COMMISSIONER OF INCOME TAX , Appellant, and A. H. M. ALLAUDIN , Respondent

091-NLR-NLR-V-54-COMMISSIONER-OF-INCOME-TAX-Appellant-and-A.-H.-M.-ALLAUDIN-Respondent.pdf

GRATIAEN J.—Commissioner of Income Tax v. Altaudin
386
1953Present: Gratiaen J. and Gnnasekara J.COMMISSIONER OF INCOME TAX, Appellant, andA. H. M. ALLATJDIN, Respondent
8. C. 367—Case stated under the provisions of Section 74 of the IncomeTax Ordinance (Gap. 188)
Income Tax Ordinance (Cap. 188)—Excess Profits Duty Ordinance, No. 38 of 1941—Partnership with capital exceeding Rs. 1,000—No written agreement—Pre-vention of Frauds Ordinance (Cap. 57), s. 18 (c)—Scope of evidentiary prohibitioncontained therein—Executor—Transaction with himself in personal capacity—Validity.'
^ ’By section 18 (c) of the Prevention of Frauds Ordinance: “ No. . .. agree-ment, unless it be in writing … shall be of force or avail in law …
for the purpose of … establishing a partnership where the capital
exceeds one thousand rupees : provided that this shall not be construed toprevent third parties from suing partners, or persons aoting as such, and offeringin evidence circumstances to prove a partnership existing between suchpersons
Held, that, in computing under the provisions of the Excess Profits DutyOrdinance the profits of a de facto partnership the initial capital of whichexceeded Rs. 1,000, an Assessor was not precluded by the evidentiary prohibitioncontained in section 18 (c) of the Prevention of Frauds Ordinance from, proving(1) that, although there was no written agreement of partnership in operation, ade facto partnership subsisted and (2) that a particular person, who had managedthe business and who had been paid a monthly allowance as well as a shareof the profits of the business, was in truth a partner and not merely an employeein the business.
Held further, that an executor may enter into a partnership with himself inhis personal capacity if such a transaction is authorised by the will or is subse-quently adopted by the beneficiaries under the will. It is not correot to state,as an absolute proposition of law, that a transaction which a man enters intoqua executor with himself in his personal capacity is automatically void onthe ground that it gives rise to-a conflict between his interest and his duty.
C^ASE stated under the provisions of section 74 of the Income TaxOrdinance upon the application of the Commissioner of Income Tax.
T. 8. Fernando, Acting Solicitor-General, with M. Tiruchelvam andG. Sethukavaler, Crown Counsel, for the Commissioner of Income Tax,appellant.
8. Nadesan, with N. Nadarasa, for the assessee respondent.
Cur. adv. vult.
February 27, 1953. Gratiaen J.—■
This is a case stated by the Board of Review for the opinion of theSupreme Court on the application of the Commissioner of Income Tax.The dispute is as to whether, in computing the profits of the business17LTV.
%J. N. B 25806—1,592 (3/53)
386
GRAT'IAJSjST J.—Commissioner of Income (Tax v. AllaucUn
of the Colombo Cargo Boat Company for the year 1944, under theprovisions of the Excess Profits Duty Ordinance, No. 38 of 1941, certainpayments made to T. V. Edwards, who had admittedly managed thebusiness during “the relevant accounting period, were permissibledeductions.
The assessee claimed that these payments, which took the form of amonthly allowance as well as a share of the profits of the business, hadbeen made to Edwards as an employee who had no proprietary interestin the business. It is common ground that in that event the deductionclaimed would be permissible. The Assessor contended, however, andthe Commissioner decided in appeal, that Edwards was in truth apartner of the Company. The assessee concedes that if that be so,the deduction could not properly be claimed.
The Board of Review set aside the Commissioner’s decision and heldthat during the relevant accounting period “ the Company was notcarried on as a partnership business. Accordingly the appellant isentitled to have the payments of profits given to T. V. Edwards deductedfrom the assessment for Excess Profits duty ”.
The learned Solicitor-General has argued before us that the Boardmisdirected itself in law in arriving at this conclusion, and that, uponthe facts set out in the case stated, there was no evidence to supportthe decision that Edwards was not a partner of the business.
