1984 (2) TMI 78 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the gift made by Poonam Chand to Paras Mal.
2. Eligibility of Paras Mal to become a partner in the HUF business without separate property and investment.
3. Granting of registration to the firm under the Income-tax Act, 1961.

Detailed Analysis:

1. Validity of the Gift:
The primary issue was whether 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 constitute a valid gift. The Tribunal held that the gift was invalid due to insufficient cash balance. However, the court referenced the Delhi High Court's decision in Indian Class Agency v. CIT [1982] 137 ITR 245, which allows for the possibility of effectuating a gift through book entries. The court concluded that the gift of Rs. 11,001 in favor of Paras Mal on December 8, 1964, was valid. The necessary elements of parting by Poonam Chand and acceptance by Paras Mal were established, and the entries in the account books supported the transaction of the gift.

2. Eligibility of Paras Mal to Become a Partner:
The second issue was whether Paras Mal could become a partner in the HUF business without separate property and investment. The Tribunal found that since Paras Mal had no separate property on December 9, 1964, he could not enter into a partnership. However, the court held that it is permissible for a karta of a HUF to enter into a partnership with any other member of the HUF or any stranger, even as a working partner, without contributing separate or individual property. The court cited multiple cases, including CIT v. Gaekwade Vasappa and Sons [1983] 143 ITR 1 (AP), which supported this view. The court found that Paras Mal had some funds of his own, including a sum of Rs. 7,000 received from his father-in-law, which was credited in the firm's books. The partnership was thus deemed genuine, and Paras Mal's admission as a partner was valid.

3. Granting of Registration to the Firm:
The third issue concerned the Tribunal's decision not to grant registration to the firm under the Income-tax Act, 1961. The Tribunal had relied on the decisions of the Gujarat High Court in Pitamberdas Bhikhabhai & Co. v. CIT [1964] 53 ITR 341 and the Bombay High Court in Shah Prabhudas Gulabchand v. CIT [1970] 77 ITR 870. However, the court distinguished these cases and followed the precedent set by the Privy Council in Lachhman Das v. CIT [1948] 16 ITR 35 (PC), which allows for a valid partnership between a karta of a HUF representing the family and a member of that family in his individual capacity. The court concluded that the partnership deed's clause 7, which allowed Poonam Chand to retain control over the business, did not make the partnership fictitious. Therefore, the firm should have been granted registration under Section 185 of the I.T. Act, 1961.

Conclusion:
In conclusion, the court answered the first and third questions in the negative, indicating that the gift made by Poonam Chand to Paras Mal was valid, and Paras Mal could become a partner in the HUF business. Consequently, the firm should have been granted registration under Section 185 of the I.T. Act, 1961. The second question did not arise due to the resolution of the first issue.