A) ABSTRACT / HEADNOTE

This landmark ruling in Commissioner of Income-Tax, Bombay City v. Nandlal Gandalal, decided by the Hon’ble Supreme Court of India in 1960, decisively examined the criteria for determining the “residence” of a Hindu Undivided Family (HUF) under Section 4A(b) of the Indian Income-tax Act, 1922. The primary contention was whether a coparcener representing an HUF in a partnership with strangers in British India could make the HUF “resident” in the taxable territory, thereby triggering tax liability on remittances received from outside British India. The appellant contended that since the partnership business conducted by the coparceners in Bombay and Banaras derived capital from the joint family and generated income for it, the HUF exercised control and management within British India, thus qualifying as a resident.

The majority judgment ruled in favor of the assessee, holding that since the partnership was formed with strangers and under the Indian Partnership Act the family could not control the business, the firm was not an “affair” of the HUF. Therefore, it could not establish the HUF’s residence within British India. In a strongly reasoned dissent, Hidayatullah J. emphasized that the activities of the coparceners amounted to de facto management of the family’s business interests within British India and that tax obligations should follow economic substance over legal form.

Keywords: Hindu Undivided Family, Control and Management, Section 4A(b), Income-tax Act 1922, Taxable Territories, Coparcener, Partnership Law, Residence for Taxation

B) CASE DETAILS

i) Judgement Cause Title: Commissioner of Income-tax, Bombay City v. Nandlal Gandalal

ii) Case Number: Civil Appeal No. 788 of 1957

iii) Judgement Date: April 21, 1960

iv) Court: Hon’ble Supreme Court of India

v) Quorum: S. K. Das, J.; J. L. Kapur, J.; M. Hidayatullah, J.

vi) Author: S. K. Das, J. (majority), Hidayatullah, J. (dissenting)

vii) Citation: [1960] 3 S.C.R. 620

viii) Legal Provisions Involved:

• Section 4A(b) of the Indian Income-Tax Act, 1922

• Section 66(1) of the Indian Income-Tax Act, 1922

ix) Judgments overruled by the Case: None

x) Case is Related to which Law Subjects:

• Taxation Law

• Hindu Law

• Corporate & Partnership Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The dispute stemmed from the legal interpretation of the term “residence” concerning a Hindu Undivided Family under Section 4A(b) of the Indian Income-Tax Act, 1922. The case raised fundamental issues about tax liability where coparceners of an HUF participated in business partnerships situated within taxable territories (British India) while the HUF itself was based outside, in this instance, in Wadhwan, Kathiawar, a princely state at that time. The Income-tax Officer included a capital remittance of ₹1,50,000 made from the HUF to Nandlal (a coparcener) as taxable income on grounds that the family was resident in British India. This triggered an extended legal battle culminating in this Supreme Court ruling.

The determination of residence status of an HUF under tax statutes was, at the time, a gray area. The Court had to reconcile the formal structure of Hindu coparcenary law, contractual partnership law, and income tax jurisprudence. A careful interpretation of the concept of “control and management” and “affairs” under the statute was required.

D) FACTS OF THE CASE

The Hindu undivided family of Gandalal, located in Wadhwan, Kathiawar, operated a traditional cloth business. In 1944, Nandlal, a coparcener, moved to Bombay and entered into a partnership with strangers under the firm name Amulakh Amichand & Co., without any capital contribution from his partners. The firm later expanded to Banaras, with other coparceners joining.

Remittances totaling ₹1,50,000 were made from the HUF’s funds to Nandlal during 1944. These funds were used as capital in the Bombay partnership. The Income Tax Officer deemed this as indicative of HUF’s control within British India and thus held the HUF to be resident under Section 4A(b). The Tribunal found that although income from partnerships was indeed HUF income, the HUF did not manage or control the partnerships in the manner required by the statute. Hence, it ruled in favor of the assessee.

The High Court of Bombay upheld this view. The Commissioner of Income Tax brought the matter to the Supreme Court via special leave.

E) LEGAL ISSUES RAISED

i) Whether the HUF was “resident in taxable territories” under Section 4A(b) of the Income-Tax Act, 1922, during the assessment year 1945-46?

ii) Whether the partnership business conducted by coparceners within British India constituted an “affair” of the HUF subject to its control and management?

