TMI Blog1991 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ith effect from November 1, 1959, the business had been converted into partnership between Chandrakant Manilal Shah as karta of the Hindu undivided family and Naresh Chandrakant. The deed of partnership executed in this behalf on November 12, 1959, indicated that Naresh Chandrakant had been admitted as a working partner with effect from November 1, 1959, having 35 per cent. share in the profits and losses of the firm and the remaining 65 per cent. share was held by Chandrakant Manilal as the karta of the Hindu undivided family. An application was made for registration of the firm which was dismissed by the Income-tax Officer on the ground that there was no valid partnership. The view taken by the Income-tax Officer was upheld in appeal by the Appellate Assistant Commissioner. On further appeal, the Income-tax Appellate Tribunal also came to the same conclusion that there was no valid partnership and the business consequently must be taken to continue in the hands of the joint family. However, at the instance of the assessee, the following question was referred by the Tribunal to the High Court for its opinion : "Whether, on the facts and in the circumstances of the case, there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stranger as held by the Privy Council in P. K. P. S. Pichappa Chettiar v. Chockalingam Pillai, AIR 1934 PC 192, there was no reason why a coparcener also could not enter into such a partnership by making contributions in his individual capacity from his separate funds. This plea was repelled by the High Court on the ground that a coparcener could not be regarded as a stranger so long as he continued his connection with his undivided family in his capacity as a coparcener. While reversing the judgment of the High Court, it was held by the Privy Council (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 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been no partition of the family properties, could become partners of a firm of which the joint Hindu family represented by its karta is itself a partner. If a partner by putting into the partnership by way of his capital his separate property or the property which he obtained at a partition on division and thus can become a partner with the family represented by its karta, it is difficult to understand how such a partnership cannot come into being and why a coparcener who continues to remain a member of the coparcenary cannot become a working partner of a firm of which he and the family represented by its karta are the partners. In Lachhman Das case [1948] 16 ITR 35 (PC), the coparcener placed at the disposal of the firm as his capital his separate property, and in the case of a working partner he contributes his skill or labour or both as the case may be. If the partnership is permissible in one case, it would be difficult to assign any reason for reaching the conclusion that it is not permissible in the other." In Ramchand Nawalrai v. CIT [1981] 130 ITR 826, it was held by the Madhya Pradesh High Court as hereunder (pp. 832, 833, 834) : "It will be clear from the facts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artnership, cannot be accepted. The conclusion reached by us is fully supported by the decision of the Mysore High Court in I. P. Munavalli v. CIT [1969] 74 ITR 529, with which we respectfully agree. The Bombay High Court in Shah Prabhudas Gulabchand v. CIT [1970] 77 ITR 870 took a contrary view. With great respect and for the reasons given above, we are unable to agree with it." In CIT v. Gupta Brothers [1981] 131 ITR 492, the Allahabad High Court took the same view when it said (p. 496) : "The observations of the Privy Council that a partnership can be formed with a junior member by the karta qua his separate property is by way of illustration of a particular eventuality when the separate property constitutes consideration for the induction of a junior member into the partnership. It cannot be read as being exhaustive of cases where consideration may take other forms. Now, as labour and skill would also be consideration as contemplated by the Contract Act, a valid partnership had come into existence, which ought to have been registered." Learned counsel for the respondent has laid considerable emphasis on two points. Firstly, it was urged that Hindu law does not recognise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into the partnership on behalf of the Hindu undivided family, the consequence was that not only he but his two undivided brothers B and C also became partners in the firm in their individual capacity ; and (b) It was suggested that when M entered into the partnership agreement in 1940, all the three coparceners M, C and B, could be regarded as having entered into the contract as kartas of (i.e., representing) the Hindu undivided family. Both these contentions were negatived. So far as the first contention was concerned, the court observed that it could be disposed of as being an afterthought opposed to the factual findings in the case. However, the court proceeded to observe that it was difficult to visualise a Situation which the appellants contended for, of a Hindu undivided family entering into a partnership with strangers through its karta and the junior members of the family also becoming its partners in their personal capacity. After referring to Lachhman Das case [1948] 16 ITR 35 (PC) and Sunder Singh Majithia v. CIT [1942] 10 ITR 457 (PC) where divided members of a family were held competent to carry on the erstwhile joint family business in Partnership, the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR, 238 (SC). Again, on the second contention which was left open, subsequent decisions of this court have held that it is open to more than one member of a Hindu undivided family to represent the family in partnership with strangers. In CIT v. Sir Hukumchand Mannalal and Co.