Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, MADHYA PRADESH,NAGPUR
Vs.
RESPONDENT:
SETH GOVINDRAM SUGAR MILLS LTD.
DATE OF JUDGMENT:
26/03/1965
BENCH:
SUBBARAO, K.
BENCH:
SUBBARAO, K.
SHAH, J.C.
SIKRI, S.M.
CITATION:
1966 AIR 24 1965 SCR (3) 488
ACT:
Partnership Act (9 of 1932), ss. 31 and 42(c)-Scope of-Two
joint Hindu families-Partnership between-When possible-
Income-tax Act (11 of 1922), s. 164(1).
HEADNOTE:
A joint Hindu family consisting of two branches owned a
sugar mill. After partition, the two kartas entered into a
partnership in 1943, to carry on the business of the sugar
mill. The two partners represented the respective joint
families, and the partnership deed provided that the death
of any of the parties shall not dissolve the partnership and
either the legal heir or the nominee of the deceased partner
should take his place. One of the kartas died in 1945
leaving as members of his branch of the family, three widows
and two minor sons. The other partner continued the
business of the sugar mill in the firm name. For the
assessment year 1950-51, the assessee (respondent-firm)
applied for registration on the basis of the partnership
agreement of 1943. The Income-tax Officer, Appellate
Assistant Commissioner and the Tribunal held that there was
no partnership between the members of the two families after
the death of one of the kartas. On a reference to the High
Court, it was held that the partner-ship business was
carried on by the representatives of the two families after
the dent), of one of the kartas.
In the appeal to this Court, on the question as-, to whether
during the assessment year 19-50-51, the assessee, was a
firm within the meaning of s. 16(1) of the Income-tax Act,
1922, or an association of persons.
HELD: The High Court was wrong in its finding. But, as
a result ,of the concession by the appellant, that there was
a partnership from 13th December 1949, when one of the minor
sons had become a major, the status of the assessee was that
of a firm for the assessment year 1950-51. [498B]
A joint Hindu family as such cannot be a partner of a firm,
but it may through its karta enter into a partnership with
the karta of another family. [495H]
Kshetra Mohan Sanyasi Charan Sadhukhan v, Commissioner of
Excess Profits Tax, [19541 S.C.R. 268. followed.
A widow, though a member of a joint family, cannot become
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its manager. [495B]
Commissioner of Income-tax, C.P. & Berar v. Seth Lakshmi
Narayan Raghunathdas, (1948) 16 I.T.R. 313 and Pandurang
Dakhe v. Pandurang Gorle. I.L.R. [1947] Nag. 299.
overruled.
Therefore, in the instant case, when one of the kartas died,
the partnership had come to an end. There was no scope for
applying s. 42(c) of the Partnership Act, 1932, because, the
section is applicable only to a partnership with more than
two partners. In such a case. if one of them dies, the firm
is dissolved, but if there is a contract to 488
489
the contrary, the surviving partners will continue the firm.
On the other hand, if there are only two partners and one of
them dies, the firm automatically comes to an end and,
thereafter, there is no partnership for a third party to be
introduced. Section 31, which deals with the validity of a
contract between the partners to introduce a third party
into the partnership without the consent of all the existing
partners, presupposes the subsistence of a partnership and
does not apply to a partnership of two partners, which is
dissolved by the death of one of them. [492E-H]
Hansraj Manot v. Messrs, Gorak Nath Pandey, (1961) 66 C.W.N
262, disapproved.
Further, there was no evidence that the representatives of
the two families constituted a new partnership and carried
on the business of the sugar mill before 13th December 1949,
when, it was conceded a new partnership had come into
existence.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 38 and 39 of
1964.
Appeals from the judgment and order dated April 10, 1961 of
the Madhya Pradesh High Court in Miscellaneous Civil Case
No. 63 of 1961.
C. K. Daphtary, Attorney-General, R. Ganapathy Iyer- and
R. N. Sachthey, for the appellant (for both the appeals).
N. D. Karkhanis, Rameshwar Nath, S. N. Andley and P. L.
Vohra, for the respondent (in both the appeals).
