Commissioner of Income Tax, Bombay vs Nandlal Gandalal

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

Court: supreme-court

Case Number: Civil Appeal No. 788 of 1957

Decision Date: 21 April 1960

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

The case was styled Commissioner of Income‑Tax, Bombay City versus Nandlal Gandalal and was decided on 21 April 1960 by the Supreme Court of India. The judgment was authored by Justice S. K. Das, with Justices J. L. Kapur and M. Hidayatullah forming the bench. The official citation records the decision as 1960 AIR 1147 and 1960 SCR (3) 620. The petitioner in the proceeding was the Commissioner of Income‑Tax for Bombay City, while the respondent was the individual Nandlal Gandalal. The headnote of the judgment set out the factual background: N, a coparcener of the Hindu undivided family of G, was carrying on a business in Kathiwar, a location then outside British India, when he entered into a partnership with strangers in Bombay in 1944. From the undivided family’s funds a total sum of Rs 1,50,000 was remitted to N and was employed as capital in the partnership. Subsequently N’s brother joined the partnership in Bombay, and the partnership later established another firm in Banaras, to which a third brother of N became a partner. For the assessment year 1945‑46, the Income‑Tax Officer held that the Hindu undivided family of G was resident in the taxable territories and therefore included the remitted sum in the family’s income under section 4(1)(b)(iii) of the Indian Income‑Tax Act, 1922, treating it as having been brought into or received in British India during the relevant year, and made the assessment on that basis. The assessee appealed, and the Appellate Assistant Commissioner affirmed the assessment. However, the Income‑Tax Appellate Tribunal, on reviewing the matter, concluded that in the year of assessment the family was not resident in the taxable territories and consequently deleted the sum from the assessed income. The Tribunal’s decision was upheld by the High Court in a reference made under section 66(1) of the Act, at the appellant’s request.

The Supreme Court, speaking through Justices S. K. Das and J. L. Kapur, held that the expression “control and management” occurring in section 4A(b) of the Indian Income‑Tax Act denotes de facto control and management, and that the word “affairs” refers to those matters of the Hindu undivided family which the family as such is capable of controlling and managing. It was reiterated that it is well‑settled that a Hindu undivided family cannot exercise any controlling power or management over a partnership entered into by a coparcener with strangers, whether under the Indian Partnership Act, 1932, or under Hindu law. Consequently, the partnerships in the present case could not be regarded as “affairs” of the Hindu undivided family within the meaning of section 4A(b) of the Act, even though the incomes generated by those partnerships might belong to the family and could not be used to determine its residence. The Court further observed that the place where income of a Hindu undivided family accrues and the place that determines its residence need not necessarily

It was observed that under the Indian Income‑tax Act of 1922 the place where income accrues need not be identical to the place where the Hindu undivided family is deemed to reside. The Court referred to the decisions in V.V. R. N. M. Subbayya Chettiar v. Commissioner of Income‑tax, Madras ([1950] S.C.R. 961), Kshetra Mohan Sannyasi Charan Sadhukhan v. Commissioner of Excess Profits Tax, West Bengal ([1953] 24 I.T.R. 488) and B. R. Naik v. Commissioner of Income‑tax ([1946] 14 I.T.R. 324). Justice Hidayatullah explained that the determination of what truly constitutes the “affairs” of a Hindu undivided family under section 4A(b) of the Act must be made in accordance with Hindu law rather than the law of partnership. The Court reiterated the settled principle that a coparcener cannot claim any distinct portion of property or a personal share in the family estate. Consequently, when one or more coparceners enter into partnerships with outsiders and invest capital that originates from the family’s undivided funds, the income generated from such business activities is attributable to the Hindu undivided family as a whole. Even if the resulting partnership may not, on its face, be classified as an “affair” of the family, the underlying business venture undertaken in the taxable territory through the coparceners demonstrates that the family is engaged in a permanent commercial enterprise, and the partnership merely evidences that activity. This permanent character of the business satisfies the income‑tax law’s requirement that the activity be regarded as an “affair” of the family within the meaning of section 4A(b). The Court cited earlier authorities including Approvier v. Rama Subba Aiyan ([1866] 11 M.I.A. 75), Katama Natchiar v. Rajah of Shivaganga ([1864] 9 M.I.A. 539), Mangalchand Mohanlal (Inre) ([1952] 21 I.T.R. 164), Murugappa Chetty & Sons v. Commissioner of Income‑tax ([1952] 21 I.T.R. 311) and Kaniram Hazarimull v. Commissioner of Income‑tax ([1955] 27 I.T.R. 294). The earlier case of V.V. R. N. M. Subbayya Chettiar was also considered. The Court further held that control and management of the family’s affairs may be exercised by one or more coparceners, even if only partially, and that if those coparceners reside in the taxable territory and manage the family’s affairs, the family must be treated as a resident of that territory for tax purposes.

