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Ramchand Nawalrai Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case No. 389 of 1975
Judge
Reported in(1981)20CTR(MP)50; [1981]130ITR826(MP)
ActsIncome Tax Act, 1961 - Sections 185; Indian Partnership Act, 1932 - Sections 4
AppellantRamchand Nawalrai
RespondentCommissioner of Income-tax
Appellant AdvocateG.N. Purohit and ;Deepak Verma, Advs.
Respondent AdvocateP.S. Khirwadkar, Adv.
Cases ReferredNarayandppa v. Bhaskara Krishnappa
Excerpt:
.....and it is impossible for the court to measure the quantum of value. whatever the view of a hindu joint family and its property might have been at the early stages of its development, their lordships think that it is now firmly established that an individual coparcener, while remaining joint, can possess, enjoy and utilise, in any way he likes, property which was his individual property not acquired with the aid of or with any detriment to the joint family property. it follows from this that to be able to utilise this property at his will, he must be accorded the freedom to enter into contractual relations with others, including his family, so long as it is represented in such transactions by a definite personality like its manager. '7. a reading of the passage quoted above goes to show..........was no division in the huf and as all the funds invested in the so-called firm had flowed from the joint family funds, there was no genuine and valid partnership. the application for registration was, therefore, rejected. in appeal, the aac set aside the order of the ito and held that the partnership was valid and genuine and that it was not necessary to effect a partition when the coparcener entering into a partnership with the karta is only a working partner. the aac was of the view that there was a valid partnership between the karta, representing the huf, and jaikumar, in his individual capacity, as a working partner. in appeal, the tribunal set aside the order of the aac. in the opinion of the tribunal as jaikumar did not bring in anything for getting his share in the firm out of.....
Judgment:

G.P. Singh, C.J.

1. This is a reference made by the Income-tax Appellate Tribunal referring for our answer the following questions of law :

'1. Whether, on the facts and in the circumstances of the case, a legal and valid partnership could be constituted between Ramchand Nawalrai and his undivided son, Jai Kumar, as evidenced by the deed of partnership dated 5-9-1969, in spite of the fact that Jaikumar had not contributed any capital out of his separate and individual property ?

2. If the answer to the first question is in the affirmative and infavour of the assessee, whether the assessee is entitled to registration forthe assessment year 1970-71 under Section 185(1)(a) of the Income-tax Act,1961?'

2. The facts briefly stated are that a HUF consisting of Ramchand, the karta, and his four sons, namely, Jaikumar, Kailashkumar, Anilkumar and Sunilkumar, carried on business in commission agency and purchase and sale of confectionary at Satna up to and inclusive of the assessment year 1969-70. The income from business was assessed in the status of a HUF. For the assessment year 1970-71, it was claimed that a partnership was constituted between Ramchand, acting as karta, and his adult son, Jaikumar, with effect from 1st April, 1969. The partnership is evidenced by a deed of partnership dated 5th September 1969. According to the terms contained in the partnership deed, Ramchand and Jaikumar were ,to share the profits and losses of the business in the ratio of 70 and 30 percent., respectively. It was claimed that the business of the HUF was carried on in the relevant previous year by the partnership. An application for registration of the partnership was filed under Section 185 of the Act. The ITO held that there was no division in the HUF and as all the funds invested in the so-called firm had flowed from the joint family funds, there was no genuine and valid partnership. The application for registration was, therefore, rejected. In appeal, the AAC set aside the order of the ITO and held that the partnership was valid and genuine and that it was not necessary to effect a partition when the coparcener entering into a partnership with the karta is only a working partner. The AAC was of the view that there was a valid partnership between the karta, representing the HUF, and Jaikumar, in his individual capacity, as a working partner. In appeal, the Tribunal set aside the order of the AAC. In the opinion of the Tribunal as Jaikumar did not bring in anything for getting his share in the firm out of his separate and individual property and was described merely as a working partner, there could be no valid partnership in law between him and the karta.