The Judgment of the Court was delivered by
Subba Rao, J. These two appeals by certificate arise out of
the judgment of the High Court of Madhya Pradesh, Jabalpur,
in Miscellaneous Case No. 63 of 1961 from a reference under
s. 66(2) of the Indian Income-tax Act, 1922, made by the
Income-tax Appellate Tribunal, Bombay.
To appreciate the contention of the parties the following
genealogy will be useful:
Kalooram Todi
:
:
------------------------------------------
: :
Govindram Gangaprasad
(d. in January 1943) (d. in 1933)
: :
: :
: Bachhulal
: :
------------------------------------ :
: : :
Madanlal (predeceased his Nandlal Babulal
father) (d. 9-12-1945) (b. 25-1-1935)
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: :
Jankibai Banarsibai
: :
: :
Radheyshyam (predeceased Venkatlal
his father) (b. 13-12-1931)
:
:
Shantibai
:
:
Vishwanath (adopted)
(b. 13-4-1941)
490
After the death of Kalooram Todi, his two sons by name
Govindram and Gangaprasad constituted a joint Hindu family
which owned extensive property in Jaora State and a sugar
mill called "Seth Govindram Sugar Mills" at Mahidpur Road in
Holkar State. In the year 1942 Bachhulal filed a suit for
partition against Govindram and obtained a decree therein.
In due course the property was divided and a final decree
was made. We are concerned in these appeals only with the
Sugar Mills at Mahidpur Road. After the partition Govindram
and Bachhulal jointly worked the Sugar Mills at Mahidpur
Road. After the death of Govindram in 1943, Nandlal, the
son of Govindram, and Bachhulal, as kartas of their
respective joint families, entered into a partnership on
September 28, 1943 to carry on the business of the said
Sugar Mills. Nandlal died on December 9, 1945, leaving
behind him the members of his branch of the joint family,
namely, the three widows and the two minor sons shown in the
genealogy. After the death of Nandlal, Bachhulal carried on
the business of the Sugar Mills in the name of "Seth
Govindram Sugar Mills". For the assessment year 1950-51,
the said firm applied for registration on the basis of the
agreement of partnership dated September 28, 1943. The
Income-tax Officer refused to register the partnership on
the ground that after the death of Nandlal the partnership
was dissolved and thereafter Bachhulal and the minors could
be treated only as an association of persons. On that
footing he made another order assessing the income of the
business of the firm as that of an association of persons.
Against the said orders, two appeals-one being Appeal No. 21
of 1955-56 against the order refusing registration and the
other being Appeal No. 24 of 1955-56 against the order of
assessment-were filed to the Appellate Assistant
Commissioner. The Appellate Assistant Commissioner
dismissed both the appeals. In the appeal against the order
of assessment, the Appellate Assistant Commissioner
exhaustively considered the question whether there was any
partnership between the members of the two families after
the death of Nandlal and came to the conclusion that in fact
as well as in law such partnership did not exist. Two
separate appeals, being Income-tax Appeal No. 8328 of 1957-
58 and Income-tax Appeal No. 8329 of 1957-58, preferred to
the Income-tax Appellate Tribunal against the orders of the
Appellate Assistant Commissioner were dismissed. The
assessee made two applications to the Tribunal for referring
certain questions of law to the High Court, but they were
dismissed. Thereafter, at the instance of the assessee the
High Court directed the Tribunal to submit the following two
questions for its decision and it accordingly did so:
"(1) Whether on the facts and in the
circumstances of the case, the status of the
assessee, "Seth Govindram Sugar Mills,
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Mahidpur Road, Proprietor Nandlal Bachhulal,
Jaora", is an Association of Persons or a firm
within the meaning of Section 16(1)(b) of the
Income-tax Act."
491
"(2) Whether the order of the Appellate
Tribunal is illegal on account of the Tribunal
having committed an error of record and having
omitted to consider the relevant material in
the case."
The High Court, for reasons given in its judgment, held on
the first question that in the assessment year 1949-50 the
status of the assessee was that of a firm within the meaning
of s. 16(1),(b) of the Income-tax Act and on the second
question it held that the Tribunal misdirected itself in law
in reaching the conclusion that the parties could not be
regarded as partners. The present two appeals are preferred
against the said order.
