as in earlier years. An appeal against this assessment was made to the Appellate Assistant Commissioner, but the appeal was dismissed. Thereupon the dispute was taken before the Income‑Tax Appellate Tribunal. The Tribunal examined the memorandum and concluded that, if any division had taken place, it concerned only the income and not the underlying assets that generated the income. The Tribunal observed that the agreements between the managing agencies and the companies they managed were unchanged by the alleged partition. Accordingly, the Tribunal held that the arrangement to share the receipts from that source of income was not binding on the Department so long as the assets themselves remained jointly held. The Tribunal further described the memorandum as “a farce” and held that it did not exempt the family from assessment as a Hindu undivided family. Because the Tribunal declined to invoke the relief provided by section sixty‑six(1) of the Indian Income‑Tax Act, Charandas Haridas sought relief under section sixty‑six(2) of the same Act before the Bombay High Court.

The primary issue before the High Court was whether there existed material on the record that could support the Tribunal’s finding that the income from the commission‑agency share of the mills continued to be the income of the Hindu undivided family. The High Court observed that, although the parties had presented an elaborate argument, the question to be decided was essentially factual: it was necessary only to determine whether the Tribunal had before it sufficient material on which to base its factual conclusion. The Court held that, while the Tribunal’s finding did not amount to a declaration that the memorandum was inauthentic, the method employed by the family to effect a partition of the assets was inadequate to achieve the result they intended. In the Court’s view, the Tribunal was correct in holding that the document was ineffective; even if the income had been purportedly divided and perhaps in practice had been divided, the source of that income remained undivided and therefore still belonged to the Hindu undivided family. Accordingly, the High Court answered the question affirmatively, concluding that the Tribunal had indeed possessed material on which it could base the finding that, with respect to the income‑bearing assets, the assets continued to belong to the Hindu undivided family. The High Court refused leave to appeal to this Court, but Charandas Haridas subsequently obtained special leave and filed the present appeal. Counsel for Charandas Haridas argued that a Hindu undivided family cannot be a partner of a firm, and that the only permissible mode of partition was a division of income rather than a division of assets, a point that became central to the arguments before this Court.

The Court observed that a Hindu undivided family could not be a partner in a firm, and therefore, although Charandas Haridas represented the Hindu undivided family, in his capacity as a partner he could not demand that the other members of the family be taken in as partners or be admitted to the benefits of partnership. The Court explained that the only permissible mode of effecting partition was to divide the income, and that such division produced, in law, the effect of dividing the assets. This effect was relevant not for the purposes of the Partnership Act but at least for the purposes of assessing income‑tax. Accordingly, counsel for the petitioner contended that the Hindu undivided family, which had ceased to exist with respect to these assets, could not be assessed as such after 1 January 1946, the date on which the partition became effective. Counsel for the respondent, identified as the learned Solicitor‑General for the Department, responded that the petitioner's argument presupposed that the assets had not actually been divided, and since income‑tax becomes payable at the moment income accrues, that income must be treated as having accrued to the Hindu undivided family; the subsequent division of that income into five or six shares did not alter the tax position. Before examining these arguments, the Court reproduced the operative portion of the memorandum relating to the partial partition, which read: “Re:‑Partial partition of the Hindu Undivided Family of Charandas Haridas of Ahmedabad. We the undersigned Sheth Charandas Haridas by himself and as the guardian of minors Rameshchandra Charandas, Anilkumar Charandas and Gautamkumar Charandas and Shantaben Charandas all residing in Shahibaug, Ahmedabad make this memorandum (Nondh) that, we have a Hindu undivided family and Sheth Charandas Haridas manages our family's joint property as Karta or Manager and all of us as members of the joint undivided family are entitled to our joint undivided family as Malik. Our family received a commission of Re. 0‑1‑11. 5112 from the Vijaya Mills Co., Ltd. and out of this commission Sheth Charandas Haridas as Karta or Manager of the family has given already a commission of one pie to Pratima, the daughter of the family. So also out of the commission of Re. 0‑2‑1/2 received by the family from the Gopal Mills Co., Ltd. Sheth Charandas Haridas as Karta and Manager has given already to Pratima one pie commission. After deducting these Re. 0‑1‑10. 5/12 and Re. 0‑1‑11 commission remained. These commissions and other commission received from various other mills have been partitioned orally by us on Samvat Year 2002 Magsar Vadi 12, dated 31st December, 1945. By this partition we decided that whatever commission fell due till 31‑12‑45 and which is received after 31‑12‑45 should be kept joint and in respect of the commission which accrues from 1‑1‑46 and received after that date each of us become absolute owner of his one‑fifth share and therefore from the date, i.e., from 1‑1‑46 these commissions cease to be the joint property of our family. But it is our desire that we should keep a memorandum for our memory of the oral partial partition effected on Samvat Year 2002 Magsar Vadi 12, dated 31‑12‑45. Because of this we keep this note.” The Court noted that the document mentioned “a commission” in respect of each of the six managing agencies, and that the term “commission” was used both to denote the amount of managing‑agency commission to be received by Charandas Haridas and to denote the right to that commission which Charandas Haridas held as a partner. The sole question was whether the source had been effectively divided for the purposes of the Income‑tax law, so that assessment could not be made upon a Hindu undivided family.

