Chhaganlal Gulab Chand vs Commissioner of Income Tax

This reference u/s 256(1) of the Income Tax Act, 1961, is at the instance of the assessee for answering 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 Hindu undivided family and a stranger was not a valid partnership, so as not to be entitled to registration u/s 185 of the Income Tax Act, 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 Hindu undivided family, a member of the same Hindu undivided family and a stranger was not a partnership valid in law merely because the funds of the Hindu undivided family were all shown in the name of the karta as capital, and none shown in the names of other members, 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 April 3, 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 Hindu undivided family 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, Gulabchand and Vimal Kumar, as partners, applied to the Income Tax Officer for registration of the firm. The Income Tax Officer rejected the application on the ground that Vimal Kumar, being a member of the Hindu undivided family 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. Registration was accordingly refused by the Income Tax Officer.

The assessee''s appeal to the Appellate Assistant Commissioner, however, succeeded inasmuch as the Appellate Assistant Commissioner held that a 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 Income Tax Officer 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 a valid partnership can be constituted by the karta of a Hindu undivided family along with a stranger and another member of that Hindu undivided family. 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 Hindu undivided family as well as a member of the Hindu undivided family to undertake a separate business during the continuance of the Hindu undivided family 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 the karta of a Hindu undivided family and/or another member of the same Hindu undivided family. (See 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 the 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 Hindu undivided family with a stranger was not a valid partnership entitled to registration u/s 185 of the Income Tax Act, 1961.

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 Hindu undivided family.

No costs.