3. A reading of the order of the Tribunal goes to show that the Tribunal assumed the alleged partnership to be genuine, but came to the conclusion that there could be no valid partnership between a karta of a HUF and one of its members when the member is merely a working partner and does not bring in for obtaining a share in the business, his individual property. The memorandum of appeal filed by the department before the Tribunal against the order of the AAC goes to show that the finding that the firm was genuine was also challenged. The Tribunal gave no finding on the genuineness of the firm presumably because it held that even on the assumption that the firm was genuine, there could be no valid partnership in law. We will, therefore, proceed upon the assumption that the firm was genuine and that Jaikumar who was inducted as a partner in the business was a real working partner in the sense that he contributed his skill and labour for the business to be carried on by the partnership.

4. It is no longer in dispute that a HUF acting through its karta can enter into a valid partnership with a stranger. In such a case the karta alone becomes the partner and not the individual members of the family. It cannot also be in dispute that contribution of capital by a person is not necessary to make him a partner. What is necessary is that there should be consideration for the contract of partnership. This consideration may come in the shape of capital or labour or any act which may result in liability to third parties. In the case of a partnership where one of the partners is a working partner, the contribution of capital is made by the other partners and the working partner merely contributes his skill and labour as a consideration for getting a share in the business. As stated by Lindley, 'any contribution in the shape of capital or labour, or any act which may result in liability to third parties, is a sufficient consideration to support a partnership agreement'. (Lindley on Partnership, 14th Edn., p. 119). The legal position that contribution of labour and skill by a partner are sufficient to support an agreement of partnership is fully brought out from the following observations of Vice-Chancellor Wigram in Dale v. Hamilton [1846] 5 Har 369:

'If one man has skill and wants capital to make that skill available, and another has capital and wants skill, and the two agree that the one shall provide capital and the other skill, it is perfectly clear that there is a good consideration for the agreement on both sides, and it is impossible for the court to measure the quantum of value. The parties must decide that for themselves'. (See Lindley, 14th Edn., p. 119).

5. The definition of partnership as contained in Section 4 of the Indian Partnership Act, 1932, does not make it obligatory that the partners must combine their property for sharing profits by constituting a partnership. The definition contained in Section 4 is in line with the English law that any consideration such, as contribution of skill and labour by a person would be sufficient to support the agreement of partnership. Indeed, it has been stated that Section 4 if at all has extended the scope of the definition as compared to the earlier definition contained in Section 239 of the Contract Act. (See : Birdichand v. Harakchand, ). It cannot, therefore, be disputed that the karta of a joint Hindu family can enter into a partnership with a stranger when the consideration flowing from the stranger is either his property or his skill and labour. It has also been settled by the Privy Council that the karta of HUF can enter into a partnership with a member of the family who contributes his individual property [Lachhman Das v. CIT [1948] 16 ITR 35]. The question before us is, however, whether the karta can enter into a partnership with a member of the family when the member does not bring in any separate property of his own but the consideration flowing from him is skill and labour in carrying on the business.

6. In Lachhman. Das case [1948] 16 ITR 35, the Privy Council in holding that there can be a valid partnership between a karta and a coparcener when the coparcener puts into the partnership his separate property, made the following observations (p. 40):

'After careful consideration, their Lordships cannot accept this view and on general principles they cannot find any sound reason to distinguish the case of a stranger from that of a coparcener who puts into the partnership what is admittedly his separate property held in his individual capacity and unconnected with the family funds. Whatever the view of a Hindu joint family and its property might have been at the early stages of its development, their Lordships think that it is now firmly established that an individual coparcener, while remaining joint, can possess, enjoy and utilise, in any way he likes, property which was his individual property not acquired with the aid of or with any detriment to the joint family property. It follows from this that to be able to utilise this property at his will, he must be accorded the freedom to enter into contractual relations with others, including his family, so long as it is represented in such transactions by a definite personality like its manager. In such a case he retains his share and interest in the property of the family, while he simultaneously enjoys the benefit of his separate property and the fruits of its investment. To be able to do this, it is not necessary for him to separate himself from his family. '

7. A reading of the passage quoted above goes to show that a coparcener has freedom of contract like a stranger in respect of his individual property not acquired with the aid of or by any detriment to the joint family property and, therefore, like a stranger, he can enter into a partnership with the karta by contributing his separate property. Now, just as a coparcener is free to use his individual property, he is free to use his skill and labour. He can enter into a contract in respect of his skill and labour with a third person. He may even enter into a partnership with a third person by only contributing his skill and labour. In our opinion, therefore, it would be logical to hold that in the same manner a coparcener can enter into a partnership with the karta of his family by contributing his skill and labour instead of his separate property. Such a conclusion is a necessary corollary of the principle enunciated by the Privy Council in Lachhman Das' case [1948] 16 ITR 35.