The judgment concerned Civil Appeal No. 788 of 1957, filed by special leave against the order dated 16 February 1955 of the Bombay High Court in Income‑tax Reference No. 38/x of 1954. The appeal was argued on behalf of the appellant by counsel comprising the Solicitor‑General of India and two other advocates, while counsel for the respondent consisted of several senior advocates. The judgment was delivered on 21 April 1960. The judgment of Justices S. K. Das and Kapur was pronounced by Justice S. K. Das, and Justice Hidayatullah delivered a separate opinion. Justice S. K. Das opened his opinion by stating that the present proceeding was an appeal by special leave from the Bombay High Court’s judgment and orders dated 16 February 1955, which arose out of a reference made under section 66(1) of the Indian Income‑tax Act, 1922 (hereinafter referred to as “the Act”). The reference had been invoked in the circumstances where a Hindu undivided family was involved, leading to the issues now considered by this Court.

In this case the Hindu undivided family of one Gandalal carried on a cloth business at Wadhwan in Kathiawar, a place that at the relevant time lay outside British India. The family was composed of Gandalal and his four sons, namely Girdharlal, Hansraj, Nandlal and Ramniklal. In the year 1944 Nandlal migrated to Bombay and entered into a cloth‑trading partnership that was known as Amulakh Amichand & Co. Under the terms of the partnership Nandlal held a share expressed as ten annas, while each of his three partners, who were members of the Amulakh Amichand family, held a share expressed as six annas. It was submitted that the Amulakh Amichand family, although a well‑known business house in Bombay, did not supply any capital to the partnership and that Nandlal alone acted as the financing partner. On 13 April 1944 Nandlal received from his own Hindu undivided family a sum of Rs 50,000, and a further sum of Rs 50,000 on 27 April 1944. Additional sums of Rs 50,000 each were received from the same family on 8 June 1944 and on 29 June 1944, making a total of Rs 1,50,000. The assessee contended that the father had given each son Rs 1,00,000 and that the amounts received on 8 June and 29 June were merely loans advanced by the Hindu undivided family to Nandlal. Accordingly, the assessee argued that Nandlal became a partner in Amulakh Amichand & Co. in his individual capacity. The Department, by contrast, argued that the entire amount of Rs 1,50,000 that was transmitted to Nandlal by the Hindu undivided family was used as capital in the cloth business of the partnership Amulakh Amichand & Co. Subsequently Girdharlal, another brother of Nandlal, also came to Bombay and entered the firm. From Nandlal’s original share of ten annas, Girdharlal was allotted five annas. The partnership subsequently expanded its operations to Banaras, where a cloth business was started under the same name. The partners in the Banaras venture were the partners of the Bombay firm together with a local outsider from Banaras. A third brother of Nandlal also joined the Banaras firm but contributed no capital of his own. For the assessment year 1945‑46 the Income‑Tax Officer held that the Hindu undivided family of Gandalal was resident in the taxable territories, namely British India, and therefore included the sum of Rs 1,50,000 in the family’s income under section 4(1)(b)(iii) of the Act as an amount brought into or received in British India during the relevant year. The assessee appealed this assessment to the Appellate Assistant Commissioner in Bombay, but the appeal was dismissed. Thereafter an appeal was filed before the Income‑Tax Appellate Tribunal, Bombay. The Tribunal was asked to consider two questions: first, whether Nandlal, and later Girdharlal, represented the Hindu undivided family of Gandalal of Wadhwan (now in Saurashtra) in the Bombay firm Amulakh Amichand & Co. and subsequently in the Banaras firms; and second, whether the Hindu undivided family of Gandalal was resident in the taxable territories for the relevant years of account.

