Petitioner: Commissioner of Income-Tax, Madhya Pradesh, Nagpur v/s Respondent: Seth Govindram Sugar Mills Ltd.
Date of Judgment: March 26, 1965
Bench: Justice K. Subba Rao, Justice J.C. Shah, Justice S.M. Sikri
Citation: 1966 AIR 24, 1965 SCR (3) 488
Acts Involved:

• Partnership Act, 1932 (Sections 31 and 42(c))
• Income-tax Act, 1922 (Section 16(1))

Facts:
A joint Hindu family, comprising two branches, owned a sugar mill. Post partition, the two kartas (heads) of these branches entered into a partnership in 1943 to manage the sugar mill business. The partnership agreement stipulated that the death of a partner would not dissolve the partnership; instead, the legal heir or nominee would take the deceased partner's place.

In 1945, one of the kartas died, leaving behind three widows and two minor sons. The surviving karta continued the business under the firm's name. For the assessment year 1950-51, the assessee (respondent firm) applied for registration based on the 1943 partnership agreement.

The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal concluded that there was no partnership between the two families after the death of one karta. However, the High Court held that the partnership business continued with the representatives of the two families even after one karta died.

Issues:

• The primary issue was whether the respondent firm constituted a "firm" within the meaning of Section 16(1) of the Income-tax Act, 1922, or was an "association of persons" for the assessment year 1950-51.

Judgement:
The Supreme Court held that the High Court erred in its finding. However, based on a concession by the appellant that there was a partnership from December 13, 1949, when one of the minor sons became a major, the respondent's status was recognized as a firm for the assessment year 1950-51.

Key Points:
Partnership Composition:
A joint Hindu family cannot be a partner in a firm by itself but may enter into a partnership through its karta with the karta of another family.

Female as Karta:
A widow, despite being a member of a joint family, cannot become its manager (karta).

Partnership Dissolution:
The death of one of the two kartas dissolved the original partnership. The firm automatically ceased to exist, as the partnership could not continue with only one partner.

Section 42(c) of the Partnership Act, 1932, applies to partnerships with more than two partners, where the surviving partners continue the firm after a partner's death, subject to the partnership agreement. However, in partnerships with only two partners, the firm dissolves upon the death of either partner, leaving no scope for introducing a third party without a new partnership agreement.

Existence of New Partnership:
There was no evidence that the representatives of the two families formed a new partnership to carry on the business before December 13, 1949. A new partnership was conceded to have begun on that date when the minor son attained majority.

Legal Implications:
This case highlights the limitations on the management of a joint Hindu family business post the death of a karta, especially in the context of partnership agreements. It affirms that a female, according to the Hindu Succession Act and Dayabhaga law at that time, could not become a karta. This decision underscores the necessity for clear partnership agreements and succession plans within family businesses to avoid legal disputes.

The Supreme Court's decision provided clarity on the legal standing of family-run partnerships and the impact of the death of a karta on such business arrangements. The concession that a new partnership began when the minor son attained majority ensured the respondent firm's status as a firm for the relevant assessment year.