At the outset we must make it clear that the question of
registration could not be agitated in these appeals, as that
question was not referred to the High Court. We shall,
therefore, only consider the points raised by the questions
referred to the High Court and held by the High Court
against the appellant. Indeed, the only effective question
is whether during the assessment year 1950-51 the assesee
was a firm or an association of persons.
The first question raised by the learned Attorney General is
that on the death of Nandlal the firm of Seth Govindram
Sugar Mills was dissolved and thereafter the income of the
said business could only be assessed as that of an
association of persons.
To appreciate this contention some more necessary facts may
be stated. The deed of partnership dated September 28,
1943, was executed between Nandlal and Bachhulal. It is not
disputed that each of the said two partners entered into
that partnership as representing their respect;,-- joint
families. Under cl. (3) of the partnership deed, "The death
of any of the parties shall not dissolve the partnership and
either the legal heir or the nominee of the deceased partner
shall take his place in the provisions of the partnership"
The question is whether on the death of Nandlal his heirs,
i.e., the members of his branch of the family, automatically
became to partners of the said firm. The answer to the
question turns upon s. 42 of the Indian Partnership Act,
1932 (Act 9 of 1932). the material,part of which reads:
"Subject to contract between the partners a firm is dissolv-
ed by the death of a partner."
While for the appellant the leaned Attorney General
contended that s. 42 applied only to a partnership
consisting of more than two partners, for the respondent Mr.
Karkhanis argued that the section did not impose any such
limitation and that on its terms it equally applied to a
partnership comprising only two partners. It was argued
that the contract mentioned in the over-riding clause was a
contract between the partners and that, if the parties to
the contract agreed that in the event of death of either of
them his successor would be inducted in his place, the said
contract would be binding
492
on the surviving member. On the death of one of the
partners, it was said, his heir would be automatically
inducted into the partnership, though after such entry he
might opt to get out of it. This conclusion the argument
proceeded was also supported by s. 31 of the Partnership
Act. Section 31 of the Partnership Act reads:
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"(1) Subject to contract between the partners
and to the provisions of section 30, no person
shall be introduced as a partner into a firm
without the consent of all the existing
partners."
Converting the negative into positive, under s. 31 of the
Partnership Act if there as a contract between the partners,
a person other than the partners could be introduced as a
partner of the firm without the consent of all the existing
partners. A combined reading of ss. 42 and 31 of the
Partnership Act, according to the learned counsel, would
lead to the only conclusion that two partners of a firm
could by agreement induct a third person into the
partnership after the death of one of them.
There is a fallacy in this argument. Partnership, under s.
4 of the Partnership Act, is the relation between persons
who have agreed to share the profits of a business carried
on by all or any of them acting for all. Section 5 of the
said Act says that the relation of partnership arises from
contract and not from status. The fundamental principle of
partnership, therefore, is that the relation of partnership
arises out of contract and not out of status. To accept the
argument of the learned counsel is to, negative the basic
principle of law of partnership. Section 42 can be
interpreted without doing violence either to the language
used or to the said basic principle. Section 42(c) of the
Partnership Act can appropriately be applied to a’
partnership where there are more than two partners. If one
of them dies, the firm is dissolved; but if there is a
contract to the contrary, the surviving partners will
continue the firm. On the other hand, if one of the two
partners of a firm dies, the firm automatically comes to an
end and, thereafter, there is no partnership for a third
party to be introduced therein and, therefore, there is no
scope for applying cl. (c) of s. 42 to such a situation. It
may be that pursuant to the wishes of the directions of the
deceased partner the surviving partner may enter into a new
partnership with the heir of the deceased partner, but that
would constitute a new partnership. In this light s. 31 of
the Partnership Act falls in line with s. 42 thereof. That
section only recognizes the validity of a contract between
the partners to introduce a third party without the consent
of all the existing partners: it presupposes the subsistence
of a partnership; it does not apply to a partnership of two
partners which is dissolved by the death of one of them, for
in that event there is no partnership at all for any new
partner to be inducted into it without the consent of
others.
There is a conflict of judicial decisions on this question.
The decision of the Allahabad High Court in Lal Ram Kumar v.
