TMI Blog2005 (6) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... section 256(1) of the Income-tax Act for consideration of this court by the Tribunal at the instance of the assessee are as follows: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the assessment year 1980-81 no valid partnership could have been formed between I.P. Barot, representing his Hindu undivided family as karta and Shri Rajnikant I. Barot, and his son who was a member of the said Hindu undivided family? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the assessment year 1980-81 no valid partnership could have been formed between I.P. Barot, representing his Hindu undivided family as karta and his son, Shri Kamlesh J. Barot, who was a member of the said Hindu undivided family? 3. Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to renewal of registration for the assessment year 1979-80 and grant of registration for the assessment year 1980-81 on the basis of the decision that may be given by the High Court in R.A. No. 1440/Bom/83, pending before the said court?" The aforesaid questions of law ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax (Appeals) in appeal from the said order of the Income-tax Officer, held that merely because Mahesh I. Barot did not attend to the business of the assessee-firm for the whole day, the Income-tax Officer was not justified in coming to the conclusion that he was not a genuine partner. The Commissioner however, upheld the Income-tax Officer's order of refusal of registration on the ground that Mahesh I. Barot, a coparcener of the Hindu undivided family has brought no capital of his own and therefore there can be no partnership between him and his undivided Hindu family represented by his father I.P. Barot. In appeal before the Tribunal reliance was placed on the decision of the Allahabad High Court in CIT v. Gupta Brothers [1981] 131 ITR 492 and the decision of the Madhya Pradesh High Court in Ramchand Nawalrai v. CIT [1981] 130 ITR 826. Alternatively it was urged that the Income-tax Officer having exercised the option of assessing Shri I.P. Barot Hindu undivided family on January 20, 1979 in respect of his share of profit from the asses-see-firm for the assessment year 1978-79, was precluded from treating the assessee-firm as an unregistered firm on March ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets to the partnership firm and therefore could not be said to be a valid partner of the said firm. The points in controversy in the aforesaid case has been set at rest by the decision of the Supreme Court in the case of Chandrakant Manilal Shah v. CIT [1992] 193 ITR 1, the brief facts of which are as follows: "C was the karta of a Hindu undivided family which carried on business in cloth. N, one of the sons of C, joined the business on a monthly salary in April, 1959. With effect from November 1, 1959, the business was converted into a partnership between C, the karta of the undivided family, and N. The deed of partnership dated November 12, 1959, indicated that N was a working partner having a 35 per cent. share in the profits and losses of the firm and the remaining 65 per cent. share was held by C as karta of the family. N did not contribute any cash assets towards the capital of the firm but was contributing only his skill and labour. The Income-tax Officer rejected the firm's application for registration under section 26A of the Indian Income-tax Act, 1922, on the ground that there was no valid partnership, and the Appellate Assistant Commissioner and the Appellate Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interests 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. This must be dependent on other considerations, and the result of a separate act evincing a clear intention to break away from the family. The error of the Income-tax Officer lay in his view that, before such a contractual relationship can validly come into existence, the 'natural family relationship must be brought to an end.' This erroneous view appears to have coloured his and the subsequent decisions of the income-tax authorities. In this view of the Hindu law, it is clear that if a stranger can enter into partnership with reference to his own property, with a joint Hindu family through its karta, there is no sound reason in their Lordships' view to withhold such opportun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stration 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." The Supreme Court in the case of Chandrakant Manilal Shah v. CIT [1992] 193 ITR 1 overruled the decision of the Bombay High Court in Shah Prabhudas Gulabchand [1970] 77 ITR 870 and of the Gujarat High Court in the case of Pitamberdas Bhikhabhai and Co. v. CIT [1964] 53 ITR 341, observing as follows: "The two decisions relied on by learned counsel for the respondent in the cases of Pitamberdas Bhikhabhai and Co. v. CIT [1964] 53 ITR 341 (Guj), and Shah Prabhudas Gulabchand [1970] 77 ITR 870 (Bom), of the Gujarat and Bombay High Courts, respectively, turned on their particular facts and, if read as laying down a contrary rule, do not lay down good law. In this view of the matter, it cannot be said that, when a coparcener enters into a partnership with the karta of a Hindu undi ..... 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