1968 (12) TMI 20 - HC - Income Tax

M and K who were members of HUF entered into a partnership after partition of family - Whether finding of genuineness of partnership involves that partnership is valid in law - Held no

Summary

Issues Involved:
1. Validity of the purported partnership firm constituted by the deed dated November 12, 1953.
2. Entitlement of the assessee-firm to registration under section 26A for the assessment year 1955-56.
3. Whether the firm was a genuine partnership.

Detailed Analysis:

1. Validity of the purported partnership firm constituted by the deed dated November 12, 1953:
The primary issue was whether the partnership formed by the deed dated November 12, 1953, was legally valid and could be registered under section 26A of the Indian Income-tax Act, 1922. The partnership deed included Manilal Dharamchand and Keshavlal Dharamchand representing their respective Hindu Undivided Families (HUFs) and their sons Rasiklal Manilal and Champalal Keshavlal in their individual capacities. The entire capital for the partnership came from the HUF of Manilal Dharamchand. The Tribunal found that the partnership was not valid because it included both kartas (Manilal and Keshavlal) representing their HUFs and individual coparceners (Rasiklal and Champalal) without any separate property being brought into the firm by the latter. This was in line with the Supreme Court's decision in Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax, which held that a joint Hindu family could not enter into a partnership with strangers through its karta while junior members of the family also became partners in their individual capacities.

2. Entitlement of the assessee-firm to registration under section 26A for the assessment year 1955-56:
The Income-tax Officer initially rejected the application for registration under section 26A, considering the firm not a genuine partnership. The Appellate Assistant Commissioner disagreed, concluding that the partnership was genuine and allowed the registration. However, the Tribunal reversed this decision, holding that the firm could not be registered because the partnership was not valid in law. The Tribunal's decision was based on the fact that there could not be a valid partnership between the two kartas and the undivided members of their family when the individual members had not brought in any separate property into the firm and were partners only in their individual capacity.

3. Whether the firm was a genuine partnership:
The Tribunal, in its supplementary statement, found that Champalal and Rasiklal were genuinely partners in the assessee-firm, making the firm a genuine one. However, this finding did not affect the legal question of whether the partnership was valid. The court emphasized that a genuine partnership does not necessarily equate to a valid or legal partnership. The Supreme Court's decision in Commissioner of Income-tax v. A. Abdul Rahim and Co. was cited to clarify that while a genuine and valid partnership cannot be refused registration, the partnership in question was not valid due to the inclusion of coparceners in their individual capacity alongside kartas representing their HUFs.

Conclusion:
The court concluded that the purported partnership was not legally valid, as it included both kartas representing their HUFs and individual coparceners without any separate property being brought into the firm by the latter. This arrangement was inconsistent with the principles laid down by the Supreme Court in Bhagat Ram Mohanlal's case. Consequently, the firm was not entitled to registration under section 26A for the assessment year 1955-56. The court answered both the referred questions in the negative and ordered the assessee to pay the costs of the Commissioner.