It is convenient at this stage to refer to the history of the Companysince the date of its commencement on 6th May, 1919. It had been carriedon in partnership from that date until 17th May, 1934, by Ahamadasan(to whom I shall hereafter refer as “ the deceased ’), Meera Saibo andT. V. Edwards. Meera Saibo then died, and his surviving partnerscarried on the business as de facto partners until 29th June, 1936, when aformal agreement of partnership R1 came into operation, wherebythey mutually agreed to, and did in fact continue, to carry on the businessin partnership on the terms set out in the agreement.
The assessee was “ prepared to concede ” that the deceased andEdwards were partners in the business during the period when theagreement R1 was in operation. I do not see how their relationshipcould be interpreted otherwise. The deceased had contributed theentire capital of the. business, whereas Edwards contributed his skilland experience which were regarded as invaluable to the success of theundertaking. It is correct that under the agreement the deceasedindemnified Edwards against liability for any losses which might beincurred by the Company. Nevertheless, Edwards, who alone was tomanage the affairs of the business, was in fact and in law “ a partneracting on behalf of the firm (introducing the notion of the firm as aseparate entity from the existence of its individual members) of whichhe and the deceased were members, partly for himself and partly asagent for the deceased ”—-per Jessel M.R. in Pooley v. Driverl. Thereare many clauses in the agreement which negative entirely the alter-native theory that he was merely a servant carrying on the business onbehalf of his employer. The stipulation that, upon a dissolution, the
{1877) 5 Ch. D. 458.
GRATIAEN J.—Commissioner of Income Ta >• p. Allaudin
987
deceased would receive back all the capital and goodwill of the partner-ship does not affect the true relationship of the parties during thesubsistence of the business.
Four months after the agreement R1 came into operation the deceasedexecuted a last will dated 5th November, 1936, which was admitted toprobate when he died on 2nd September, 1937. The following provisionwas made in respect of his share of the business of the Colombo CargoBoat Company :—
I devise and bequeath all my share of the business carried on
at Colombo under the name, style and form of the “ ColomboCargo Boat Company ” and all sailing vessels, boats and allother movable articles necessary for carrying on the saidbusiness unto my son Mahoodeen Alawoodeen and to anyother male child or children who may be born to mehereafter share and share alike.
Mr. Thomas Vedanayagam Edwards shall be the manager as
heretofore of the said entire business during his lifetime.
On the death of Thomas Vedanayagam Edwards the said Company
shall be conducted by my son Mahoodeen Alawoodeen andmy son-in-law Kalingu Mohideen, and my son is authorised togive £ share to my son-in-law so long as they are harmonious.
Edwards and another gentleman were appointed executors of the willuntil the deceased’s son Allaudin attained the age of twenty seven, afterwhich the executors were directed to hand over the administration ofthe estate to him.
The deceased died leaving an only son Allaudin to whom his entireinterest in the business passed under the will. The earlier partnershipwith Edwards was automatically dissolved upon the deceased’s death,but the Board of Review has held as a fact that " notwithstanding thedissolution, the business of the Company was carried on as usual ando?i the same lines as before by T. V. Edwards, the manager of the businesswho continued to draw his allowance and his share of the profits ”.Allaudin did not apparently attain the age of twenty seven until nineyears later when, on 11th December, 1946, he and Edwards entered intoa formal agreement R2 in which they recited that they had beenpreviously “ carrying on business in Colombo under the name, styleand form of the Colombo Cargo Boat Company ” and mutuallyagreed t: to continue the said partnership business ”. The terms of R2were substantially the same as those set out in the agreement R1 underwhich the deceased and Edwards had previously carried on business inpartnership.
It is necessary to determine Edwards’ precise relationship to thebusiness (which he carried on “ as usual and on the same terms asbefore ”) during the period 2nd September, 1937, to 11th December, 1946.The assesses argued that after the deceased died Edwards ceased tobe a managing partner and commenced to manage the business as anemployee of Allaudin who had become the sole proprietor of the ColomboCargo Boat Company by virtue of his father’s will; that this alleged
388
G-RATIAEN J.—Commissioner of Income Tax v. Allaudin
change of status had taken place in strict accordance with theinstructions contained in the will; and that in any event Edwards, asan executor, derived no “ power ” under the will to continue to occupyhis former role as a partner of the business. The Assessor’s contentionon the other hand was that the testator’s direction was that Edwardsshould continue to manage the business as a partner “ as heretofore ”,and that he did in fact continue to do so in that capacity.
