Bhargava, J. -
(1.)THIS is a reference under Section 256(1) of the I.T. Act, 1961, (hereinafter referred to as "the Act"), whereby the following questions of law have been referred by the Income-tax Appellate Tribunal, Jaipur, for the opinion of this court:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the gift made by Poonam Chand to Paras Mal merely by making entries in his own books, without there being sufficient cash balance at that time, could not constitute a valid gift?
2. In case it is held that there was no valid gift, whether Paras Mal could become a partner in the HUF business without separate property and investment ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in not granting registration to the firm under the Income-tax Act, 1961 ?"
(2.)IN fact, there should have been two separate references for two different assessment years 1966-67 and 1967-68 ; but since common questions arose in two different assessment years in respect of two reference applications, the INcome-tax Appellate Tribunal sent only one statement of case and, therefore, it was registered as only one reference.
Poonam Chand who with his brother, Kalu Ram, constituted a HUF separated from him some time in the year 1936-37 and, thereafter, he started his own business at Kishangarh and was assessed as an individual till 1963-64. On January 27, 1963, Poonam Chand adopted one Paras Mal as his son and, therefore, returns for the assessment years 1964-65 and 1965-66 were filed in the status of HUF. On December 8, 1964, Poonam Chand made a gift of Rs. 11,001 to his son Paras Mal in the capacity as karta of HUF and an entry to this effect has been made in the books of account of the HUF. On December 9, 1964, a partnership deed was executed between Poonam Chand and Paras Mal whereunder the business of the HUF known as M/s. Gulraj Poonam Chand was to be treated as a partnership concern and the shares of the partners were as under :
In the preamble of the said partnership deed it was mentioned that since Poonam Chand had felt and realised that due to his old age it will not be possible for him to continue to control and manage the business with due promptness and efficiency, it was decided to take Paras Mal as a partner in the aforesaid business who had agreed to lend his support and co-operation. It was also provided in Clause 7 of the partnership deed that Poonam Chand will be responsible for the management of the partnership business and have authority to do all things and acts that may be deemed proper, expedient, beneficial and in the interest of the firm and shall have authority to make appointments, engage labour, enter into agreements and to execute special or general power-of-attorney on behalf of and in the name of the firm in favour of any person or persons severally or jointly and also to have authority to borrow money for business purposes and to execute pronotes for the same and to execute other documents in the name and on behalf of the firm. It was also provided that the accounts of the partnership will commence from December 9, 1964. Both the parties are equally responsible for maintenance of regular accounts and such accounts will be open to inspection by both the parties. There is no specific mention about the investment made by the partners, though it was incorporated that the capital investment would carry interest at the rate of 1% per annum. Paras Mal also received a gift of Rs. 7,000 from his father-in-law, Subhkaran of Sardarnagar, by a bank draft which has been credited in favour of Paras Mal on May 11, 1965, in the books of account of the firm. The said firm was also registered with the Registrar of Companies. The assessee, partnership firm, applied for registration under Section 185 of the Act, but the ITO declined to accord the same by his order dated February 16, 1967, as he found that there had been no partition in the family of the assessee and in respect of the business belonging to the HUF the karta of the family cannot enter into partnership with the coparceners of the family in their individual capacity and reliance had been placed on a decision of the Gujarat High Court in Pitamberdas Bhikhabhai & Co. v. CIT  53 ITR 341. The assessee being aggrieved of the said order of the ITO preferred an appeal before the AAC who also confirmed the order of the ITO by his order dated September 3, 1968, and did not agree with the contention of the assessee that the judgment of the Gujarat High Court was distinguishable and that in view of the Privy Council's decision in Lachhman Das v. CIT  16 ITR 35 (PC), registration should have been granted to the assessee-firm and this judgment of the Privy Council was not considered by the Gujarat High Court. He further found that in view of the latter decision of the Supreme Court in Firm Bhagat Ram Mohanlal v. CEPT  29 ITR 521, the decision in Lachhman Das v. CIT does not hold water.
