RAMCHAND NAWALRAI Vs. COMMISSIONER OF INCOME TAX
LAWS(MPH)-1980-10-26
HIGH COURT OF MADHYA PRADESH
Decided on October 13,1980

RAMCHAND NAWALRAI Appellant
VERSUS
COMMISSIONER OF INCOME-TAX Respondents





Cited Judgements :-

TULSIDAS KUNDANMAL VS. COMMISSIONER OF INCOME TAX [LAWS(MPH)-1985-7-29] [REFERRED TO]
BHAGWAN CLOTH STORES VS. COMMISSIONER OF INCOME TAX [LAWS(MPH)-1988-1-32] [REFERRED TO]
CHANDRAKANT MANILAL SHAH VS. COMMISSIONER OF INCOME TAX BOMBAY 11 [LAWS(SC)-1991-10-69] [APPROVED]
GULRAJ POONAMCHAND VS. COMMISSIONER OF INCOME TAX [LAWS(RAJ)-1984-2-9] [REFERRED TO]
ADDITIONAL COMMISSIONER OF INCOME TAX VS. CURIOUS HOUSE [LAWS(RAJ)-1985-11-42] [REFERRED TO]
ISHWAR BHUVAN HINDU HOTEL VS. COMMISSIONER OF INCOME TAX [LAWS(BOM)-2005-6-190] [REFERRED TO]


JUDGEMENT

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 in favour of the assessee, whether the assessee is entitled to registration for the 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.

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.

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 Hare 369, 393 :

"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).

(3.)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, AIR 1940 Nag 211, 212). 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 (PC)]. 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.
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. "



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