Admittedly no written agreement was in operation during the relevantperiod from which one can ascertain whether Edwards carried on thebusiness as an employee or as a partner until 11th December, 1946, butthe facts, as set out in the case stated, may be summarised as follows :
On 9th September, 1937, Edwards, as surviving partner of the Company’sent a notification to the Registrar of Business Names declaringthat his former partner (the deceased) had died on 2nd Sep-tember, 1937. On 23rd May, 1939, the names of Edwards and hisco-executor were included in the Register as “ added partners ”who were carrying on the business in partnership with Edwardsin his personal capacity, and a contemporaneous documentwas registered stating, in conformity with the proyisions ofsection 3 of the Business Names Ordinance (Cap. 120), that“ the added partners ” were functioning in a representativecapacity for the benefit of Allaudin. In 1940 and Rom time totime thereafter both Allaudin and Edwards submitted theirrespective Income Tax returns disclosing, in the columnsspecially reserved for “ income received from a business carriedon in partnership ”, the amounts each of them had receivedout of the profits of the Colombo Cargo Boat Company. Thedistribution of profits between the partners was on eachoccasion calculated in the proportions stipulated in the earlieragreement R1 (and subsequently in R2). Eventually, as Ihave said, Allaudin entered into a formal agreement withEdwards in 1946 to continue to carry on the business on thebasis of a partnership, and their association as partners wasduly registered under the Business Names Ordinance. Thereis no evidence to indicate that Edwards was at any stageregarded by himself or' by his co-executor or by Allaudin asa mere employee who had no proprietary interest in the businesswhich he was managing. Upon these facts, I conceive that itwas not possible for any tribunal to come to any other con-clusion than that a de facto partnership was subsisting duringthe relevant accounting period between Edwards on the onehand and himself and his co-executor on the other, the executorsfunctioning in a representative capacity for the benefit ofAllaudin who was the survivor-in-interest of the deceased’s' share in the business ; and that the profits had in fact beendistributed between Edwards and Allaudin on that basis. I
I now proceed to examine the .grounds upon which the Board consideredthemselves precluded from holding that Edwards was a partner in thebusiness during the relevant accounting period. They first decided,
GRATZAEN’ J,—Commissioner oj Income Tax v. AllauAin
389
as a matter of law, that it was not open to the Assessor to prove theexistence of the partnership because the initial .capital of the businessexceeded Rs. 1,000 and there was no written agreement of partnershipin operation until 1946. In the second place they decided, also as amatter of law, that in any event “ T. V. Edwards as the executor of thewill marked A could not enter into a partnership with himself, thatbeing a breach of trust In my opinion the Board misdirected itselfon both these questions, and wrongly applied the law in pronouncingthat “ for these two reasons the assessee had established his contentionthat from the death of the deceased in 1937, until December, 1946, theCompany was not carried on as a partnership business The Boardhas not found as a fact that Edwards was Ailaudin’s employee.
Section IS (c) of the Prevention of Frauds Ordinance (Cap. 57) declaresthat “ No. … agreement, unless it be in writing ….
shall be of force or avail in law …. for the purpose of ….
establishing a partnership where the capital exceeds one thousand rupees :provided that this shall not be construed to prevent third parties fromsuing partners, or persons acting as such, and offering in evidence circum-stances to prove a partnership existing between such persons Thetrue meaning of section 18 (c) has been authoritatively explained by theJudicial Committee of the Privy Council in Pate v. Pate *. > Apart fromcases to which the proviso applies, the existence of a partnership (whosecapital exceeds Rs. 1,000) cannot, in the absence of a written agreement,be established “ as the basis of a suit ”, or, to put it in another way, asthe foundation of a claim in proceedings before the appropriate tribunalvested with jurisdiction in the matter. Can it be said that in the presentcase the Assessor, in offering circumstantial proof of the de facto, partner-ship, was seeking to “ establish the partnership ” as the basis of aclaim to recover excess profits duty from the assessee ? The answeris to be found, I think, in the provisions of the Income Tax Ordinanceand the Excess Profits Duty Ordinance. If an assessee is dissatisfiedwith an assessment of his income or of the profits of a business in whichhe has an interest, the only proceedings which can be equated to a“ suit ” would be his appeal to the Commissioner for the purpose ofhaving the assessment amended, revised, or set aside. The onus ofproof of the character of payments claimed as admissible deductionsin the computation of profits is upon him.