The assessee then preferred a second appeal before the Income-tax Appellate Tribunal, which was also dismissed by order dated August 25, 1971, and the Tribunal also found that since Paras Mal had no separate property on December 9, 1964, he could not enter into a partnership and the book entry gifting Rs. 11,001 was of no avail as the cash balance on December 8, 1964, available with the firm was only Rs. 3,356. Therefore, relying on the decisions of the Gujarat High Court in Pitamberdas Bhikhabhai & Co. v. CIT  53 ITR 341, and of the Bombay High Court in Shah Prabhudas Gulabchand v. CIT  77 ITR 870, it came to the conclusion that no partnership came into existence on December 9, 1964, and further found that making of the gift of Rs. 11,001 was not a bona fide act and was primarily meant to avoid payment of property tax by the HUF. The assessee, therefore, moved an application under Section 256(1) of the Act and the Income-tax Appellate Tribunal found that the questions of law do arise and, therefore, it made this reference to this court for decision, on the point mentioned above.
We have heard Shri S. K. Jain, the learned counsel for the assessee, and Shri R. N. Surolia, the learned counsel for the Department.
(3.)THE learned counsel for the assessee has submitted that by now the law is well settled that gift even by book entry is permissible and, in this connection, has " relied on a decision of the Delhi High Court in Indian Glass Agency v. CIT  137 ITR 245, wherein, after considering a number of authorities, the High Court has come to the conclusion that it is possible to effectuate a gift by instructing the firm, family or company to give effect to the gift by debiting his account and crediting an account in the name of the donee, and has, therefore, submitted that the gift of Rs. 11,001 in favour of Paras Mal on December 8, 1964, should beheld to be valid and, as such, Paras Mal was in a position to enter into a contract of partnership with Poonam Chand and, therefore, the partnership should not be held to be ineffective. THE ingredients of a partnership are sharing of profit, or even an agreement to share the profit, as will be obvious from a reference to Sections 184 and 185 of the I.T. Act and, since in the partnership deed dated December 9, 1964, there was an agreement to share the profit, the ITO should not have refused registration to the firm. He also referred to Section 4 of the Partnership Act, according to which, to constitute a partnership in law there must be an agreement to share the profit or loss of the business and, secondly, the business must be carried on by all the partners, or any of them acting for all. Control of business of a firm can be left by agreement between the parties on one partner to be exercised on behalf of other partners and, therefore, he has argued that even Clause 7 of the partnership deed dated December 9, 1964, will not entitle refusal of registration and, in this connection, placed reliance on K. D. Kamath and Co. v. CIT  82 ITR 680 (SC). He further submitted that a karta of a HUF can enter into a partnership with another member of a HUF and a coparcener has freedom of contract like a stranger in respect of his individual property and can enter into a partnership with the karta by contributing his separate property. He can enter into a contract in respect of skill and labour as well and since in the partnership deed it has been mentioned that Poonam Chand cannot continue to control and manage the business due to age with due promptness and efficiency it was necessary to induct Paras Mal as a partner into the business. THE partnership is perfectly valid and is entitled to registration and, in this connection, he has placed reliance on a decision of the M.P. High Court in Ramchand Nawalrai v. CIT  130 ITR 826, which has followed the decision of the Mysore High Court in J. P. Munavalli v. CIT  74 ITR 529 and has distinguished the case of Shah Prabhudas Gulabchand v. CIT  77 ITR 870 (Bom). He has also placed reliance on CIT v. Gaekwade Vasappa and Sons  143 ITR 1, a decision of the Andhra Pradesh High Court. Munavalli's case  74 ITR 529 (Mys), was also applied in Ramchand Nawalrai v. CIT  130 ITR 826 (MP) and CIT v. Gupta Brothers  131 ITR 492 (All), and they also distinguished Pitamberdas Bhikhabhai & Co. v. CIT  53 ITR 341 (Guj) and Shah Prabhudas Gulabchand v. CIT  77 ITR 870 (Bom).
The learned counsel for the assessee has also relied on CIT v. Raghavji Anandji and Co.  100 ITR 246 (Bom), wherein the Bombay High Court has held that a karta of a HUF can sign and enter into partnership as karta of a HUF and also in his individual capacity.
On the other hand, the learned counsel for the Department has submitted that since there was no cash available in the account books of the firm on December 8, 1964, the gift of a sum of Rs. 11,001 in favour of Paras Mal was not valid and cannot be taken into account entitling Paras Mal to enter into a partnership agreement. Since there was no money available in hand, Paras Mal could not enter into partnership with Poonam Chand. Moreover, the partnership was only a device to save tax as there was no change in the business of the authority and powers were still with Poonam Chand who was also karta of HUF, and, as karta of HUF, Poonam Chand could not have entered into partnership with his son, a member of the family, and, therefore, the ITO as well as the AAC as also the Tribunal were justified in refusing to grant registration to the firm.