Gandhi Electrical Engg. Co. vs Commissioner of Income Tax

Mrs. Sujata Manohar, J.—The assessee is a partnership-firm. The assessee-firm originally consisted of two partners, (1) Mahendrakumar J. Gandhi, and (2) Harshadkumar J. Gandhi. A minor brother, Nikhilkumar J. Gandhi, was admitted to the benefits of the partnership. This was under the partnership deed of May 1, 1959. Thereafter, a fresh partnership deed was executed on November 5, 1964. Under this partnership deed, Mahendrakumar J. Gandhi became a partner as the karta of his Hindu undivided family comprising himself, his wife and his two minor sons and one minor daughter. The other partners of the firm were Harshadkumar Jayantilal Gandhi and Nikhilkumar Jayantilal Gandhi who had by then attained majority. Under the partnership deed, the three minor children of Mahendrakumar were admitted to the benefits of partnership. The respective shares of the partners were :

Mahendrakumar Jayantilal Gandhi (HUF) - 30 per cent. Harshadkumar Jayantilal Gandhi - 20 per cent. Nikhilkumar Jayantilal Gandhi - 20 per cent.

and each of the three minor children of Mahendrakumar were admitted to the benefits of partnership to the extent of 10 per cent. The assessee-firm, as constituted under the partnership deed of November 5, 1964, applied for registration for the assessment year 1966-67 and for continuation of registration for the subsequent assessment years. The Income Tax Officer refused registration holding that the minors had not brought in any capital in the partnership firm. Their father who was the karta of the Hindu undivided family, was the partner and hence the firm was not a valid partnership firm. The Appellate Assistant Commissioner as well as the Tribunal dismissed the appeals filed before them by the assessee. From the order and the judgment of the Tribunal, the following question is referred to us u/s 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Income Tax Officer was right in refusing to register the firm for 1966-67 to 1970-71 assessment years and assessing the said firm in the status of an association of persons ?"

In the case of Ratanchand Darbarilal Vs. Commissioner of Income Tax, M.P., , the Supreme Court said that it was a well-settled proposition applicable to Hindu law that members of a joint family and even coparceners could, without disturbing the status of the joint family or the coparcenary, acquire separate property or run independent business for themselves. It is, therefore, possible for a coparcener to become a partner in a firm in which the Hindu undivided family is also a partner. The coparcener can invest his independent property in such a partnership firm. The Supreme Court further said that, if such a firm is genuine, it is entitled to registration. It observed that the partnership must be genuine and must actually have existed in conformity with the terms and conditions of the instrument of partnership in the accounting year. Once such conditions are satisfied, it is the obligation of the Income Tax Officer under the Act to extend the benefit of registration and allow the firm to enjoy the benefits provided by the Act.

In the case of CHANDRAKANT MANILAL SHAH AND ANOTHER Vs. COMMISSIONER OF Income Tax., , the Supreme Court considered a case where the karta of a Hindu undivided family constituted a partnership along with one of the coparceners who had joined the partnership along with one of the coparceners who had joined the partnership as a working partner. The coparcener did not contribute any cash asset towards the capital of the firm and was contributing only his skill and labour. The Supreme Court said that the mere fact that the coparcener 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 the karta and the coparcener who was his son was valid and the firm was entitled to registration. The court said that skill and labour are assets of an individual and there is no reason why they cannot be considered as a contribution for earning profits in the business of a firm. The Supreme Court, in its judgment, explained its earlier observations in Ratanchand Darbarilal Vs. Commissioner of Income Tax, M.P., , and overruled the judgment of the Bombay High Court in Shah Prabhudas Gulabchand Vs. Commissioner of Income Tax, Bombay, and the judgment of the Gujarat High Court in Pitamberdas Bhikhabhai and Co. Vs. Commissioner of Income Tax, Gujarat, . The Supreme Court said that it would be incorrect to hold that there can be a partnership between the karta of a Hindu undivided family and its individual members only when he brings in some capital asset. The Supreme Court in the above case also explained its earlier decision in Firm of Bhagat Ram Mohanlal Vs. The Commissioner of Excess Profits Tax, Madhya Pradesh, Nagpur and Another, , and clarified that it would be incorrect to hold that the karta of a Hindu joint family can form a partnership with one of its coparceners only if he brings in capital in his individual capacity.

The legal position, therefore, is that there can be a valid partnership between a karta and a coparcener in his individual capacity. The coparcener who becomes a partner may bring in capital from out of his self-acquired property or he may contribute his skill and labour without bringing in any capital contribution. If the partnership is formed for the purpose of carrying on a business to earn profits and is genuine, there is no reason why it cannot be registered.

(See also in this connection Commissioner of Income Tax, Madhya Pradesh, Nagpur and Bhandara Vs. Hukumchand Mannalal and Co., and Lachhman Das v. CIT [1948] 16 ITR 35 ). Dr. Balasubramanium who appeared for the Department relied upon a decision of the Bombay High Court in the case of Manilal Dharamchand Vs. Commissioner of Income Tax, Poona, . The Bombay High Court, in that case, held that there cannot be a partnership in law where the karta of a Hindu undivided family has become a partner in a partnership firm in which a coparcener has also become a partner in his individual capacity in respect of the family property brought into the partnership. The Supreme Court has now clarified its decision in Firm of Bhagat Ram Mohanlal Vs. The Commissioner of Excess Profits Tax, Madhya Pradesh, Nagpur and Another, in the case of CHANDRAKANT MANILAL SHAH AND ANOTHER Vs. COMMISSIONER OF Income Tax., . The judgment of the Bombay High Court above must therefore be read in the light of the Supreme Court judgment in the case of CHANDRAKANT MANILAL SHAH AND ANOTHER Vs. COMMISSIONER OF Income Tax., .

In the present case, there is a partnership between Mahendrakumar Jayantilal Gandhi as the karta of his joint Hindu family, Harshadkumar Jayantilal Gandhi and Nikhilkumar Jayantilal Gandhi. There is no reason to hold that this is not a genuine partnership firm for the purpose of carrying on a business to earn profit. The three minor children of Mahendrakumar have been admitted to the benefits of the partnership. The minors are clearly not partners of the firm as they cannot be partners, being minors. They are only admitted to the benefits of the partnership u/s 30 of the Partnership does not affect the constitution of a valid partnership firm in any manner. Had they been majors, they could have become partners in view of the Supreme Court judgment in CHANDRAKANT MANILAL SHAH AND ANOTHER Vs. COMMISSIONER OF Income Tax., . So their being given a share in the benefits of the partnership cannot render the partnership invalid. The partnership is between the karta of the joint Hindu family and two other persons. Such partnership is valid in law. We are not here concerned with the manner in which income from the partnership can be assessed in the hands of the minors.

In the premises, the question which is referred to us is answered in the negative and in favour of the assessee.

The question is answered accordingly.

No order as to costs.