[1970] 78 ITR 18, it was held by this court (p. 21) : "The Indian Contract Act imposes no disability upon members of Hindu undivided family in the matter of entering into a contract inter se or with a stranger. A member of a Hindu undivided family has the same liberty of contract as any other individual : it is restricted only in the manner and to the extent provided by the Indian Contract Act. Partnership is under section 4 of the Partnership Act the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all : if such a relation exists, it will not be invalid merely because two or more of the persons who have so agreed are members of a Hindu undivided family. " This position has also been recognised in Ratanchand Darbarilal v. CIT [1985] 155 ITR 720 (SC). In that case, there were two firms, one at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... significance cannot be read into these observations for, if construed too strictly and in the manner suggested, they will militate against the possibility of valid partnership being formed in two classes of cases about which there can be no doubt. The first is where an undivided member seeks to become a partner by furnishing capital which has been held permissible in Lachhman Das [1948] 16 ITR 35 (PC), and approved in Firm Bhagat Ram Mohanlal [1956] 29 ITR 521 (SC), itself. The other is the case of a partnership firm in which more than one partner represents a Hindu undivided family the validity of which has been upheld in the cases referred to earlier. The observations cannot, therefore, be read as precluding altogether a claim by an undivided member of a Hindu undivided family that he has in fact agreed to become a partner along with the karta for genuine and valid reasons. In our view, the Allahabad, Madhya Pradesh and Mysore decisions rightly held that the observations in Firm Bhagat Ram Mohanlal [1956] 29 ITR 521 (SC), do not militate against the formation of a valid partnership in such cases. This takes us on to the second point made by Sri Manchanda that, though an undivid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or avocation in life. 3. Notwithstanding any custom, rule or interpretation of the Hindu law, no gains of learning shall be held not to be the exclusive and separate property of the acquirer merely by reason of (a) his learning having been, in whole or in part imparted to him by any member living or deceased, of his family, or with the aid of the joint funds of his family or with the aid of the funds of any member thereof, or (b) himself or his family having, while he was acquiring his learning, been maintained or supported, wholly or in part, by the joint funds of his family, or by the funds of any member thereof." As seen above, the definition of the term "learning" is very wide and almost encompasses within its sweep every acquired capacity which enables the acquirer of the capacity "to pursue any trade, industry, profession or avocation in life." The dictionary meaning of "skill", inter alia, is : "the familiar knowledge of any science, art, or handicraft, as shown by dexterity in execution or performance ; technical ability" and the meaning of "labour", inter alia, is : "physical or mental exertion, particularly for some useful or desired end." Whether or not skill and l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber of a Hindu undivided family considered it his duty to place his personal skill and labour at the services of the family with no quid pro quo except the right to share ultimately, on a partition, in its general prosperity. Today, where an undivided member of a family is qualified in technical fields may be at the expense of the family-he is free to employ his technical expertise elsewhere and the earnings will be his absolute property ; he will, therefore, not agree to utilise them in the family business, unless the latter is agreeable to remunerate him therefor immediately in the form of a salary or share of profits. Suppose a family is running a business in the manufacture of cloth and one of its members becomes a textile expert, there is nothing wrong in the family remunerating him by a share of profits for his expert services over and above his general share in the family properties. Likewise, a Hindu undivided family may start running a diagnostic laboratory or a nursing home banking on the services of its undivided members who may have qualified as nurses or doctors and promising them a share of profits of the "business" by way of remuneration. This will, of course, have t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