It was the assessee who, in a sense, “ sued ” the Assessor before theCommissioner, and later before the Board of Review, claiming a reductionof the assessment on the ground that the payments to Edwards werepermissible deductions. The basis of his claim on each occasion wasthat Edwards was a mere employee in the business, and the Assessorrelied on the evidence of a partnership for the purpose only Of rebuttingthat allegation. In Balasubramaniam v. Valiappa Chettiar2 "Poyser
J.and Keuneman J., in separate judgments, decided that, even in anaction between two de facto partners, one of them might lead evidence,“by way of defence”, to prove the existence of the partnership inorder to negative the other partner’s claim to an accounting based on the
1 (191o) 18 N. L. R. 289.2 (1938) 39 N. L. R. 553.
2*——T. X. B 25806 (8/58)
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GB.ATIAEN' J.—Commissioner of Income Tax v. Allaudin
allegation that their true relationship was only that of principal andagent. Vide Bonser G.J.’s judgment to the same effect in Silva v. Nelson1.
A. fortiori, the Assessor was not precluded from proving the partnershipfor the purpose of resisting the assessee’s claim to have the assessmentreduced upon a false hypothesis. The evidentiary prohibition containedin section 18 (c) does not apply to such a situation, and there is reallyno need to resort to the proviso in order to arrive at this conclusion. >■/
I shall now examine the second ground which forms the basis of theBoard’s decision. It is not correct to state, as an absolute propositionof law, that a transaction which a man enters into qua executor withhimself in his personal capacity is automatically void. Such a situationwithout doubt gives rise to a conflict between his interest and his duty.If, however, that conflict was “ brought about by a situation createdby the testator ”, the transaction is perfectly valid unless, of course, itcan be attacked on the ground of fraud or bad faith. Hordern v. Hordern 2.If, on the other hand, the transaction was not authorised by the will orsanctioned by the Court, the beneficiaries affected by it would be entitledto -have the transaction set aside ; equally, they would have a right, if-they so choose, to adopt the transaction. Wright v. Morgan3. Inother words, the transaction is not void at its inception but avoidable.As Lord Buckmaster pointed out in Costa v. Silva*, “ a party entitledto affirm or disaffirm it is sure to regulate his action by the considerationof which course will in the end prove to be the most profitable. It isprimarily this right which is given to a person in that position, and itis this risk that is run by any (executor) who enters into a transactionsubject to such defect ”. I do not agree that Wood Renton C.J. intendedto lay down a different rule of equity in Fernando v. Mathew5.
These general principles must now be applied to the facts of the presentcase. Even if we were to assume that the establishment of the partner-ship between Edwards and the executors (including himself) was not anauthorised transaction, the facts set out in the case stated establishbeyond doubb that it was affirmed and adopted by Allaudin for whosebenefit the executors had acted in the transaction. Allaudin cannotnow be heard to disaffirm the partnership retrospectively. Besides,I think that, upon a proper interpretation of the will Al, there is a clearindication that the testator, by directing the business to be managed byEdwards “ as heretofore ”, did intend that Edwards should continue tofunction as the managing partner of the business. Very differentlanguage would have been necessary to give expression to a testamentarydirection that Edwards’ connection with the business should be convertedinto that of a mere employee.
Eor the reasons which I have set out, 1 take the view that the decisionof the Board is insupportable. The particular questions submittedfor our opinion, as questions of law, are—
Was the business of the Colombo Cargo Boat Company carried on
as a partnership during the fourth accounting period ?
Are the profits paid to T. V. Edwards during the period to be
deducted from the assessment of Excess Profits Duty ?
(1898) 1 Brouxne 75.3 (1926) A.C. 789.
(1910) A.C. 465.4 (1917) 19 N. L. It. 481.
3 (1917) 4 C. TP. It. 22.
GRATLAEN" J.—Gunaratne Thero v. Nayake TJiero
391
Upon the facts set out in the case stated and summarised in my judgmentI would answer the first of these questions in the affirmative. In thatview of the matter, the second question must admittedly be answeredin the negative. In accordance with this decision, I would restore theorder of the Commissioner of Income Tax confirming the Assessor’sbasis of assessment and fixing the duty payable for the fourth accountingperiod at Rs. 235,814. The assessee must pay the Commissioner’scosts of this appeal, and also a sum of Rs. 50 representing the fee deliveredto the Clerk to the Board of Review under section 74 (1) of the Ordinance.
Gtjnasekara J.—I agree.
Appeal allowed.