493
Kishori Lal(1) is not of any practical help to decide the
present case,. There. from the conduct of the surviving
partner and the heirs of the deceased partner after the
death of the said partner, the contract between the original
partners that the partnership should not be dissolved on the
death of any of them was inferred. Though the partnership
there was only between two partners, the question of the
inapplicability of s. 42(c) of the Partnership Act to such a
partnership was neither raised nor decided therein. The
same criticism applies to the decision of the Nagpur High
Court in Chainkarcin Sidhakaran Oswal v Radhakisan Vishwnath
Dixit(2). This question was directly raised and clearly
answered by a Division Bench of the Allahabad High Court in
Mt. Sughra v. Babu(3) against the legality of such a term
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of a contract of partnership consisting of only two
partners. Agarwala, J., neatly stated the principle thus:
"In the case of a partnership consisting of
only two partners, no partnership remains on
the death of one of them and, therefore, it is
a contradiction in terms to say that there can
be a contract between two partners to the
effect that on the death of one of them the
partnership will not be dissolved but will
continue ....... Partnership is not a matter
of status, it is a matter of contract. No
heir can be said to become a partner with
another person without his own consent,
express or implied."
This view accords with that expressed by us
earlier. In Narayanan v. Umayal(4).
Ramachandra lyer J., as he then was, said much
to the same effect when he observed thus:
".............. if one of the partners died,
there will not be any partnership existing to
which the legal representatives of the
deceased partner could be taken in. In such a
case the partnership would come to an end by
the death of one of the two partners, and if
the legal representatives of the deceased
partner joins in the business later, it should
be referable to a new partnership between
therein."
But Chatterjee J., in Hansraj Manot v. Messrs.
Gorak Nath Pandey(5) struck a different note.
His reasons for the contrary view are
expressed thus:
"Here the contract that has been referred to s
the contract between the two partners Gorak
Nath and Champalal Therefore, it cannot be
said that the contract ceased to have effect
because a partner died. The contract was
there. There was no new contract
(1) A.T.R. 1946 All. 259. (2) A.T.R.1956 nag.
46
(3) A.I.R. 1952 All. 506, 507. (4) A.I.R, 1959
Mad. 283,284.
(5) [1961] 66 C.W.N. 262, 264.
(N)4SCI-5
494
with the heirs and there was no question of a
new contract with the heirs because of the
original contract, and by virtue of the
original contract the heirs become partners as
soon as one of the partners
died.................. As soon as there is the
death, the heirs become the partners auto-
matically without any agreement between the
original Partners by virtue of the original
agreement between the Partners while they were
surviving. there is no question of
interregnums. As soon as the death occurs the
right of somebody else occurs. The question
of interregnums does not arise. The heirs
become partners not because of a contract
between the heirs on the one hand and the
other partners on the other but because of the
contract between the original partners of the
firm."
With great respect to the learned Judge, we find it
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difficult to appreciate the said reasons. The learned Judge
seems to suggest that by reason of the contract between the
original partners, the heirs of the deceased partner enter
the field simultaneously with the removal by death of the
other partner from the partnership. This implies that the
personality of the deceased partner projects into that of
his heirs, with the result that there is a continuity of the
partnership without any interregnums. There is no support
either on authority or on principle for such a legal
position. In law and in fact there is an interregnums
between the death of one and the succession to him. We
accept the view of the Allahabad and Madras High Courts and
reject the view expressed by Nagpur and Calcutta High
Courts,
The result of the discussion is that the partnership between
Nandlal and Bachhulal came to an end on the death of Nandlal
on December 9, 1945.
The next question is whether after the death of Nandlal a
new partnership was entered into between the representatives
of the two branches of the families, i.e., Nandlal’s and
Bachhulal’s. Before we consider this question it is as well
that we advert to incidental questions of law that were
raised. One is whether the widow of Nandlal could under
Hindu law be a karta of the joint Hindu family consisting of
three widows and two minors. There is conflict of view on
this question. The Nagpur High Court held that a widow
could be a karta: see Commissioner of Income-tax, C. P. &
Berar v. Seth Laxmi Narayan Raghunathdas(1); Pandurang Dahke
v. Pandurang Gorle(2), The Calcutta High Court expressed the
view that where the male members are minors and their
natural guardian is the mother, the mother can represent the
Hindu undivided family for the purpose of assessment and
recovery of taxes under the Income-tax Act: see Sushila Devi
Rampurla v. Income-tax Officer(2); and
(3) (1959) 38 I.T.R. 316.
