1983 (12) TMI 28 - HC - Income Tax

Issues Involved:
1. Validity of the partnership under Hindu law.
2. Contribution of capital by individual members.
3. Registration of the partnership firm under the Income Tax Act, 1961.
4. Interpretation of Section 5 of the Partnership Act, 1932.
5. Precedent cases on similar issues.

Detailed Analysis:

1. Validity of the partnership under Hindu law:
The primary issue was whether a partnership consisting of the karta (manager) of a Hindu Undivided Family (HUF) and his two undivided sons could be validly constituted under Hindu law. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) initially refused registration, arguing that the partnership was invalid under Hindu law. They contended that the formation of the partnership was detrimental to the interests of the joint family and against the principles of Hindu law. However, the Tribunal found that the partnership was valid, as the junior members contributed their separate earnings or gifts received from relatives, which were their individual properties.

2. Contribution of capital by individual members:
The Tribunal established that one son, Natarajan, contributed Rs. 5,000, comprising Rs. 2,500 from his salary and Rs. 2,500 gifted by his father-in-law. The other son, Kandaswami, contributed Rs. 5,000 received as a gift from his maternal grandfather. The father, Mariappa Muthiriyar, contributed Rs. 37,000 from the HUF funds. The Tribunal concluded that the contributions from the sons were from their separate and individual funds, thus not detrimental to the joint family.

3. Registration of the partnership firm under the Income Tax Act, 1961:
The ITO refused registration under Section 185(1)(b) of the Income Tax Act, 1961, citing the lack of partition in the family and the negligible capital contribution by the sons compared to the HUF. The Tribunal, however, directed the ITO to grant registration for the assessment year 1974-75, as the partnership was validly constituted with contributions from individual funds.

4. Interpretation of Section 5 of the Partnership Act, 1932:
Section 5 of the Partnership Act, 1932, states that a partnership is the result of a contract and not status. It also mentions that members of a HUF carrying on a family business are not partners in such business. The Tribunal and the court interpreted this to mean that there is no legal impediment preventing HUF members from constituting a partnership with the karta using their separate resources while maintaining the family's joint status.

5. Precedent cases on similar issues:
The court referred to several precedent cases to support its judgment:
- Sir Sunder Singh Majithia v. CIT [1942] 10 ITR 457: Established that members of a HUF can divide some properties and carry on business as partners without disrupting the joint family status.
- Lachhman Das v. CIT [1948] 16 ITR 35: Highlighted that an individual coparcener can possess and utilize his separate property without separating from the family and can enter into contractual relations with the karta.
- Firm Bhagat Ram Mohanlal v. CEPT [1956] 29 ITR 521: Approved the principle that a karta can enter into a partnership with an individual member of the coparcenary in respect of his separate property.
- Shah Purshottamdas Ghelabhai v. CIT [1974] 96 ITR 442: Held that a valid partnership can be formed between the karta of a HUF and its coparceners in their individual capacity if the coparceners contribute their separate property.

Conclusion:
The court concluded that the partnership was valid as the contributions by the sons were from their separate and individual funds. The Tribunal's decision to grant registration to the partnership firm was upheld. The question referred to the court was answered in the affirmative and against the Revenue, confirming the validity of the partnership and its registration.

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