Gulraj Poonamchand vs Commissioner of Income Tax

S.N. Bhargava, J.—This is a reference u/s 256(1) of the income tax Act, 1961 (''the Act''), whereby the following questions of Jaw have been referred by the Tribunal, for the opinion of this Court :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the gift made by Poonam Chand to Paras Mal, merely by making entries in his own books, without there being sufficient cash balance at that time, could not constitute a valid gift ?

In case it is held that there was no valid gift, whether Paras Mal could become partner in the HUF business without separate property and investment ?

Whether, on the facts and in the circum stances of the case, the Tribunal was right in not granting registration to the firm under the income tax Act, 1961 ?

In fact there should have been two separate references for two different assessment years 1966-67 and 1967-68, but since common question arises in two different assessment years in respect of two reference applications, the Tribunal sent only one statement of case and, therefore, it was registered as only one reference.

Poonam Chand who with his brother Kalu Ram constituted a HUF separated from him some time in the year 1936-37 and, thereafter he started his own business at Kishangarh and was assessed as an individual till 1963-64. On 27-1-1963, Poonam Chand adopted Paras Mal as his son and, therefore, returns for the assessment years 1964-65 and 1965-66 were filed in the status of HUF. On 8-12-1964, Poonam Chand made a gift of Rs. 11,001 to his son Paras Mal in the capacity as karta of HUF and an entry to this effect has been made in the books of account of the HUF. On 9-12-1964, a partnership deed was executed between Poonam Chand and Paras Mal where-under the business of the HUF known as Gulraj Poonam Chand was to be treated as a partnership concern and the shares of the partners were as under :

Poonamchand 60 per cent shares

Paras Mal 40 per cent shares

In the preamble of the said partnership deed it was mentioned that since Poonam Chand had felt and realised that due to overage it will not be possible for him to continue to control and manage the business with due promptness and efficiency, hence it was decided to take Paras Mal as a partner in the aforesaid business who had agreed to lend his support and cooperation. It was also provided in clause 7 of the partnership deed that Poonam Chand will be responsible for the management of the partnership business and have authority to do all things and acts, that may be deemed proper, expedient, beneficial and in the interest of the firm and shall have authority to make appointment, engage labour, enter into agreements and to execute special or general power of attorney on behalf of and in the name of firm in favour of any person or persons, severally or jointly, and also have an authority to borrow the money for business purposes and to execute pronotes for the same and to execute other documents in the name and on behalf of the firm. It was also provided that the accounts of the partnership will commence from 9-12-1964. Both the parties are equally responsible for maintenance of regular accounts and such accounts will be open to inspection by both the parties. There is no specific mention about the investment made by the parties, though it was incorporated that the capital investment would carry interest at the rate of 1 per cent per annum. Paras Mal also received a gift of Rs. 7,000 from his father-in-law, Subhkaran of Sardarnagar, by a bank draft which has been credited in favour of Paras Mal on 11-5-1965 in the books of account of the firm. The said firm was also registered with the Registrar of Companies. The assessee-partnership firm applied for registration u/s 185 of the Act, but the ITO declined to accord the same by his order dated 16-2-1967 as he found that there had been no partition in the family of the assessee and in respect of the business belonging to the HUF, the karta of the family cannot enter into the partnership, of the coparceners of the family in their individual capacity and reliance had been placed on a decision of the Gujarat High Court in Pitamberdas Bhikhabhai and Co. Vs. Commissioner of Income Tax, Gujarat, . The assessee, being aggrieved of the said order of the ITO, preferred an appeal before the AAC who also confirmed the order of the ITO by his order dated 3-9-1968 and did not agree with the contention of the assessee that the judgment of the Gujarat High Court was distinguishable and that view of the Privy Council''s decision in (1948) 16 ITR 35 (Privy Council) , registration should have been granted to the assessee-firm and this judgment of the Privy Council was not considered by the Gujarat High Court. He further found that in view of the later decision of the Supreme Court in the Firm of Bhagat Ram Mohanlal Vs. The Commissioner of Excess Profits Tax, Madhya Pradesh, Nagpur and Another, The decision in Lachhman Das''s case (supra) does not hold water.