495
Sm. Champa Kumari Singhi v. Additional Member, Board of
Revenue, West Bengal(1) The said two decisions did not
recognize the widow as a karta of the family, but treated
her as the guardian of the minors for the purpose of income-
tax assessment. The said. decisions, therefore, do not
touch the question now raised. The Madras and Orissa High
Courts held that coparcenership is a necessary qualification
for the managership of a joint Hindu family and as a widow
is not admittedly a copartner, she has no legal qualifi-
cations to become the manager of a joint Hindu family. The
decision of the Orissa High Court in Budhi Jena v. Dhobai
Naik(2) followed the decision of the Madras High Court in
V.M.N. Radha Ammal v. Commissioner of Income-tax, Madras(2)
wherein Satyanarayana Rao J., observed:
"The right to become a manager depends upon
the fundamental fact that the person on whom
the right devolved was a copartner of the
joint family Further, the right is confined to
the male members of the family as the female
members were not treated as copartner though
they may be members of the joint family."
Viswanatha Sastri J., said:
"The managership of a joint Hindu family is a
creature of law and in certain circumstances,
could be created by an agreement among the
copartner of the joint family. Coparcenership
is a necessary qualification for managership
of a joint Hindu family."
Thereafter, the learned Judge proceeded to
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state:
"It will be revolutionary of all accepted
principles of Hindu law to suppose that the
senior most female member of a joint Hindu
family, even though she has adult sons who are
entitled as copartner to the absolute
ownership of the property, could be the
manager of the family .....................
She would be the guardian of her minor sons
till the eldest of them attains majority but
she would not be the manager of the joint
family for she is not a copartner."
The view expressed by the Madras High Court is in accordance
with well settled principles of Hindu law, while that
expressed by the Nagpur High Court is in direct conflict
with them. We are clearly of the opinion that the Madras
view is correct.
Another principle which is also equally well settled may be
noticed. A joint Hindu family as such cannot be a partner
in a firm, but it may, through its karta enter into a valid
partnership with a stranger or with the karta of another
family. This Court in Kshetra
(1) (1961) 46 T.T.R. 81 (2) A.I.R. 1956 Orissa 6.
(3) (1950) 18 I.T.R. 225, 230, 232, 233.
496
Mohan Sanyasi Charan Sadhukhan v. C.E.P.T.(1) pointed out
that when two kartas of different families constituted a
partnership the other members of the families did not become
partners, though the karta might be accountable to them.
The question, therefore, is whether after the death of
Nandlal the representatives of the two families constituted
a new partnership and carried on the business of the Sugar
Mills. Admittedly no fresh partnership deed was executed
between Banarsibai, acting as the guardian of the minors in
Nandlal’s branch of the family and Bachhulal. It is not
disputed that partnership between the representatives of two
families can be inferred from conduct. Doubtless the
accounts produced before the income-tax authorities
disclosed that Bachhulal was carrying on the business of
"Seth Govindram Sugar Mills Ltd." in the same manner as it
was conducted before the death of Nandlal. Therein Kalooram
Govindram and Gangaprasad Bachhulal were shown as partners,
Govindram having 10 annas share and Bachhulal having 6 annas
share. There were separate current accounts for the two
parties. The Appellate Assistant Commissioner, who examined
the accounts with care, gave the following details from the
accounts ason November 1, 1948:
Joint capital account of Kalooram
Govindram and Gangaprasad
Bachhulal in the ratio of 10 : 6 Rs.
Credit balance 10,78,660
Current Accounts:-
Gangaprasad Bachhulal Do. 10,46,797
Kalooram Govindram Do. 8,30,348
Profit & Loss Account Debit balance 14,01,669
No profit or loss was adjusted to the current account of the
parties. Thereafter the accounts were closed as on 31-3-
1950, when the capital account was squared up by
transferring that much loss from the profit and loss account
and balance in the profit and loss account was transferred
in the ratio of 10:6 to the current accounts of the two
parties.
Thus the profit and loss account showed:-
Net debit balance including current Rs.
year’s loss 17,51,992
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Loss set off against capital account 10,78,666
.................