The Income‑Tax Appellate Tribunal considered two issues. The first issue was whether Nandlal, and subsequently Girdharlal, had joined the Bombay firm and the Banaras firm of Amulakh Amichand & Co. as representatives of the Hindu undivided family of Gandalal, and whether the capital used to start the Bombay business originated from that family. The Tribunal found that both Nandlal and Girdharlal did indeed become partners in the Bombay firm as well as in the Banaras firm, and that they acted on behalf of the Hindu undivided family. The Tribunal further observed that the initial funds for the Bombay enterprise were contributed by the Hindu undivided family. On that basis, the Tribunal concluded that Nandlal should be treated as a member of a Hindu undivided family for tax purposes and that his assessment in that capacity was proper. The second issue concerned the residence of the Hindu undivided family of Gandalal in the taxable territories for the relevant year of account. After examining the facts, the Tribunal held in favour of the assessee and pronounced that the businesses carried on in Bombay and later in Banaras could not be regarded as the affairs of the Hindu undivided family. The Tribunal explained that these two businesses were distinct entities – the Bombay firm of Amulakh Amichand & Co. and the Banaras firm of Amulakh Amichand & Co. – and although the family would eventually receive a share of the profits, the firms themselves did not constitute the family’s affairs. According to the Partnership Act, the enterprises belonged to Nandlal and the other partners, not to the family. Consequently, the Tribunal was of the opinion that for the assessment year 1945‑46 the Hindu undivided family was not resident in the taxable territories. The relief granted by the Tribunal was expressed as follows: “For the assessment year 1945‑46, the assessee’s status would be Hindu undivided family but non‑resident. In so far as the assessed income is concerned the sum of Rs 1,50,000 which was included under section 4(1)(b)(iii) has to be deleted. The rest of the income accrued to the Hindu undivided family in the taxable territories.”

At the instance of the Commissioner of Income‑Tax, Bombay, who appealed before this Court, the Tribunal framed a question of law and referred it to the High Court of Bombay for decision under section 66(1) of the Act. The question put to the High Court was: “Whether the Hindu undivided family of Gandalal represented by Nandlal in the firm of Amulakh Amichand & Co. of Bombay was resident in the taxable territories in the year of account relevant for the assessment year 1945‑46.” The resolution of this question depended upon the proper interpretation of section 4A(b) of the Act. The High Court held that the phrase “the affairs of the Hindu undivided family” in section 4A(b) did not refer to the private or domestic matters of the family, but rather to matters relating to income and its taxation. The Court explained: “We might put the matter in this way that when a coparcener carries on business in partnership on behalf of the Hindu undivided family, the affair is of the coparcener and not of the family, but when the business is carried on by the family itself then it is the affair of the family and not of the coparceners.” Relying on this interpretation, the High Court agreed with the Tribunal’s view and answered the question in the negative, concluding that the Hindu undivided family was not resident in the taxable territories for the year in question.

The High Court observed that when a partnership is carried on by an individual coparcener, the relevant affair belongs to the coparcener and not to the family, but when the family itself conducts the business, the affair belongs to the family and not to the individual coparceners. The Court further stated that it must concur with the view taken by the Tribunal and therefore answer the question that had been referred to it in the negative. After the High Court rendered its decision, the Commissioner obtained special leave to appeal and approached this Court pursuant to the special leave that had been granted. At the very beginning of the present proceedings, the Court clarified that the first question that the Tribunal had raised and decided against the assessee is no longer open for consideration. The Court explained that any income that Nandlal and Girdharlal derived from their two enterprises in Bombay and Banaras was income of the Hindu undivided family, and that the present appeal does not concern that income. Instead, the appeal concentrates on the second question, namely, whether the Hindu undivided family of Gandalal was resident in the taxable territories during the relevant year so that the sum of one lakh fifty thousand rupees could be taxed under section four one (b)(iii) of the Act on the basis of such residence.

The Court observed that if the Hindu undivided family of Gandalal was not resident in the taxable territories in the relevant year, then the amount of one lakh fifty thousand rupees would not fall within the scope of section four (b)(iii) of the Act. Consequently, the Court emphasized that the issue before it is narrowly confined to determining whether the family could be said to be resident in the taxable territories—meaning British India—during the year in question, even though the family conducted its cloth business entirely outside those territories. The Court found it both necessary and convenient to read section four A(b) at this point, which provides that a Hindu undivided family, firm, or other association of persons is deemed resident in the taxable territories unless the control and management of its affairs is situated wholly outside the taxable territories. Referring to the earlier decision in V. V. R. N. M. Subbayya Chettiar v. Commissioner of Income‑tax, Madras (1), the Court noted that the test for residence under section four A(b) largely follows the rule applied in England to corporations, creating a general presumption of residence in British India that can be displaced when the second limb of the provision applies. The Court also reiterated that the word “affairs” must be interpreted as affairs relevant to the Income‑tax Act and having some connection to income, and that to invoke the exception the Court must examine where the direction and control of the family’s affairs are seated.