The assessee then preferred a second appeal before the Tribunal which was also dismissed by order dated 25-8-1971, and the Tribunal also found that since Paras Mal had no separate property on 9-12-1964, he could not enter into a partnership and the book entry gifting Rs. 11,001 was of no avail as the cash balance on 8-12-1964 available with the firm was only Rs. 3,356. Therefore, relying on the decision of the Gujarat High Court reported in Pitamberdas Bhikhabhai & Co.''s case (supra) and of the Bombay High Court in Shah Prabhudas Gulabchand Vs. Commissioner of Income Tax, Bombay, it came to the conclusion that no partnership came into existence on 9-12-1964 and further found that making of the gift of Rs. 11,001 was not a bona fide act and was primarily meant to avoid payment of property tax by the HUF. The assessee, therefore, moved an application u/s 256(1) of the Act and the Tribunal found that the questions of law do arise and, therefore, it made this reference to this Court for decision, on points mentioned above.

We have heard Shri S.K. Jain, the learned counsel for the assessee, and Shri R.N. Surolia, the learned counsel for the department.

The learned counsel for the assessee has submitted that by now the law is well settled and gift even by book entry is permissible and in this connection has relied on a decision of the Delhi High Court in Indian Glass Agency Vs. Commissioner of Income Tax, , wherein after considering a number of authorities, the High Court has come to the conclusion that it is possible to effectuate a gift by instructing the firm, family or company to give effect to the gift by debiting his account and crediting an account in the name of the donee, and has, therefore, submitted that the gift of Rs. 11,001 in favour of Paras Mal on 8-12-1964 should be held to be valid and as such Paras Mal was in a position to enter into a contract of partnership with Poonam Chand and, therefore, the partnership should not be held to be ineffective. The ingredients of partnership are sharing of profit or even agreement to share the profit as will be obvious from a reference to sections 184 and 185 of the Act, and since in the partnership deed dated 9-12-1964 there was an agreement to share profit, the ITO should not have refused the registration of the firm. He also referred to section 4 of the Partnership Act, according to which to constitute a partnership in law there must be an agreement to share the profit or loss of the business and secondly, the business must be carried on by all the partners or any of them acting for all, control and business of a firm can be left by agreement between the entries on one partner to be exercised on behalf of other partners and, therefore, he has argued that even clause 7 of the partnership deed, dated 9-12-1964, will not entitle the refusal of registration and in this connection placed reliance on K.D. Kamath and Co. Vs. Commissioner of Income Tax, Mysore, He further submitted that a karta of HUF can enter into a partnership with another member of HUF and coparcener has a freedom of contract like a stranger in respect of his individual property and can enter into a partnership with the karta by contributing his separate property. He can enter into a contract in respect of skill and labour as well and since in the partnership deed it has been mentioned that Poonam Chand cannot continue to control and manage the business due to age with due promptness and efficiency it was necessary to induct Paras Mal as a partner into the business. The partnership is perfectly valid and is entitled to registration and, in this connection, he has placed reliance on a decision of the Madhya Pradesh High Court in Ramchand Nawalrai Vs. Commissioner of Income Tax, which has followed the decision of the Mysore High Court in I.P. Munavalli Vs. Commissioner of Income Tax, Mysore, and has distinguished the case of Shah Prabhudas Gulabchand (supra). He has also placed reliance on Commissioner of Income Tax, Andhra Pradesh Vs. Gaekwade Vasappa and Sons, , decision of the Andhra Pradesh High Court in I.P. Munavalli''s case (supra) was also applied in Ramchand Nawalrai''s case (supra) and Commissioner of Income Tax Vs. Gupta Brothers, and they also distinguished Pitamberdas Bhikhabhai & Co.''s case (supra) and Shah Prabhudas Gulabchand''s case (supra).

The learned counsel for the assessee has also relied on Commissioner of Income Tax, Bombay City II Vs. Raghavji Anandji and Co., wherein the Bombay High Court has held that a karta of a HUF can sign and enter into partnership as a karta of HUF and also in his individual capacity.