8. Learned standing counsel for the department, however, submitted that a partnership with the karta in which a coparcener does not contribute any separate property is negatived by the decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. CEPT : [1956]29ITR521(SC) . In that case a partnership consisted of Mohanlal, the karta of a HUF, and two other persons. The HUF, of which Mohanlal was the karta, later on disrupted and a new partnership deed was executed. In the new partnership, Chhotelal and Bansilal who were earlier members of the undivided family and who separated when the family disrupted also became members of the partnership. The question in the case was whether there could be a set-off of the profits of the firm for the years when there was no division in the undivided family against the deficiency of the profits in the later years when the firm was reconstituted after disruption of the HUF. The argument on behalf of the assessee was that there was no change in the partners as the individual members of the HUF must be taken to be the partners of the original partnership which was entered into through the karta. In negativing this contention and in holding that the individual members did not become partners in the original partnership when there was no division in the HUF, the Supreme Court observed as follows (p. 526):

'But even apart from this, it is difficult to visualise the situation, which the appellant contends for, of a Hindu joint family entering into a partnership with strangers through its karta and the junior members of the family also becoming at the same time its partners in their personal capacity. In Lachhtnan Das v. Commissioner of Income-tax [1948] 16 ITR 35, it was held by the Judicial Committee that the karta of a joint Hindu family could enter into a partnership with an individual member of the coparcenary quoad his separate property. It was also held by the Privy Council in Sundar Singh Majithia v. Commissioner of Income-tax [1942] 10 ITR 457 that there was nothing in the Income-tax Act to prohibit the members of a joint Hindu family from dividing some properties, while electing to retain their joint status, and carrying on business as partners in respect of those properties treating them as its capital. But in the present case, the basis of the partnership agreement of 1940 is that the family was joint and that Mohanlal was its karta and that he entered into the partnership as karta on behalf of the joint family. It is difficult to reconcile this position with that of Chhotelal and Bansilal being also partners in the firm in their individual capacity, which can only be in respect of their separate or divided property. If members of a coparcenary are to be regarded as having become partners in a firm with strangers, they would also become under the partnership law partners inter se, and it would cut at the very root of the notion of a joint undivided family to hold that with reference to coparcenary properties the members can at the same time be both coparceners and partners.'

9. It will be clear from the facts of the case of Finn Bhagat Ram Mohanlal : [1956]29ITR521(SC) that the question whether a coparcener can enter into a valid partnership with the karta of his family by contributing merely skill and labour did not arise for decision. The only question in the case was whether the individual members of a HUF can, without contributing anything, become members of a partnership constituted between the karta and strangers. This question had necessarily to be answered in the negative on the settled view that when a karta enters into a partnership with strangers it is the karta alone who becomes the partner. The observations of the Supreme Court that (p. 526): 'If members of a coparcenary are to be regarded as having become partners in a firm with strangers, they would also become under the partnership law partners inter se, and it would cut at the very root of the notion of a joint undivided family to hold that with reference to coparcenary properties the members can at the same time be both coparceners and partners', as contained in the passage quoted above, must be limited to the facts on which Firm Bhagat Ram Mohanlal's case : [1956]29ITR521(SC) was decided. The Supreme Court in the same passage referred to the decision of the Privy Council in Lachhmandas' case [1948] 16 ITR 35 and did not disapprove of it. If a coparcener by contributing his separate property can enter into a valid partnership with the karta of his family, as held by the Privy Council in Lachhmandas' case [1948] 16 ITR 35 there seems no valid reason why a coparcener cannot, by contributing merely his skill and labour, enter into a partnership with the karta. If the former does not cut at the root of the notion of the joint Hindu family, the latter also does not. Even in the case of the former, the partnership property will consist of the contribution made by the karta from the coparcenary property and the contribution made by the coparcener of his individual property. Both taken together would become partnership property in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership [Narayandppa v. Bhaskara Krishnappa, : [1966]3SCR400 ]. If in such a situation the coparcener entering into the partnership can be a partner in relation to coparcenary property contributed for the partnership business, there can be no difficulty in holding that the same result would follow when the coparcener entering into a partnership only contributes his skill and labour. In the former case, as stated by the Privy Council in Lachhman Das' case [1948] 16 ITR 35, the coparcener entering into the partnership, retains his share and interest in the family property while simultaneously enjoying the benefit of his separate property and the fruits of its investment. In the same way, it can be said that in the latter case the coparcener retains his share and interest in the property of the family while simultaneously enjoying the benefits of his skill and labour which he contributes as consideration for formation of the partnership and for sharing profits.