According to a memorandum dated 31‑12‑45 and referring to the year 2002 Magsar Vadi 12, the family had executed a partition of the commissions that were to be received by its members, and the memorandum was retained for that purpose. The document clearly identified a “commission” for each of the six managing agencies, and indicated that those commissions had been divided by reference to the memorandum. The term “commission” was employed in two distinct ways: on some occasions it denoted the actual monetary amount of the managing‑agency commission that Charandas Haridas was to receive, while on other occasions it signified the legal right to that commission which Charandas Haridas held in his capacity as a partner. The essential issue before the Court was whether the source of the commission had been effectively divided for the purposes of the Income‑Tax Act, thereby preventing the income from being assessed as belonging to a Hindu undivided family. The Court quoted the rule expressed by Mayne and affirmed by the Privy Council in Pichappa v. Chokalingam, which stated that when a managing member of a joint family enters into a partnership with an outsider, the remaining family members do not automatically become partners and therefore do not acquire the rights and obligations of partnership under the Indian Contract Act; only those family members who actually contract with the outsider become partners, and the partnership is governed by the Partnership Act.

The Court also referred to the observation of the Privy Council in Appovier v. Rama Subba Aiyan, which explained that a conversion of tenancy brings about a change in the family’s status with respect to the property, so that the produce is no longer pooled in a common chest as income of an undivided property, but is instead distributed in six equal shares to the individual family members who become entitled to those definite shares. Citing this passage, the Bombay High Court held that a valid division must involve both a division of the right and a division of the property itself; if the division merely separates the income after it accrues without separating the underlying asset into distinct shares, the asset remains joint. Accordingly, the High Court concluded that, despite the division of income after accrual, the asset continued to be treated as joint. The Supreme Court then observed that three separate legal regimes were relevant to the case. The law of partnership, which does not consider the existence of a Hindu undivided family, the Hindu law, which allows for an overall or partial partition of the family, and the Income‑Tax law, which may regard a particular source of income either as belonging to the undivided family or to the individual members who hold separate shares after partition.

The Court observed that a partition under Hindu law may leave the partner’s position unchanged under the Partnership Act, while it fully alters the situation of the family under Hindu law. It explained that when a Karta becomes a partner, the members of the undivided family are not automatically brought into the partnership, and likewise, a division of the family does not modify the partner’s relationship with the other partners. The Court noted that, prior to any partition, the Income‑Tax law regards the Karta not as a partner but as the representative of the Hindu undivided family, and therefore applies Hindu law principles rather than the provisions of the Partnership Act. Once the family is disrupted, the Court held that the partnership relationship remains exactly as it was, but the status under Hindu law changes; consequently there is no longer a Hindu undivided family to serve as a unit of assessment, and the income that accrues cannot be said to belong to such a family. The Court further stated that neither the Indian Income‑Tax law nor the Partnership law forbids members of a Hindu joint family from dividing any asset, provided the division is effective enough to bind all members. Hindu law does not require a physical partition by metes and bounds where separate enjoyment can be secured according to each member’s share. For an asset of this nature, the Court explained that there was no alternative method of partition available to the parties if they wished to retain the property yet hold it severally, and the law does not compel a person to accomplish the impossible. The Court added that the outcome would have been the same even if the parties had explicitly declared that they had partitioned the assets, because such a declaration would have been irrelevant to the firms involved. The respondent suggested that the family could have partitioned the managing agencies among the members by balloting them separately; however, the Court found that this would have required the dissolution and reconstitution of the managing‑agency firms, a step beyond the control of Charandas Haridas. It was also suggested that the agencies could have been allotted to Charandas while the others received different property, or that a receiver could have been appointed. While acknowledging that many modes of partition were theoretically possible, the Court observed that the key question was whether the family, desiring only to partition these assets, could have employed any other means to achieve the same result. No answer to that question was offered. Accordingly, the Court concluded that it is evident the family adopted the most comprehensive measure available to divide the joint interest into separate interests.

In this case the Court observed that the family had transformed the joint interest into separate interests and that there was no indication that this division was a mere pretense, nor had the Appellate Tribunal made any finding to that effect. The Court noted that the partition document was fully operative among the family members and, as a matter of fact, there was no Hindu undivided family with respect to the particular assets in question. The assets had always been held in the name of Charandas Haridas, and, when examined under the law of partnership, the family itself possessed no legal standing in relation to those assets. The Court further observed that the assets continued to be held in Charandas Haridas’s name and, viewed again from the same legal perspective, the partition did not alter the legal significance of the ownership. What changed, according to the Court, was the status of the family: while the family was a joint entity the tax Department could treat the income as that of the family, but after the partition the Department could no longer characterise the income as that of a Hindu undivided family because such a family no longer existed. In light of the finding that the partition document was genuine and not a sham, and that it effectively divided both the income and the assets, the Court concluded that there was no material to support the view that the income derived from the commission agency of the mills constituted the income of a Hindu undivided family. Consequently the Court allowed the appeal, ordered the respondents to pay the costs of both assessee parties in this and the lower proceedings, and directed that only a single set of costs be awarded in this matter.