In the Court’s analysis, the term “wholly” within the statutory language indicated that a Hindu undivided family could possess more than one place of residence, analogous to a corporation that might maintain multiple residences, depending on whether its control and management were situated entirely inside or outside British India. The Court then turned to the established position under Hindu law concerning a coparcener, even when that coparcener functioned as the Karta, who entered into a partnership with other persons for the purpose of carrying on a business, a principle that had been unequivocally settled in prior authority (see [1950] S.C.R. 961). The partnership that resulted from such an arrangement was characterized as a contractual partnership governed by the provisions of the Indian Partnership Act, 1932. Importantly, the Court observed that the partnership was not a joint venture between the Hindu undivided family as a collective entity and the external partners; rather, it was a partnership formed between the individual coparcener acting in his personal capacity and the other partners, as illustrated in the decision of Kshetra Mohan Sannyasi Charan Sadhukhan v. Commissioner of Excess Profits Tax, West Bengal. While the coparcener remained answerable to his family for any income he earned, the contractual relationship of the partnership existed solely among the contracting parties, which comprised the individual coparcener(s) and the strangers to the family. Consequently, on the death of a coparcener, the surviving family members could not assert a right to continue as partners with the strangers, nor could they institute a suit for dissolution of the partnership; similarly, the stranger partners could not sue the surviving family members for the deceased coparcener’s share of any loss. Accordingly, both under the law of partnership and under Hindu law, the Court concluded that control and management of the partnership rested in the hands of the individual coparcener who acted as partner, and not in the collective family. The Court thereafter noted that it was undisputed that, but for the partnership business conducted at Bombay or Banaras, the Hindu undivided family of Gandalal would not have been resident in the taxable territories during the year in question. The principal issue for determination, therefore, was whether the very existence of that partnership could nonetheless confer residence upon the family. This question gave rise to two sub‑questions: first, whether the firm of Amulakh Amichand & Co. could be regarded as one of the “affairs” of Gandalal’s Hindu undivided family, given that it was the sole affair connected with the income that the appellant sought to tax and upon which the appellant based its residence argument; and second, where, from the perspective of the Hindu undivided family, the control and management of that affair was situated. The Court observed that, in the factual matrix of the case, these two queries were intertwined. It explained that the expression “control and management” in section 4A(b) signified the actual directing and decisive power—often described as “the head and brain”—exercised over the affair. Moreover, the Court affirmed that established jurisprudence required “control and management” to be interpreted as de facto control and management, not merely a legal right or power to control (see B. R. Naik v. Commissioner of Income‑tax). Finally, the Court stated that even if a coparcener became a partner, ostensibly on behalf of the joint family, with outsiders in a firm that operated within the taxable territories, that circumstance alone would not suffice to establish that the family itself was resident within those territories.

The Court observed that a partnership firm could not by itself determine the residence of a Hindu undivided family unless at least part of the control and management of that firm were exercised by the family. In the present case, the Court found that the Hindu undivided family, and specifically its Karta, Gandalal, possessed no power to control or manage the partnership firm, whether the analysis was made under the Partnership Act or under Hindu law. The Court therefore concluded that the term “affairs” in section 4A(b) must be understood to refer only to those affairs of a Hindu undivided family that the family is capable of actually controlling and managing as a collective entity. Accordingly, when a coparcener entered into a partnership with persons who were strangers to the family, the Hindu undivided family as such exercised no controlling power over that partnership. In that sense, the partnership could not be regarded as an “affair” of the Hindu undivided family that was capable of being controlled and managed by the family itself. The Court further noted that the earlier decision in V. V. R. N. M. Subbayya Chettiar v. Commissioner of Income‑tax, Madras was based solely on an allocation of burden of proof, and, as expressly stated in that case, the ruling applied only to the assessment year that was before the Tribunal. Moreover, the earlier judgment left open to the appellant the possibility of showing, in later years and by proper evidence, that the seat of control and management of the family’s affairs lay wholly outside British India. In the present matter, the Tribunal had correctly found, on the first issue it considered, that Nandlal and Girdharlal had joined the Bombay and Banaras partnership firms as coparceners of the Hindu undivided family and that the capital required to start those businesses had been supplied by the family. However, the Court held that this finding did not by itself settle the question of the family’s residence. Both under Hindu law and under the Partnership Act, the family as an entity could not exercise any control or management over the two businesses located at Bombay and Banaras. Those businesses belonged to the individual partners, and, on the facts established, they could not be characterised as affairs of the Hindu undivided family of Gandalal within the meaning of section 4A(b) of the Act. The Court agreed with the High Court that the situation would be different if the Hindu undivided family itself had carried on the business as its own undertaking; in such a scenario the business would indeed be an affair of the family because the family would exercise the necessary control and management. The Court also acknowledged that, at first glance, it might seem paradoxical that the income earned from the two partnership businesses, although received by Nandlal and Girdharlal, could be treated as income of the Hindu undivided family while, at the same time, the businesses were held not to be affairs of the family under section 4A(b). The Court clarified that there is no true paradox, because the place where the family’s income accrues and the place of its residence need not coincide under the statute. Consequently, the Court concluded that the partnership businesses did not determine the family’s residence, and that the High Court’s answer to the question of residence was correct. The appeal therefore failed.

