High Court Of Bombay
Ishwar Bhuvan Hindu Hotel vs. CIT
Sections 2(31), 184, 185
Asst. Years 1979-80, 1980-81
V.C. Daga & A.S. Aguiar, JJ.
IT Ref. No. 73 of 1988
27th June, 2005
Counsel Appeared
P.J. Pardiwala, for the Assessee : Ashok Kotangale, for the Revenue
JUDGMENT
A.S. Aguiar, J. :
The substantial questions of law referred to under s. 256(1) of the IT Act for consideration of this Court by the Tribunal at the instance of the assessee are as follows :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the asst. yr. 1980-81, no valid partnership could have been formed between I.P. Barot, representing his HUF as Karta and Shri Rajnikant I. Barot, and his son who was member of the said HUF ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the asst. yr. 1980-81 no valid partnership could have been formed between I.P. Barot, representing his HUF as Karta and his son Shri Kamlesh J. Barot, who was member of the said HUF ?
Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to renewal of registration for the asst. yr. 1979-80 and grant of registration for asst. yr. 1980-81 on the basis of decision that may be given by the High Court in RA No. 1440/Bom/83, pending before the said Court ?”
2. The aforesaid questions of law arise out of the order of the Tribunal dt. 21st Jan., 1986, in ITA Nos. 2612 and 6213/Bom/81. The assessee which is a partnership firm filed an application for continuation of registration for the asst. yr. 1979-80 and for obtaining registration for the asst. yr. 1980-81. The said two applications were dismissed by the ITO. The first application was dismissed on the ground that no registration had been granted for the asst. yr. 1978-79. The second application was rejected on the ground that the partnership was not valid. The appeals filed by the assessee before the CIT(A) against the said orders were dismissed on the basis of the order of the Tribunal in the appeal for the asst. yr. 1978-79. The further appeal to the Tribunal was also dismissed by the Tribunal relying on its order for the asst. yr. 1978-79. The facts relevant for the asst. yr. 1978-79, which are also relevant for the asst. yrs. 1979-80 and 1980-81, are as follows : The assessee-partnership firm came into existence by partnership deed dt. 30th Aug., 1968 between one I.P. Barot and J.P. Barot, in their capacity as Kartas of their respective HUFs. The assessee-firm was granted registration, which was renewed from year-to-year upto asst. yr. 1977-78. During the asst. yr. 1978-79 there was a change in the constitution of the said partnership and one Shri Mahesh, S/o Shri I.P. Barot, also a member of the HUF of Shri I.P. Barot, was admitted as a working partner, without capital investment by him w.e.f. 21st Feb., 1978 under a fresh deed of partnership dt. 23rd May, 1977 and the shares in profits and losses of the partners in the assessee-firm were fixed as follows :
The ITO came to the conclusion that there was diversion of income by the continuing partner I.P. Barot in favour of Shri Mahesh I. Barot who was merely a name-lender. It was further found that the said Mahesh I. Barot was found to be studying in college and not attending the business of the firm and hence the application for registration of the firm was rejected. The CIT(A) in appeal from the said order of the ITO, held that merely because Mahesh I. Barot did not attend to the business of the assessee-firm for the whole day, the ITO was not justified in coming to the conclusion that he was not a genuine partner. The CIT however, upheld the ITO’s order of refusal of registration on the ground that Mahesh I. Barot, a coparcener to the HUF has brought no capital of his own and therefore, there can be no partnership between him and his HUF represented by his father, I.P. Barot.
3. In appeal before the Tribunal, reliance was placed on the decision of the Allahabad High Court in CIT vs. Gupta Brothers (1980) 19 CTR (All) 342 : (1981) 131 ITR 492 (All) and the decision of the Madhya Pradesh High Court in Ramchand Nawalrai vs. CIT (1981) 20 CTR (MP) 50 : (1981) 130 ITR 826 (MP). Alternatively it was urged that the ITO having exercised the option of assessing Shri I.P. Barot, HUF on 20th Jan., 1979 in respect of his share of profit from the assessee-firm for the asst. yr. 1978-79, was precluded from treating the assessee- firm as an unregistered firm on 20th March, 1981. The Tribunal following the decision of the Bombay High Court in Shah Prabhudas Gulabchand vs. CIT (1970) 77 ITR 870 (Bom), confirmed the decision of the ITO. No finding was given on the original contention of the assessee-firm.