F) PETITIONER/APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that the Hindu undivided family had direct economic control and benefited from income generated by the Bombay and Banaras partnerships. The capital used for business came exclusively from HUF’s assets, and the profits were credited back to it. Therefore, the business activities within British India were part of the “affairs” of the HUF. They asserted that residence for tax purposes does not require formal ownership or legal control, but rather de facto economic control and benefit.

Reliance was placed on B.R. Naik v. Commissioner of Income-Tax, [1946] 14 I.T.R. 324, where de facto control and benefit derived from a business were deemed relevant to establish residence under tax law[1].

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that under both Hindu Law and the Indian Partnership Act, a coparcener who enters into a business partnership with strangers does so in his individual capacity, and the HUF cannot exert any control over the partnership’s internal affairs. Therefore, such partnerships do not qualify as “affairs” of the HUF. The management and control of the affairs of the HUF remained wholly outside British India, and the partnerships were separate legal entities under contract law.

They cited Kshetra Mohan Sannyasi Charan Sadhukhan v. Commissioner of Excess Profits Tax, [1953] 24 I.T.R. 488, where it was affirmed that coparceners, even if they invest family funds, do not confer the status of the family into the partnership itself[2].

H) RELATED LEGAL PROVISIONS

i) Section 4A(b) of the Indian Income-Tax Act, 1922 – Defines when an HUF shall be deemed “resident” in taxable territories: when the control and management of its affairs is not wholly situated outside such territories.

ii) Section 4(1)(b)(iii) – Income deemed to accrue or arise in taxable territories.

iii) Section 66(1) – Reference to High Court from Income Tax Appellate Tribunal on questions of law.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The majority, led by S. K. Das, J., held that the mere fact that HUF funds were invested in partnerships within British India does not mean the HUF exercised control or management over those partnerships. These businesses were not “affairs” of the HUF within the meaning of Section 4A(b).

The Court clarified that the “affairs” must be affairs that the HUF as such can control and manage. In a partnership with strangers, the HUF cannot interfere in business decisions or structure. Hence, the seat of “control and management” remained wholly outside British India[3].

b. OBITER DICTA

i) The majority further noted that even if income flows back to the HUF, the legal independence of the partnership structure under the Indian Partnership Act overrides the economic linkage for purposes of residence determination under tax statutes.

c. GUIDELINES 

• To qualify as resident under Section 4A(b), the HUF must have de facto control and management over its affairs situated partly or wholly within British India.

• Merely receiving income from business carried on by coparceners in British India does not suffice.

• The law separates legal ownership/control from economic benefit, and only the former qualifies under the residency clause.

J) CONCLUSION & COMMENTS

The case stands as a crucial precedent in tax jurisprudence involving coparcenary law and partnerships. It upholds the primacy of legal form over economic substance in determining residence under Section 4A(b). The decision narrowed the conditions under which HUFs can be taxed in India based on residence. However, Justice Hidayatullah’s dissent offered a broader view that emphasized substance over form, recognizing de facto economic control by coparceners within India as sufficient for taxation. His opinion found resonance in later jurisprudence and policy rethinking, especially under modern international taxation norms.

K) REFERENCES

a. Important Cases Referred

[1] B.R. Naik v. Commissioner of Income-tax, [1946] 14 I.T.R. 324

[2] Kshetra Mohan Sannyasi Charan Sadhukhan v. Commissioner of Excess Profits Tax, West Bengal, [1953] 24 I.T.R. 488

[3] V. V. R. N. M. Subbayya Chettiar v. Commissioner of Income-tax, Madras, [1950] S.C.R. 961

[4] Appovier v. Rama Subba Aiyan, [1866] 11 M.I.A. 75

[5] Katama Natchiar v. Rajah of Shivaganga, [1864] 9 M.I.A. 539

[6] Charandas Haridas v. Commissioner of Income-tax, Bombay, [1960] 3 S.C.R. 296

[7] Murugappa Chetty & Sons v. Commissioner of Income-tax, [1952] 21 I.T.R. 311

[8] Kaniram Hazarimull v. Commissioner of Income-tax, [1955] 27 I.T.R. 294

b. Important Statutes Referred

• Indian Income-Tax Act, 1922, Sections 4(1)(b)(iii), 4A(b), and 66(1)

• Indian Partnership Act, 1932

• Hindu Law (Mitakshara Principles)