In this case, the Court explained that there was no contradiction between the place where a family’s income accrues and the place where the family is deemed resident under the Act, because the two locations need not coincide. Residence of a Hindu undivided family under section 4A(b) is determined by the seat of control and management of the family’s affairs, and in the context of partnership businesses conducted in British India the family itself had no connection with the control or management of those partnerships. When the seat of control is split, the family may have more than one place of residence, and unless the family is wholly outside the taxable territories it will be treated as resident in those territories for the purposes of the Act. However, because in the present matter the family as such had no role in controlling or managing the partnership business, the Court could not see how the existence of the partnership could determine the family’s residency under section 4A(b). Consequently, the Court held that the High Court had correctly answered the question and that the appeal failed, ordering that the appeal be dismissed with costs.

The Commissioner of Income Tax, Bombay City, had obtained special leave to appeal the judgment and order of the High Court of Bombay dated 16 February 1955 in a reference made under section 66(1) of the Indian Income‑Tax Act. The High Court, agreeing with an earlier decision of the Income‑Tax Appellate Tribunal, Bombay, had answered in the negative the question whether the Hindu undivided family of Gandalal, represented by Nandlal in the firm of Amulakh Amichand & Co., Bombay, was resident in the taxable territories for the assessment year 1945‑46. The factual backdrop was that a Hindu undivided family in Wadhwan State, Kathiawar, consisted of Gandalal and his four sons—Girdharlal, Hangraj, Nandlal and Ramniklal—and carried on a cloth business. In 1944 Nandlal moved to Bombay and, on 25 April 1944, started a cloth partnership with three unrelated persons under the name Amulakh Amichand & Co. Nandlal’s share was ten annas and each partner’s share was six annas. All capital of the new firm was supplied by Nandlal, who received two remittances of Rs 50,000 each on 13 April and 27 April 1944, and two additional remittances totalling Rs 50,000 on 8 June and 29 June 1944, amounting to a total of Rs 1,50,000 transferred from Wadhwan to Bombay. Subsequently, Girdharlal also relocated to Bombay, joined the firm and was allotted five annas out of Nandlal’s ten‑anna share. In 1946 the firm opened another establishment in Banaras under the same name, with partners identical to those in Bombay, an outsider from Banaras, and a third brother of Nandlal, who did not contribute capital but presumably received a share alongside his two brothers.

Nandlal did not contribute any capital to the partnership, and it was presumed that he received a profit share together with his two brothers. For the assessment year 1945‑46 the Income‑Tax Officer applied section 4A(b) of the Indian Income‑Tax Act and treated the Hindu undivided family as a resident in British India. Accordingly, the Officer added the amount of Rs 1,50,000 to the income earned by the firm Amulakh Amichand & Co., Bombay, and assessed the family on that combined total. The assessee appealed this assessment to the Appellate Assistant Commissioner, but the appeal was dismissed. The matter was then taken to the Appellate Tribunal, Bombay. The Tribunal observed that Nandlal remained a coparcener of the family and was not a separated member, because the partition he had effected had not been intended to be acted upon. However, the Tribunal also concluded that the earlier decision of the Income‑Tax Officer and the Appellate Assistant Commissioner, which had held the Hindu undivided family to be resident in British India for the relevant year, was untenable. Consequently, the Tribunal ordered that the sum of Rs 1,50,000, which had been included under section 4(1)(b)(iii) of the Income‑Tax Act, could not be taken into account and had to be removed from the assessment. The Tribunal reasoned that the business carried on in Bombay, and subsequently the business in Banaras, could not be described as “the affairs of the Hindu undivided family of Gandalal” for the purpose of section 4A(b). It held that these two enterprises were distinct entities – the Bombay firm and the Banaras firm – and that they represented the affairs of Nandlal and his brothers under partnership law, not the affairs of the Hindu undivided family. At the assessee’s request, the Tribunal referred the question to the High Court for further opinion. The Bombay High Court, citing the Supreme Court decision in V. V. N. M. Subbayya Chettiar v. Commissioner of Income‑Tax, Madras, noted that the expression “the affairs of the Hindu undivided family” did not refer to private or domestic matters but to matters having a reference to the Income‑Tax Act, and that the term “affairs” must be interpreted in a taxation context. The learned judges then examined the situation of a coparcener who enters into partnership with outsiders, observing that when a coparcener conducts a partnership business on behalf of the Hindu family, the “affair” is that of the coparcener, not of the family; whereas when the family itself conducts the business, the “affair” belongs to the family and not to the individual coparceners. They further pointed out that, in the cited case, Fazl Ali, J., appeared to hold that even if a partnership business might be an “activity” of the Hindu family, it would not constitute “the affair” of the Hindu family as intended by the provisions of the Indian Income‑Tax Act. Nevertheless, the judges concluded that…

