FIRM OF BHAGAT RAM MOHANLAL vs. THE COMMISSIONER OF EXCESS PROFITS TAX, MADHYA PRADESH, NAGPUR AND ANOTHER.

Case Analysis

FIRM OF BHAGAT RAM MOHANLAL vs. THE COMMISSIONER OF EXCESS PROFITS TAX, MADHYA PRADESH, NAGPUR AND ANOTHER.

April 23, 2025

A) ABSTRACT / HEADNOTE

This case scrutinizes whether the reconstitution of a partnership firm, due to a partition in a Hindu Undivided Family (HUF), constitutes a “change in persons carrying on business” under Section 8(1) of the Excess Profits Tax Act, 1940. The judgment examines the legal character of a joint Hindu family’s participation in a firm through its karta and the extent of implications that arise upon the disruption of such a family structure.

The core legal issue centers on whether a firm, earlier registered under Section 26-A of the Indian Income-Tax Act, 1922, which underwent a personnel change following a partition, could lawfully receive the tax relief under Section 7 of the Excess Profits Tax Act. The Supreme Court ultimately held that the reconstitution of the firm, through the partition and entry of individual members as new partners, resulted in a legal discontinuity of the business, thereby disqualifying the firm from availing relief under Section 7. The Court further upheld the jurisdiction of the Commissioner under Section 20 of the Excess Profits Tax Act to rectify a mistake apparent from the record.

Keywords: Hindu Undivided Family (HUF), Excess Profits Tax, Reconstitution of Firm, Section 8(1) Excess Profits Tax Act, Karta Partnership, Tax Refund Jurisdiction.

B) CASE DETAILS

i) Judgement Cause Title:
Firm of Bhagat Ram Mohanlal v. The Commissioner of Excess Profits Tax, Madhya Pradesh, Nagpur and Another

ii) Case Number:
Civil Appeal No. 139 of 1953

iii) Judgement Date:
15 February 1956

iv) Court:
Supreme Court of India

v) Quorum:
S.R. Das (Acting C.J.), N.H. Bhagwati, Venkatarama Ayyar JJ.

vi) Author:
Justice Venkatarama Ayyar

vii) Citation:
[1956] SCR 143

viii) Legal Provisions Involved:

Section 26-A of the Indian Income-Tax Act, 1922
Sections 7, 8(1), and 20 of the Excess Profits Tax Act, 1940
Article 226 of the Constitution of India

ix) Judgments overruled by the Case:
None explicitly mentioned

x) Case is Related to which Law Subjects:

Taxation Law
Hindu Law (Coparcenary & Partition)
Administrative Law (Jurisdictional Review under Article 226)Partnership Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The appellant firm, Bhagat Ram Mohanlal, was constituted as a partnership and registered under Section 26-A of the Indian Income-Tax Act, 1922 on 23 August 1940. The firm was initially composed of three partners: the Hindu Undivided Family (represented by Mohanlal as karta), Richpal, and Gajadhar. The issue before the Court arose due to a refund order granted under Section 7 of the Excess Profits Tax Act, 1940, which was later rescinded by the Commissioner under Section 20, citing a change in the firm’s constitution due to the partition of the joint family. The dispute escalated when the appellant approached the Nagpur High Court under Article 226, which dismissed their plea, resulting in the present appeal before the Supreme Court.

D) FACTS OF THE CASE

The firm made taxable profits during the accounting years ending in 1943 and 1944. It paid excess profits tax accordingly. However, during the subsequent year, 1944-45, the firm incurred losses. Pursuant to Section 7 of the Excess Profits Tax Act, the firm received a refund of Rs. 23,028 after setting off its previous profits against the current losses. During this period, a partition took place in the HUF represented by Mohanlal, transforming the family’s joint status into separate individual identities. Consequently, the firm was reconstituted with the same members, now individually represented, along with the two original partners, forming a five-partner firm.

On discovering this reconstitution, the Commissioner exercised his powers under Section 20 of the Excess Profits Tax Act to revise the refund order, holding that the relief under Section 7 was wrongly granted because the firm’s reconstitution amounted to a “change in persons carrying on business” as envisaged under Section 8(1). The matter led to a legal tussle over whether such reconstitution terminated the old business for tax purposes.

E) LEGAL ISSUES RAISED

i) Whether the reconstitution of the firm on 17-10-1944 following the partition of the joint Hindu family amounted to a “change in persons carrying on business” under Section 8(1) of the Excess Profits Tax Act.

ii) Whether the Commissioner’s invocation of Section 20 of the Excess Profits Tax Act, for revising the earlier refund order, was justified as a “mistake apparent from the record.”

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that the reconstitution of the firm was only nominal since the original joint family, through its karta Mohanlal, had always represented all three brothers. The substitution of individual names post-partition did not materially alter the composition of the firm. It was contended that all five individuals, under the 1944 agreement, were in substance parties to the 1940 firm. Thus, the change was not one falling within Section 8(1).

Further, the appellant argued that the refund granted under Section 7 was lawfully passed as no new business had commenced, and no genuine discontinuation occurred. They also questioned the jurisdictional basis of invoking Section 20, arguing that the facts regarding partition were not part of the tax record and hence could not constitute an “apparent” mistake.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that the reconstitution introduced three new individuals—Mohanlal, Chhotelal, and Bansilal—as individual partners post-partition, which represented a fundamental alteration in the firm’s composition. As per Section 8(1), this was tantamount to a discontinuance of the old firm and a commencement of a new business.

It was further asserted that under Hindu Law, junior members of a joint family do not become partners by mere virtue of the karta’s participation. Consequently, the inclusion of Chhotelal and Bansilal post-partition indicated a clear legal shift in the firm’s structure.

They argued that records from income-tax proceedings could be relied upon due to the integrated nature of income and excess profits tax assessments under Section 22 of the Excess Profits Tax Act.

H) RELATED LEGAL PROVISIONS

i) Section 26-A, Indian Income-Tax Act, 1922

ii) Section 7, Excess Profits Tax Act, 1940

iii) Section 8(1), Excess Profits Tax Act, 1940

iv) Section 20, Excess Profits Tax Act, 1940

v) Article 226, Constitution of India

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Court held that a partition within a joint Hindu family, followed by reconstitution of a partnership firm, constitutes a change in the persons carrying on the business as per Section 8(1) of the Excess Profits Tax Act. Since Chhotelal and Bansilal were not individual partners in the original firm, their inclusion after partition resulted in a fresh business setup, thereby disqualifying the appellant from relief under Section 7.

b. OBITER DICTA

i) The Court observed that members of a joint family, other than the karta, do not automatically acquire partnership status in a firm simply due to their coparcenary status. Only express contractual engagement confers such a status.

c. GUIDELINES

A reconstitution of a firm after partition of HUF is considered a change in business if new partners are inducted individually.
In partnership law, legal status and contractual entry as partners determine business continuity, not internal familial relationships.

J) CONCLUSION & COMMENTS

This judgment clarifies the interplay between Hindu family law and partnership taxation under the Excess Profits Tax Act. It underscores that tax relief mechanisms are rigidly tied to statutory interpretations, especially regarding business continuity. The verdict reinforces the principle that partnership identity is a function of explicit contractual relations rather than inferred familial connections. This case is significant for its articulation of the doctrine that a HUF’s status does not obfuscate individual identities in tax law post-partition.

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