On the other hand, the learned counsel for the department has submitted that since there was no cash available in the account books of the firm on 8-12-1964, the gift of a sum of Rs. 11,001 in favour of the Paras Mal was not valid and cannot be taken into account entitling Paras Mal to enter into a partnership agreement; since there was no money available in hand, Paras Mal could not enter into partnership with Poonam Chand. Moreover, the partnership was only a device to save tax as there was no change in the business. The authority and powers were still in Poonam Chand''s hands who was also karta of HUF and as karta of HUF Poonam Chand could not have entered into partnership with his son, a member of the family, and, therefore, the ITO as well as the AAC as also the Tribunal were justified in refusing to grant registration to the firm.

We have considered the arguments and submissions made by the learned counsel for the parties at the Bar and have also gone through the various authorities cited by them and the orders passed by the ITO, the AAC as well as the Tribunal. In our view it is permissible to a karta of a HUF representing the HUF to enter into a partnership with any other member of the HUF or any stranger who is taken in partnership even as working partner and even if they did not contribute any separate or individual property of their own. We are in full agreement with the decision of the Andhra Pradesh High Court in Gaekwade Vasappa & Sons'' case (supra). Their Lordships of the Andhra Pradesh High Court in that case have placed reliance on I.P. Munavalli''s case (supra), which case was followed by the Madhya Pradesh High Court in Ramchand Nawalrai''s case (supra) and the Allahabad High Court in Gupta Bros.'' case (supra). The decision of the Gujarat High Court in Pitamberdas Bhikhabhai & Co.''s case (supra) as also of the Bombay High Court in Shah Prabhudas Gulabchand''s case (supra) have been distinguished and not followed by the Andhra Pradesh High Court. Even as early as in Lachhman Das'' case (supra), it has been held that there can be a valid partnership between a karta of a HUF representing the family on the one hand and member of that family in his individual capacity, on the other hand. The view of the Privy Council still holds water and has not in any way been changed by the Supreme Court in Firm Bhagat Ram Mohanlal''s case (supra). This, case is clearly distinguishable and does not in any way take a different or contrary view from what the Privy Council had taken in the case of Lachhman Das (supra).

In the present case also, in the deed of partnership entered on 9-12-1964 between Poonam Chand a nd Paras Mal in the preamble itself it is stated that due to overage it will not be possible for Poonam Chand to continue to control and manage the business with due promptness and efficiency and, therefore, it had become necessary to take Paras Mal, his adopted son, as a partner, which shows that the skill and labour of Paras Mal was also a consideration for entering into a partnership apart from the amount of Rs. 11,000 which was gifted to Paras Mal by his father Poonam Chand. Entries in this connection find place in the account books of the assessee-firm. Their future conduct also supports that the transaction of entering into partnership was genuine and Paras Mal had also received a sum of Rs. 7,000 from his father-in-law which amount was also credited in the books of account of the assessee-firm. Therefore, in the present case, we find that Paras Mal had also some fund of his own to enter into the partnership. Merely because cash balance available on 8-12-1964 was only a sum of Rs. 3,356, it cannot be said that the gift made by Poonam Chand to Paras Mal was not valid. Admission of Paras Mal as a partner is, thus, a circumstance to show that the intention of Poonam Chand was to gift a sum of Rs. 11,001 to Paras Mal and that the amount was accepted by Paras Mal. Therefore, the necessary element of parting by Poonam Chand and acceptance by Paras Mal to constitute a proper and valid gift is established in the circumstances of the case and the entries in the account books fully support the transaction of gift. Thus, there was nothing artificial on the part of the father retaining a dominion position in the affairs of the partnership especially when Paras Mal was quite young and unexperienced in business. The partnership between father and son could not be termed as fictitious one merely on the ground that the father had under the terms of the partnership retained the main control over the business. Therefore, clause 7 of the partnership deed, as mentioned above, does not make the partnership a fictitious affair. In view of the above discussion, answer to the first question is in the negative. Answer to Question No. 2 does not arise and answer to the third question is also in the negative and it is found that, on the facts and in the circumstances of the case, the gift made by Poonam Chand to Paras Mal was valid and Paras Mal can become a partner of the HUF business and firm could have been granted registration u/s 185 of the Act.