It was held that the mere fact that a coparcener or a Karta engages in an activity which yields a profit does not automatically make that activity “the affair” of the Hindu undivided family. Accordingly, the business of Amulakh Amichand & Co. was characterised by the High Court, in conformity with the view expressed by the Appellate Tribunal, as “the affair” of the individual coparceners who were parties to the business and not as “the affair” of the Hindu undivided family itself. The two courts therefore answered the question put to them in the negative. Before analysing the arguments presented and interpreting the statutory provision involved, the Court set out the factual findings that had been recorded. It was found that the Hindu undivided family had been disrupted and its assets partitioned. The two members named Nandlal and Girdharlal continued to remain coparceners, and the amount of Rs 1,50,000 was identified as representing the funds belonging to the Hindu undivided family. No finding was recorded that, apart from the partnership entered into by some of the coparceners with persons outside the family, any other business was being carried on in the taxable territories. Moreover, the Tribunal did not make a finding that any part of the control and management of the family’s affairs was exercised in British India, although the High Court had held that such control and management did in fact occur in British India. The matter before the Court concerned the operation of section 4A(b), which deals with the notion of “residence” of a Hindu undivided family, a firm or any other association of persons in the taxable territories.

Prior to the amendment that introduced the term “taxable territories,” the provision read as follows: “For the purposes of this Act… (b) a Hindu undivided family, firm or other association of persons is resident in British India unless the control and management of its affairs is situated wholly without British India.” The subsequent amendment replaced the words “British India” with “taxable territories,” but the underlying principle and the reasoning remained unchanged. The provision was plain in its intent: it deemed a Hindu undivided family to be resident in British India unless the control and management of its affairs was located entirely outside British India. Consequently, if the control and management was situated wholly or even partially within British India, the family was treated as a resident. The phrase “wholly without British India” was therefore interpreted to mean that the existence of even a tiny portion of control or management exercised inside British India would defeat the condition of being wholly outside, thereby rendering the family resident. There was no dispute on the point that the term “its affairs” in the section referred to matters connected with the Income‑Tax Act and not to the domestic or private affairs of the family. It was agreed that the term pointed to any activity that generated income. Both parties accepted that this aspect of the law was clear and unambiguous, a view that had been reaffirmed by the decision of this Court in Subbayya Chettiar’s case. Nonetheless, the parties differed on how to interpret the words “its affairs” as used in the statutory provision, and the matter required further consideration.

The Court examined where the control and management of the Hindu undivided family (HUF) were situated. When the HUF itself, or its Karta, directly controls and manages a business within the taxable territories, the situation is straightforward. However, difficulty arises in cases such as the present one, where the HUF is represented by one of its coparceners who acts as a partner in a firm. In that context the Court identified two principal questions. First, it asked whether any “affair” of the HUF exists in the taxable territories under these circumstances. Second, it considered whether the fact that the coparcener controls and manages the partnership, either wholly or partially, is enough to conclude that the control and management of the family are located in the taxable territories.

The Court noted that settled law holds that a HUF cannot be a partner under the law of Partnership. Consequently, any coparcener who joins a partnership is treated, with respect to the other partners, as an individual who holds rights in his own name. Nevertheless, the benefits that flow to such a coparcener from the partnership are deemed to belong to the HUF, and his rights are regarded as assets of the family. In the recent decision of Charandas Haridas v. Commissioner of Income‑Tax, Bombay, the Court explained that this situation must be examined through three distinct and independent branches of law: partnership law, Hindu law, and income‑tax law. The implications of a coparcener entering a partnership with strangers differ when viewed from the perspective of partnership law, from that of Hindu law, or from the standpoint of income‑tax law. Under partnership law, the coparcenary has no place in the partnership and the coparcener‑partner is the sole entity. By contrast, from the Hindu law perspective, the position is entirely different.

To illustrate the Hindu law perspective, the Court recalled two well‑settled principles concerning coparcenary. The first principle, derived from Lord Westbury’s judgment in Appovier v. Rama Subba Aiyan, states that while the family remains undivided, no individual member may claim a definite share of the joint, undivided property; the proceeds of such property must be brought to a common chest and then dealt with according to the family’s modes of enjoyment. The second principle, expressed by Turner, L.J., in Katama Natchiar v. Rajah of Shivaganga, emphasizes the community of interest and unity of possession among all family members, noting that upon the death of one member, the others may, by survivorship, take the interest that the deceased had during his lifetime. These principles underscore that, under Hindu law, a coparcener’s dealings with family assets are for the benefit of the family as a whole, not for his personal gain.