4. For the asst. yr. 1979-80, the assessee-firm filed Form No. 12 for renewal of registration as there was no change in the constitution of the firm for the asst. yr. 1979-80. The renewal was not granted because the registration had not been granted for the asst. yr. 1978-79. For the asst. yr. 1980-81 there was a change in the constitution of the partnership during the previous year relevant to the asst. yr. 1980-81. Two more partners viz., Shri Rajnikant I. Barot and Shri Kamlesh J. Barot were admitted as working partners. These two partners had also not contributed any capital of their own and were members of the respective HUFs which were partners of the said assessee-firm. The application for registration was refused by the ITO relying on the decision in the case of Shah Prabhudas Gulabchand (supra) and the firm was treated as an unregistered firm. The order of the ITO was confirmed by the CIT(A) relying on the Tribunals’ order in the assessees’ own case for the asst. yr. 1978-79 in ITA No. 455/Bom, dt. 2nd Aug., 1983. The Tribunal by its order dt. 2nd Aug, 1983 upheld the order of the CIT(A) and that of the ITO who had based his decision on the judgment of the Bombay High Court in the case of Shah Prabhudas Gulabchand (supra). In the said decision this Court noted the legal position as follows : “The ratio of the decisions of the Judicial Committee and the Supreme Court is that a coparcener can never become a partner in the business carried on by a Karta of a undivided family, unless he is separate and is owner of separate property and makes contribution thereof.”
5. The material point for consideration is whether the ITO was justified in refusing registration of the assessee firm on the ground that there was no valid partnership firm, since (a) the newly added partner, Mahesh I. Barot, was a member of the HUF of Shri I.P. Barot, (b) Mr. Mahesh I. Barot contributed no capital or assets to the partnership firm and therefore, could not be said to be a valid partner of the said firm.
6. The points in controversy in the aforesaid case have been set at rest by the decision of the Supreme Court in the case of Chandrakant Manilal Shah vs. CIT (1991) 100 CTR (SC) 91 : (1992) 193 ITR 1 (SC), the brief facts of which are as follows : “C was the Karta of an HUF which carried on business in cloth. N, one of the sons of C, joined the business on a monthly salary in April, 1959. With effect from 1st Nov., 1959, the business was converted into a partnership between C, the Karta of the undivided family, and N. The deed of partnership dt. 12th Nov., 1959, indicated that N was a working partner having a 35 per cent share in the profits and losses of the firm and the remaining 65 per cent share was held by C as Karta of the family. N did not contribute any cash assets towards the capital of the firm but was contributing only his skill and labour. The ITO rejected the firm’s application for registration under s. 26A of the Indian IT Act, 1922, on the ground that there was no valid partnership, and the AAC and the Tribunal, on appeal, upheld the decision of the ITO. The High Court, on a reference, affirmed the decision of the Tribunal, holding that there was no valid partnership…”. The Supreme Court in the said case reversed the decision of the High Court and observed that the mere fact N had neither separated from the family nor brought in any cash asset as his capital contribution to the partnership but was contributing only his skill and labour, could not in law detract from a valid partnership being created. The partnership between C, as the Karta and N was valid and the firm was entitled for registration. The apex Court further observed that it is not correct to say that, under Hindu law, there can be no contract inter se between the undivided members of an HUF. The Supreme Court in the said case approved the judgments of the Mysore High Court in the case of I.P. Munavalli vs. CIT (1969) 74 ITR 529 (Mys), of the Madhya Pradesh High Court in the case of Ramchand Nawalrai (supra) and of the Allahabad High Court in the case of Gupta Brothers (supra) to which reference was made in the order of the Tribunal. However the Tribunal, finding itself bound by the decision of the Bombay High Court in Shah Prabhudas Gulabchand (supra) rightly did not follow the judgments in the aforesaid cases. The Supreme Court in the case of Chandrakant Manilal Shah (supra), referred to the decision of the Privy Council in Lachhman Das vs. CIT (1948) 16 ITR 35 (PC), wherein while reversing the judgment of the High Court, it was held by the Privy Council, thus :
“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 way he likes, property which was his individual property, not acquired with the aid of or with any detriment to the joint family property. It follows from this that to be able to utilise this property at his will, he must be accorded the freedom to enter into contractual relations with others, including his family, so long as it is represented in such transactions by a definite personality like its manager. In such a case he retains his share and interests in the property of the family, while he simultaneously enjoys the benefit of his separate property and the fruits of its investment. To be able to do this, it is not necessary for him to separate himself from his family. This must be dependent on other considerations, and the result of a separate act evincing a clear intention to break away from the family. The error of the ITO lay in his view that, before such a contractual relationship can validly come into existence, the ‘natural family relationship must be brought to an end.’ This erroneous view appears to have coloured his and the subsequent decisions of the IT authorities.