10. Learned standing counsel for the department further submitted that as the profits earned by a partnership in which the contribution of capital is only of joint family funds from the side of the karta would enure to the benefit of the entire joint family being earned with the help of the joint family funds, a coparcener who only contributes his skill and labour for becoming a partner cannot claim any share in the profits as his separate property and, therefore, there cannot be any valid partnership. Learned counsel in this connection relied upon the case of V. D. Dhanwatey v. CIT : [1968]68ITR365(SC) . Dhanwatey's case has to be read along with the case of CIT v. D. C. Shah : [1969]73ITR692(SC) , In Dhanwatey's case : [1968]68ITR365(SC) a karta of a HUF who entered into a partnership was paid a salary from the partnership and it was held that the salary income was the income of the HUF. The basis of the decision was that the salary was paid because of the investments of the assets of the family in the partnership business and there was a real and sufficient connection between the investments from the joint family funds and the remuneration paid to the karta. In Shah's case : [1969]73ITR692(SC) also the karta entered into a partnership and was paid remuneration. But as the remuneration was paid for the specific acts of management done by the karta resting on his personal qualification and not because he represented the HUF, it was held that the remuneration was his individual income. Applying the same principle, if a coparcener becomes a working partner in a partnership with the karta and gets a share in profits in consideration of the skill and labour contributed by him, his share in the profits would be his separate property for the profits coming to his share would be directly related to his skill and labour and not to the investments of the joint family funds in the business. The question, however, whether a coparcener entering into a partnership with the karta does really contribute any labour or skill for the management of the partnership business in which he is given a share in profits is a question of fact which will have to be determined in the light of the circumstances of each case. In case, it is found that there is no real contribution of skill or labour by the coparcener for sharing the profits, the partnership will be held to be unreal and fictitious but that is an entirely different thing from saying that there cannot at all be a valid partnership between the karta and a coparcener when the latter only contributes his skill and labour and is merely a working partner. In our opinion, the argument that as the capital investment in the partnership is only of the funds of the undivided family, there cannot be any partnership, cannot be accepted.

11. The conclusion reached by us is fully supported by a decision of the Mysore High Court in I. P. Munavalli v. CIT : [1969]74ITR529(KAR) , with which we respectfully agree. The Bombay High Court in Shah Prabhudas Gulabchand v. CIT : [1970]77ITR870(Bom) took a contrary view. With great respect and for the reasons given above, we are unable to agree with it. We may also point out that the question arising before us was left open by a Division Bench of this court in Ude Singh & Sons v. CIT : [1981]128ITR437(MP) , as also by the Gujarat High Court in Shah Purshottamdas Ghelabhai v. CIT [1974] 96 ITR 442.

12. The learned standing counsel in the end submitted that as the Tribunal did not decide the question of genuineness of the firm that question will have to be decided by it in case we hold that there can be a valid partnership between the karta and a coparcencer even though the coparcener does not contribute any separate property and only contributes his skill and labour. In our opinion, this argument has to be accepted. As earlier pointed out by us, the question of genuineness was not gone into by the Tribunal presumably because the Tribunal held that there could be no valid partnership.

13. Our answer to the questions are as follows:

1. There can be a valid partnership between Ramchand and his undivided son, Jaikumar, as evidenced by the deed of partnership dated 5th September, 1969, in spite of the fact that Jaikumar had not contributed any capital out of his separate and individual property. The question of genuineness of the partnership, however, will have to be examined by the Tribunal.

2. The assessee would be entitled to the registration for the assessment year 1970-71 in case the Tribunal comes to the conclusion that the partnership was genuine.

14. There will be no order as to costs of this reference.


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