In that earlier passage the Court observed that the deceased, while alive, possessed a common interest together with the other members and shared a common possession. The Court acknowledged that other principles also qualify those statements, such as the right of a coparcener to seek a partition or, where usage permits, to transfer his interest, which gives rise to the expression that a coparcener has a share. However, under Hindu law a coparcener may not claim any specific piece of property or even a share of it as his own, and any dealing he makes with the assets is, as far as he is concerned, for the benefit of the family. The Income‑Tax Act therefore fixes the sole test for determining the residence of a Hindu undivided family as the existence of an “affair” of the family and its control or management, even if only partly, within the taxable territory. To apply that test one may examine the actual facts, and one may also draw an inference from those facts in the light of Hindu law. Consequently, while the law of partnership treats a coparcener who is also a partner as an equal participant, Hindu law regards the same person merely as a member of a collective body of owners. When seeking to discover whether any “affair” of the Hindu undivided family exists, the matter must be examined from the perspective of Hindu law. If this is the correct understanding of a coparcener’s position under Hindu law, it becomes difficult to accept the High Court’s and the Tribunal’s view that no family “affair” existed in British India. The High Court, with respect, asked the wrong question when it inquired whether Amulakh Amichand & Co. was an “affair” of the family; that question is self‑evident and, under partnership law, the answer is negative. The proper inquiry, as framed by this Court, should have been whether there was an “affair” of the Hindu undivided family in British India. To locate that “affair” it is unnecessary to confine the search within the partnership, just as it would be unnecessary to look for it solely among the affairs of a bank where the family keeps its money. All parties agree that the activity was not a mere trivial undertaking but involved the expenditure of family funds in British India and generated income. The income derived from the partnership belonged to the family, a proposition well settled by authorities such as Mangalchand Mohanlal, In re, Murugappa Chetty & Sons v. Commissioner of Income‑Tax, and Kaniram Hazarimull v. Commissioner of Income‑Tax, together with the many cases cited therein. Accordingly, any “affair” that may be found is not confined within the four corners of the partnership but lies outside those boundaries, as indicated by the cited authorities.

The report cited as 27 I.T.R. 294 observed that the partnership existed only as a consequence of the family’s business activity and of the evidence relating to that activity. The Court explained that the matter to be identified must be governed by Hindu law rather than by the law of partnership, because the latter operates in the opposite direction when both statutes are considered. The provision under examination refers to the affairs of the Hindu undivided family in whatever form those affairs may assume, and consequently the inquiry must be confined to the dictates of Hindu law. It would be a mistake to disregard a clear conclusion of Hindu law and to seek the answer instead in the law of partnership.

The Court further held that the earlier decision of this Court in Subbayya Chettiar’s case (1) did not establish any contrary principle. In that case the karta had visited India for a brief period and dealt with certain matters, including the initiation of some businesses. The Hindu undivided family remained entirely in Ceylon, and the Court described the karta’s actions as “activities.” The earlier judgment did not resolve whether the “affair,” if any, belonged to the family as a whole or to the individual coparceners, and the assessee lost the case because he failed to meet the burden of proof required to bring his case within the applicable exception.

The Court noted that had the karta been resident in India, or had other coparceners remained permanently in India to manage the “affairs,” the question might have been examined in a different manner. In the present matter the Court clarified that the focus is not on the “affairs” of the firm Amulakh Amichand & Co., but on the “affairs” of the Hindu undivided family. The coparceners who had become partners could not claim that they were unrelated to the Hindu undivided family to which they belonged, nor that they did not share an undivided asset held jointly with other family members. Their contribution of capital, their admission as partners, the operation of the partnership, and the formation of additional partnerships were, from the standpoint of Hindu coparcenary law, matters that concerned the family as a whole just as much as they concerned the individual partners.

Consequently, the Court concluded that the first of the two questions previously posed must be answered affirmatively: there was indeed an “affair” of the Hindu undivided family in the taxable territories, that is, in British India, as described in the circumstances of this case (1) [1950] S.C.R. 961. The subsequent question was the location of the control and management of the Hindu undivided family. If that control and management were situated entirely outside the taxable territories, the family would be classified as non‑resident. The burden of proof lay with the assessee to demonstrate such a circumstance, and the Court found that no evidence had been produced to that effect. The Court indicated that, as in Subbayya Chettiar’s case (1), the matter could be decided solely on the basis of the burden of proof, although it need not be limited to that narrow issue for reasons that will be discussed later.

