1991 (10) TMI 1 - SC - Income Tax

Claim for registration as firm - Whether there was a valid partnership under annexure A between Shri Chandrakant as the karta of the Hindu undivided family and Shri Naresh a member of the family - firm consisting of Hindu undivided family and a member can claim for registration even if member has not contributed any capital as a partner

Summary

Issues Involved
1. Validity of a partnership between the karta of a Hindu undivided family (HUF) and a member of the family.
2. Contribution of skill and labor as valid consideration for partnership.
3. Interpretation of relevant precedents and legal principles.

Detailed Analysis

1. Validity of a partnership between the karta of a Hindu undivided family (HUF) and a member of the family
The core issue was whether a valid partnership could exist between Chandrakant Manilal Shah, as the karta of the HUF, and Naresh Chandrakant, a member of the family. The High Court had previously ruled against the validity of such a partnership, relying on the decision in Shah Prabhudas Gulabchand v. CIT [1970] 77 ITR 870 (Bom). However, the Supreme Court disagreed, referencing the Judicial Committee of the Privy Council in Lachhman Das v. CIT [1948] 16 ITR 35, which held that a coparcener could enter into a partnership with the karta of a HUF by contributing his separate property. The Supreme Court extended this principle to include contributions of skill and labor.

2. Contribution of skill and labor as valid consideration for partnership
The Supreme Court examined whether the contribution of skill and labor by Naresh Chandrakant could be considered valid consideration for forming a partnership. The Court noted that skill and labor are individual achievements and could be considered separate property under the Hindu Gains of Learning Act, 1930. The Court stated, "Skill and labor involve as well as generate mental and physical capacity" and are "possessions" of the individual. Thus, they can be valid contributions to a partnership, similar to cash assets.

3. Interpretation of relevant precedents and legal principles
The Supreme Court reviewed several precedents, including:
- Lachhman Das v. CIT [1948] 16 ITR 35 (PC): Established that a coparcener could enter into a partnership with the karta by contributing separate property.
- Firm Bhagat Ram Mohanlal v. CEPT [1956] 29 ITR 521: Although it did not directly address the issue of skill and labor, it did not disapprove of the principles laid out in Lachhman Das.
- I. P. Munavalli v. CIT [1969] 74 ITR 529: Supported the view that a coparcener could become a working partner by contributing skill and labor.
- Ramchand Nawalrai v. CIT [1981] 130 ITR 826: Held that a coparcener could enter into a valid partnership with the karta by contributing skill and labor.
- CIT v. Gupta Brothers [1981] 131 ITR 492: Affirmed that skill and labor could be valid contributions to a partnership.

The Supreme Court concluded that these precedents supported the validity of a partnership where a coparcener contributes skill and labor. The Court rejected the contrary views expressed in Pitamberdas Bhikhabhai and Co. [1964] 53 ITR 341 (Guj) and Shah Prabhudas Gulabchand [1970] 77 ITR 870 (Bom), stating they did not lay down good law if read as opposing this principle.

Conclusion
The Supreme Court allowed the appeal, setting aside the judgment of the High Court. The Court answered the referred question in the affirmative, ruling in favor of the assessee and against the Revenue. The Court held that a valid partnership could exist between the karta of a HUF and a coparcener contributing only skill and labor. The appeal was allowed with no order as to costs.