1980 (10) TMI 31 - HC - Income Tax

Summary

Issues Involved:

1. Validity of a partnership between a karta and his undivided son without separate capital contribution.
2. Entitlement to registration under section 185(1)(a) of the Income-tax Act, 1961, for the assessment year 1970-71.

Detailed Analysis:

1. Validity of Partnership:

The primary issue was whether a valid partnership could be constituted between Ramchand Nawalrai (karta) and his undivided son, Jaikumar, evidenced by a deed of partnership dated 5th September 1969, despite Jaikumar not contributing any capital from his separate and individual property.

The court noted that a HUF acting through its karta can enter into a valid partnership with a stranger, and it is not necessary for a partner to contribute capital; the contribution of skill and labour is sufficient. The court referenced Lindley on Partnership and the case of Dale v. Hamilton to support the principle that any contribution, whether capital or labour, is sufficient consideration for a partnership agreement.

The court also discussed the definition of partnership under section 4 of the Indian Partnership Act, 1932, which does not necessitate combining property for sharing profits. The court referred to the Privy Council's decision in Lachhman Das v. CIT, which held that a karta can enter into a partnership with a family member contributing his separate property. The court extended this principle to include contributions of skill and labour, concluding that a coparcener can enter into a partnership with the karta by contributing skill and labour.

The court distinguished the present case from the Supreme Court's decision in Firm Bhagat Ram Mohanlal v. CEPT, which did not address the specific issue of a coparcener contributing only skill and labour. The court emphasized that the observations in Firm Bhagat Ram Mohanlal should be limited to its facts and did not disapprove the principle in Lachhman Das.

The court addressed concerns about the profits earned by the partnership, stating that if a coparcener's share in profits is directly related to his skill and labour, it would be his separate property. The court concluded that there can be a valid partnership between a karta and a coparcener contributing only skill and labour.

2. Entitlement to Registration:

The second issue was whether the assessee is entitled to registration for the assessment year 1970-71 under section 185(1)(a) of the Income-tax Act, 1961.

The court held that if the partnership is found to be genuine, the assessee would be entitled to registration. The court noted that the Tribunal did not decide on the genuineness of the firm, as it had concluded that there could be no valid partnership. Therefore, the question of genuineness must be examined by the Tribunal.

Conclusion:

The court answered the questions as follows:
1. There can be a valid partnership between Ramchand and his undivided son, Jaikumar, as evidenced by the deed of partnership dated 5th September 1969, even though Jaikumar did not contribute any capital from his separate and individual property. The Tribunal must examine the genuineness of the partnership.
2. The assessee would be entitled to registration for the assessment year 1970-71 if the Tribunal concludes that the partnership was genuine.

There was no order as to costs of this reference.