Section 4A of the statute differentiates the residence rules for an individual on one side and for a corporation such as a company on the other, while also providing separate provisions for three other categories: a Hindu undivided family, a firm and an association of persons. The criteria for determining residence differ for each of these categories. For individuals, residence is established by a simple test based on the number of days the person stays in the taxable territory. For companies, the Act supplies two alternative tests. The primary test requires that the control and management of the company’s affairs be situated entirely within the taxable territory. If that condition is not satisfied, a company may still be regarded as resident if, for the relevant year of account, the income that accrues within the taxable territory (excluding capital gains) exceeds the income that accrues outside that territory, with the same exclusion applied. This dual test is necessary because a company can possess more than one residence; its residence is said to be where it “keeps house and does business.” In contrast, the rule for a Hindu undivided family operates in reverse: the family is treated as non‑resident only when the whole of its control and management is situated outside the taxable territory. The personal residence of the individual members of the coparcenary does not determine the family’s residence. However, if any of those members exercise control and management within the taxable territory, the family as a whole is deemed resident. The Court, referring to Subbayya Chettiar’s case (1) [1950] S.C.R. 961, explained that the term “situated” implies a permanent or lasting mode of functioning, even though control and management may be exercised in more than one place. To demonstrate that control and management lie within the taxable territory, the presence of more than a casual activity must be shown. The same standards are applied to a firm and an association of persons.

The expression “control and management” has been metaphorically described as the “head and brain” of the entity. For an individual, this metaphor is unnecessary because the statutory residence test based on days automatically brings the person’s “head and brain” into the taxable territory. In the case of a company, the “head and brain” corresponds to its Board of Directors; if the Board exercises complete local control, the company is regarded as resident. For firms, associations of persons and Hindu undivided families, control and management may be exercised jointly by one or more members of the group. As long as any portion of that control and management is found within the taxable territory—particularly when some coparceners reside in British India and manage the family affairs—the entire family is treated as resident. The necessity of this test is therefore evident. The legislature anticipated that the affairs of Hindu undivided families, firms and associations of persons could easily be coordinated from two or more locations, with some coparceners inside the taxable territory and others outside. To prevent tax avoidance by splitting control across jurisdictions and to ensure that the income of such entities is properly taxed, the law requires that the whole of the control and management be located outside the taxable territory in order to escape the implication of residence.

In this case, the law required that if a Hindu undivided family had control and management spread over several locations, the entire exercise of control and management had to be completely outside the taxable territories in order to avoid the conclusion that the family was resident there. If this condition were not met, it would be possible for different coparceners to run separate businesses within the taxable territories, and the family could not be deemed resident merely because the karta lived abroad; such a situation was considered an abnormality that did not actually arise. The question before the Court was whether, in the present facts, the control and management of the family’s affairs was entirely outside the taxable territories, that is, outside British India. The assessee argued that a partition had occurred in the family and that the respondent, Nandlal, had come to Bombay as a separate member of the family. This assertion implicitly admitted that the remaining family affairs were not being directed from Wadhwan. However, the Court noted that the claim of partition was not accepted by the tribunal, and therefore it could be inferred that the family members who remained at Wadhwan might still have exercised some degree of control.

Nevertheless, the Court observed that a portion of the control over the family’s affairs was exercised within British India by certain coparceners who had become partners in the Bombay partnership. These coparceners did not act on instructions from Wadhwan; rather, they directly managed the Bombay business for the benefit of the family. The partners, who were also coparceners, organized the establishment of the Bombay enterprise, remained in charge of its operations, and later initiated a new venture in Banaras. In the Banaras venture they admitted an outsider as a partner and apparently provided capital either from the Bombay firm or from the family’s collective funds, without claiming that they used any separate personal money. All of these steps constituted acts of control and management that were continuous and permanent rather than occasional. Consequently, the management of the family’s affairs, as they related to the partnership, was being carried out by these coparceners.

The Court further held that coparceners who presented themselves as having a dual character could not hide behind partnership law and argue that their actions were unrelated to the family’s affairs, which remained behind them. While the Court did not equate the partnership’s dealings with the family’s affairs, it recognized that the entire commercial activity was a family undertaking and that the affairs were being administered from within British India. For the purposes of the Income‑tax law, this administration constituted control and management of the Hindu undivided family’s affairs inside British India, and therefore the family had to be treated as resident for the relevant accounting year.

In the Court’s judgment, the decision of the Bombay High Court was found to be incorrect. The proper answer to the statutory question should have been affirmative. Accordingly, the Court set aside the High Court’s answer and replaced it with an affirmative conclusion. The Court further ordered that the respondent should bear his own costs and also pay the costs incurred by the appellant throughout the proceedings. The order of the Court was issued in accordance with the majority judgment of the Supreme Court.

The Court, by a majority of its judges, issued its judgment. In that judgment the Court determined that the appeal must be dismissed and that the costs of the proceedings shall be awarded. Accordingly, the appeal was rejected and the party bringing the appeal was ordered to bear the costs incurred.