Chhagan Lal Gulabchand vs Commissioner of Income Tax

This reference u/s 256(1) of the income tax Act, 1961 (''the Act'') is at the instance of the assessee to answer the following questions of law : 1. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the partnership constituted by the karta and another member of the same HUF and a stranger, was not a valid partnership, so as not to entitle to registration u/s 185 of the income tax Act, 1961 is correct and justified in law?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the partnership formed by the karta of the HUF, a member of the same HUF and a stranger was not a partnership valid in law merely because the funds of the HUF were all shown in the name of the karta as capital, and none shown in the name of other member, and as such not entitled to registration u/s 185 of the income tax Act, 1961?

The relevant assessment year is 1972-73. Ratanlal and Gulabchand were brothers who had separated in 1959. Vimal Kumar is the son of Ratanlal. Initially there existed a joint family business comprising of the two brothers Ratanlal and Gulabchand. On 3-4-1971 a fresh partnership deed was executed showing Ratanlal, his son Vimal Kumar and Gulabchand as partners. There was no partition between Ratanlal and his son Vimal Kumar, and they continued to comprise a smaller HUF of which Ratanlal as father was the karta. There was no investment of capital by Vimal Kumar in this partnership. The assessee-firm comprising of Ratanlal, Gulab Chand and Vimal Kumar as partners applied to the ITO for registration of the firm. The ITO rejected the application on the ground that Vimal Kumar being a member of the HUF of which Ratanlal as the father was the karta, could not be a partner of the firm more so when there was no investment of any capital by him. The registration was accordingly refused by the ITO. The assessee''s appeal to the AAC, however, succeeded inasmuch as the AAC held that valid partnership could be constituted by these three partners. The revenue''s appeal to the Tribunal has thereafter been allowed. The Tribunal has taken the same view as the ITO, in favour of the revenue that no valid partnership could be constituted in these circumstances. This has led to the reference for decision of the above questions of law arising out of the Tribunal''s order.

The point for decision is, whether valid partnership can be constituted by karta of a HUF along with a stranger and another member of that HUF. It is well settled that there is no illegality in the formation of such a partnership inasmuch as it is open to the karta of a HUF as well as a member of the HUF to undertake a separate business during the continuance of the HUF to which they belong. It is obvious that there can be no objection to a stranger also being inducted as a partner in a partnership, or in other words, there can be no objection to a partnership between a stranger and a karta of HUF and/or another member of the same Gulraj Poonamchand Vs. Commissioner of Income Tax, Additional Commissioner of Income Tax Vs. Curious House and Birdhichand Pannalal, and Ratanchand Darbarilal Vs. Commissioner of Income Tax, M.P.,

It is equally obvious that for constitution of a valid partnership it is not necessary that each and every member should contribute to the capital. This being so, the mere fact that one of the partners Vimal Kumar did not contribute to the capital and was a working partner, could not invalidate an otherwise validly constituted partnership. The Tribunal was, therefore, not justified in taking the contrary view. Consequently, the reference is answered in favour of the assessee and against the revenue as under:

The Tribunal was not justified in holding that the partnership constituted by the karta and another member of the same HUF with a stranger was not a valid partnership entitled to registration u/s 185 of the Act.

The Tribunal was not justified in holding that such a partnership was not validly constituted merely because no contribution to the capital was shown in the name of one of its partners, who was a member of the HUF.

No costs.