In this view of the Hindu law, it is clear that if a stranger can enter into partnership, with reference to his own property, with a joint Hindu family through its Karta, there is no sound reason in their Lordships’ view to withhold such opportunity from a coparcener in respect of his separate and individual property.” The apex Court in Chandrakant Manilal Shah (supra), noted that the above principle has been applied by several other High Courts to uphold the validity of a partnership between the Karta of an HUF and an individual member of the family where the latter is taken in as a working partner. Specific reference is made by the apex Court to the decision of the Mysore High Court in the case of I.P. Munavalli (supra), wherein it was held by the Mysore High Court, after referring to the decision of the Privy Council in the case of Lachhman Das (supra) and the Supreme Court in the case of Firm Bhagat Ram Mohanlal vs. CEPT (1956) 29 ITR 521 (SC) as follows : “So, it is clear that the Supreme Court did not dissent from the opinion expressed by the Privy Council that ‘in respect of their separate or divided property’ the coparceners of a Hindu joint family, even though they had not become divided from one another and there had been no partition of the family properties, could become partners of a firm of which the joint Hindu family represented by its Karta is itself a partner. If a partner by putting into the partnership by way of his capital his separate property or the property which he obtained at a partition on division and thus can become a partner with the family represented by its Karta, it is difficult to understand how such a partnership cannot come into being and why a coparcener who continues to remain a member of the coparcenary cannot become a working partner of a firm of which he and the family represented by its Karta are the partners. In Lachhman Das vs. CIT (1948) 16 ITR 35 (PC), the coparcener placed at the disposal of the firm as his capital his separate property, and in the case of a working partner he contributes his skill or labour or both as the case may be. If the partnership is permissible in one case, it would be difficult to assign any reason for reaching the conclusion that it is not permissible in the other.” Reference is also made to the decision of the Allahabad High Court in Gupta Bros.’ case (supra) wherein the Allahabad High Court observed as follows : “The observations of the Privy Council that a partnership can be formed with a junior member by the Karta qua his separate property is by way of illustration of a particular eventuality when the separate property constitutes consideration for the induction of a junior member into the partnership. It cannot be read as being exhaustive of cases where consideration may take other forms. Now, as labour and skill would also be consideration as contemplated by the Contract Act, a valid partnership had come into existence, which ought to have been registered.”
The Supreme Court in the case of Chandrakant Manilal Shah (supra) overruled the decision of the Bombay High Court in Shah Prabhudas Gulabchand (supra) and of the Gujarat High Court in the case of Pitamberdas Bhikhabhai & Co. vs. CIT (1964) 53 ITR 341 (Guj), observing as follows : “…The two decisions relied on by learned counsel for the respondent in the cases of Pitamberdas Bhikhabhai & Co. vs. CIT (1964) 53 ITR 341 (Guj) and Shah Prabhudas Gulabchand vs. CIT (1970) 77 ITR 870 (Bom), of the Gujarat and Bombay High Courts, respectively, turned on their particular facts and, if read as laying down a contrary rule, do not lay down good law.
In this view of the matter, it cannot be said that, when a coparcener enters into a partnership with the Karta of an HUF and contributes only his skill and labour, no contribution of any separate asset belonging to such partner is made to meet the requirement of a valid partnership…”.
7. In the present case it is not disputed that Mahesh S/o Shri I.P. Barot was inducted as a working partner. He was contributing his skill and expertise in running the partnership business and therefore, it cannot be said that he was not a genuine partner and/or was merely a name-lender, in view thereof the orders of the lower authorities need to be set aside. Accordingly, questions 1 and 2 of the reference are answered in the negative and in favour of the assessee and consequentially question No. 3 has to be answered in the affirmative, in favour of the assessee.
[Citation : 281 ITR 139]