Rs. 6,73,326
Transferred to partners’ accounts:-
Messrs. Kalooram Govindram 4,20,829
Messrs. Gangaprasad Bachhulal 2,52,497 6,73,326
.....................
Balance Nil
(1)[1954] S.C.R.
497
The accounts only establish that Bachhulal was doing the
business of Govindram Sugar Mills Ltd. But Banarsibai’s
name was not found in the accounts. If she was a partner,
her name should have found a place in the accounts. Not a
single document has been produced on behalf of the assessee
which supports the assertion that Banarsibai acted as a
partner or was treated by the customers of the firm as a
partner. There is not a little of evidence of conduct of
Bachhulal, Banarsibai or even of third parties who had
dealings with the firm to sustain the plea that Banarsibai
was a partner of the firm. Indeed, the conduct of the
parties was inconsistent with any such partnership between
Banarsibai and Bachhulal. After the death of Nandlal,
Banarsibai and Shantibai applied to Jaora District Court for
the appointment of guardians to look after the properties
and the persons of the two minors; and on January 21, 1946,
four persons other than these two widows were appointed as
guardians of the minors. If Banarsibai was acting as a
guardian of the minors representing the family in the
business, she would not have applied for the appointment of
others as guardians. On October 4, 1952, a partnership deed
was drawn up between Bachhulal on the one hand and the
minors represented by the said four guardians on the other.
If Banarsibai was the representative of the family in the
business, this document would not have come into being
Banarsibai also had no place in another partnership deed
which was executed on March 27, 1953, between Venkatlal
represented by the aforesaid guardians and Bachhulal. The
evidence, therefore, demonstrates beyond any reasonable
doubt that Banarsibai was nowhere in the picture and that
Bachhulal carried on the business of the Sugar mills on
behalf of the two families. Nor is there any evidence to
show that from 1943 till the assessment year the guardians
of the minors appointed by the District and Sessions Judge,
Jaora, in 1946 representing the minors entered into a
partnership with Bachhulal. The partnership deeds of 1952
and 1953 were subsequent to the order of assessment and they
contain only self-serving statements and they cannot, in the
absence of any evidence, sustain the plea of earlier
partnership. Indeed, the guardians were only appointed for
the properties situated within the jurisdiction of the
District Judge, Jaora, and they could not act as guardians
in respect of the properties outside the said jurisdiction.
If they were acting as partners with Bachhulal, their names
would have been mentioned either in the accounts or in the
relevant documents pertaining to the business. The
conflicting version given by the assessee in regard to
person or persons who actually represented the family in the
partnership in itself indicates the falsity of the present
version. It must, therefore, be held that the Court
guardians did not enter into a partnership with Bachhulal.
But, Venkatlal became a major on December 13, 1949, i.e.,
during the accounting year 1949-50. On October 17, 1951, an
application for registration was received by the Income-tax
Officer
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498
signed by Venkatlal and Bachulal who are shown as partners
representing their respective joint families. The return of
income submitted along with the application for registration
was signed by Venkatlal on August 29, 1951. After Venkatlal
became a major, there was no obstacle in his representing
his branch of the family, in the partnership. Indeed, it
was conceded in the High Court that there was a partnership
from December 13, 1949, when Venkatlal, attained majority.
Having regard to the said circumstances and the concession,
we must hold that from December 13, 1949, the business was
carried on in partnership between Venkatlal, representing
his branch of the family, and Bachhulal, representing his
branch of the family.
In the result we set aside that part of the finding of the
High Court holding that the partnership business was carried
on by the representatives of the two families after the
death of Nandlal, but confirm the finding to the extent that
such a partnership came into existence only after December
13, 1949. In this view, we answer the two questions
referred to the High Court as under:
(1)For the assessment year 1950-51 the
status of the, assessee was that of a firm
within the meaning of s. 16 (1)(b) of the
Income-tax Act, 1922.
(2)The Tribunal misdirected itself in law
in reaching the conclusion that the parties
could not be regarded as partners.
In the result the appeals are dismissed. But as the
respondent failed in its main contentions, the parties will
bear their own costs in this Court.
Appeals dismissed.
499