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TMI Blog1983 (12) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... uted as capital a sum of Rs. 37,000 from out of the funds of the HUF. Considering the application of the assessee for registration of the firm, the ITO passed an order under s. 185(1)(b) of the I.T. Act, 1961 (hereinafter referred to as " the Act "), refusing registration on the ground that no partition had taken place in the family, that the action of the two adult members in becoming partners was detrimental to the interest of the joint family, that the family contribution towards capital was Rs. 37,000, while the capital brought in by the adult sons was negligible and further that the formation of the partnership was against the principles of Hindu law. On appeal, the AAC agreed with the ITO and held that the partnership was invalid according to Hindu law and dismissed the appeal. On further appeal by the assessee to the Tribunal, the Tribunal found that one of the sons, M. Natarajan, contributed a sum of Rs. 5,000 towards capital for the business, which was made up of a sum of Rs. 2,500 earned by him and a gift of Rs. 2,500 received from his father-in-law. The other son, M. Kandaswami, was found to have contributed to the partnership a sum of Rs. 5,000 received by him by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds of the HUF. The capital contribution to the partnership by the junior coparceners had thus been found by the Tribunal to have been made out of their own earnings or with the amounts received by them by way of a gift. In either event, such amounts would partake the character of the separate and individual earnings or funds of the members and, therefore, the question that has to be considered is whether a valid partnership can be constituted among the members of the undivided Hindu family with the capital contribution out of the separate earnings of two adult members and also with the contribution by the karta from out of the funds of the HUF. Section 5 of the Partnership Act, I 932, states that partnership is the result of a contract and not status and that members of a HUF carrying on a family business as such are not partners in such a business. Though the business of a HUF is the property of the family and a divisible asset as well and the rights and obligations of a member therein are those of coparcener, yet there is no legal bar on, or impediment to, the members of, the HUF constituting a partnership, even with the karta, by an agreement amongst themselves, without detri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enjoys the benefit of his separate property and the fruits of its investment, for which purpose it is not necessary that the individual coparcener should separate himself from the family. It was also further pointed out that if a stranger can enter into a partnership with reference to his own property with a HUF through its karta, there is no sound reasoning to withhold from a coparcener that benefit in respect of his separate and individual property. The following observations of the Privy Council in Lachhman Das v. CIT [1948] 16 ITR 35 at page 40, are instructive in this connection : "After careful consideration, their Lordships cannot accept this view and on general principles they cannot find any sound reason to distinguish the case of a stranger from that of a coparcener who puts into the partnership, what is admittedly his separate property, held in his individual capacity and unconnected with the family funds. Whatever the view of a Hindu joint family and its property might have been at the early stages of its development, their Lordships think that it is now firmly established that an individual coparcener, while remaining joint, can possess, enjoy and utilise, in any wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits Tax Act, proceeded to set off the profits of the firm for the years 1943 and 1944, against the loss during the year ending 1945. According to s. 8 of the Act, such relief could not be granted, if there was a change in the persons carrying on the business and in fact, there was such a change, as there was a reconstitution under the agreement dated December 17, 1944, consequent upon the disruption of the joint family consisting of Mohanlal and his brothers. Under that agreement, Mohanlal and his two brothers were introduced as partners of the firm along with two other original partners and there was also a change in the shares of the partners. Purporting to exercise the powers of rectification, the Commissioner of Excess Profits Tax set aside the order granting relief under s. 7 of the Excess Profits Tax Act and the matter was carried in appeal to the Supreme Court. Before the Supreme Court, it was argued that persons who entered into the contract of partnership were not only Mohanlal as the karta of the joint family and two strangers, but also his brothers, Chhotelal and Bansilal, in their individual capacity and, therefore, they were partners under the ordinary law of partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HUF and a coparcener falling within the principle laid down by the judicial Committee in Lachhman Das v. CIT [1948] 16 ITR 35. Again while approving the ratio in Lachhman Das v. CIT [1948] 16 ITR 35 and Sir Sunder Singh Majithia v. CIT [1942] 10 ITR 457, the Supreme Court has also pointed out that by reason of the fact that the karta of a family has entered into a partnership on behalf of the HUF, the individual members thereof cannot be considered as partners in the firm in their individual capacity but that can be so only in respect of a partnership entered into with the karta with their separate or divided property. The Supreme Court has also cautioned that if the individual members of a family, who had entered into a partnership through its karta, are also to be regarded as having become partners in a firm with stranger, that would strike at the very notion of a joint undivided family, as with reference to the interest of the HUF in the firm, they would at the same time occupy the position of partners as well as coparceners. The observations of the Supreme Court thus made in the aforesaid context cannot be pressed into service by the Revenue in this case, where, on the facts, t ..... 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