Chandrakant
Manilal Shah & Anr Vs. Commissioner of Income Tax, Bombay-II [1991] INSC
272 (24 October 1991)
Ojha, N.D. (J) Ojha, N.D. (J) Rangnathan, S. Ramaswami, V. (J) II
CITATION:
1992 AIR 66 1991 SCR Supl. (1) 546 1992 SCC (1) 76 JT 1991 (4) 171 1991 SCALE
(2)827
ACT:
Indian
Income Tax Act, 1922:
Section
26A and 66(1) --Registration of firm--Partnership entered into between a
coparcener with the Karta of HUF-.--Coparcener not bringing any cash asset, but
contributing skill and labour--Partnership deed--- Whether valid.
Indian
Partnership Act, 1932:
Section
4(57)--Pannership inter se between members of HUF--Member contributing skill
and labour instead of cash assets---Validity of.
Hindu
Law:
Contract
inter se between coparceners of HUF---One of the coparceners not contributing
any cash asset--Validity of.
Hindu
Gains of Learning Act, 1930:
Sections
2 and 3--Gains of learning by a Member of HUF--Whether assets of an individual.
Words
& Phrases: 'Skill', 'Labour' 'Property'- Meaning of.
HEAD NOTE:
The
business being carried on by a HUF, of which the first appellant was the Karta,
was converted into a partnership between the first appellant and one of his
sons, who had earlier joined the business on monthly remuneration. The deed of
partnership executed in that behalf indicated that the son had been admitted as
a working partner, having 35 per cent share in the profits and losses of the
firm and the remaining 65 per cent share was held by the first appellant as the
Karta of the HUF. An 547 application made for registration of the firm was
dismissed by the Income-tax Officer on the ground that there was no valid
partnership. This was upheld in appeal by the Appel- late Tribunal. However, at
the instance of the assessee the matter was referred to the High Court for its
opinion. The High Court also held that there was no valid partnership.
In the
appeal before this Court, on behalf of the asses- seeappellants, it was
contended that the mere fact that the son had neither separated from the HUF
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.
On
behalf of the respondent-Revenue it was contended that Hindu Law did not recognise
any contract among the coparceners inter se except in two cases, namely, where
there was a partial partition and where a coparcener had separate property and
brought in such separate property as capital towards consideration for becoming
a partner and that skill and labour could not be treated as property.
Allowing
the appeal by the assessee-appellants, this Court,
HELD:
1.1 It cannot be said that when a coparcener enters into a partnership with a karta
of a HUF and contrib- utes 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. [563 F] 12 The aim of business is earning of profit. When an
individual contributes cash asset to become partner of a partnership firm in
consideration of a share in the profits of the firm, such contribution helps
and at any rate is calculated to help the achievement of the purpose of the
firm, namely, to earn profit. The same purpose is, undoubt- edly, achieved also
when an individual, in place of cash asset, contributes his skill and labour in
consideration of a share in the profits of the firm. [562 D-E]
1.3
Just like a cash asset, the mental and physical capacity generated by the skill
and labour of an individual is possessed by or is a possession of such
individual.
Indeed,
skill and labour are by themselves possessions. "Any possession" is
one of the dictionary meaning of the word 'property'. In its wider connotation,
therefore, the mental and physical capacity generated by skill and labour of an
individual and indeed the skill and 548 labour by themselves would be the
property of the individ- ual possessing them. They are certainly assets of that
individual and there is no reason why they cannot be con- tributed as a consideration
for earning profit in the busi- ness of a partnership. They certainly are not
the properties of the HUF, but are separate properties of the individual
concerned. To hold to the contrary, would also be incompati- ble with the
practical, economic and social realities of present day living. [562 E-G]
1.4
Where an undivided member of a family qualifies in technical fields -- may be
at the expense of the family - he is free to employ his technical expertise
elsewhere and the earnings will be his absolute property; he will, therefore,
not agree to utilise them in the family business unless the latter is agreeable
to remunerate him therefor immediately in the form of a salary or share of
profits. This, of course, will have to be the subject matter of an agreement
between the HUF and the member, but where there is such an agreement, it cannot
be characterised as invalid. [562 H, 563 A-B,C]
1.5 It
is, therefore, illogical to hold that an undi- vided member of the family can
qualify for a share of prof- its in the family business by offering moneys --
either his own or those derived by way of partition from the family -- but not
when he offers to be a working partner contributing labour and services or much
more valuable expertise, skill and knowledge for making the family business
more prosper- ous. [563 C-D]
1.6 In
the instant case, it is not the case of Revenue that the partnership between
the first appellant as karta of HUF and his son was fictitious or invalid on
any other ground. Hence, the judgment of the High Court cannot be sustained.
[563 F-G] I.P. Munavalli v. Commissioner of Income-Tax, Mysore, [1969] 74 ITR
page 529; Ramchand Nawalrai v. Commissioner of Income-Tax, M.P. [1981] 130 ITR
page 826; Commissioner of Income- Tex; Lucknow v. Gupta Brothers, [1981] 131
ITR 492; approved.
Shah Prabhudas
Gulabchand v. Cornmissioner of Income- Tax; Bombay, [1970] 77 ITR page 870; Pitamberdas Bhikhabhai
page
341; disapproved.
Lachman
Das v. Commissioner of Income-tax, Punjab, [ 1948] 16 ITR -I 35; P.K.P.S. Pichappa Chettiar v. Chockalin- gam Pillai,
A.I.R. 1934 P.C. 192; 549 Finn Bhagat Ram Mohanlal v. Commissioner of Excess
profits Tax; Nagpur, [1956] 29 ITR page 521; Jitmal Bhuramal
v. CIT, (1964) 44 ITR 887 (SC); and Jugal Kishore Baldeo Sahai v. CIT, [ 19671
63 ITR 238 S.C.; Commissioner of Income-tax v. Sir Hukumchand Mannalal and Co.,
[1970] 78 ITR 18; and Ratanchand Darbarilal v. Commissioner of Income Tax,
(1985) 155 ITR 720; referred to.
2. The
definition of the term "learning" under Section 2 of the Hindu Gains
of Learning Act, 1930 is very wide and almost encompasses within its sweep
every acquired capacity which enables the acquirer of the capacity 'to pursue
any trade, industry, profession of vocation in life". The dic- tionary
meaning of "skill" inter alia, is: "the familiar 'knowledge of
any science, art, or handicraft, as shown by dexterity in execution or
performance; technical ability" and the meaning of "labour"
inter alia is: "physical or mental exertion, particularly for some useful
or desired end." Whether or not skill and labour would squarely fail
within the traditional jurisprudential connotation of property e.g. jura in re propria,
jura in re aliena, corpo- real and incorporeal etc. may be a moot point but it
cannot be denied that skill and labour involve as well as generate mental and
physical capacity. This capacity is in its very nature an individual
achievement and normally varies from individual to individual. It is by utilisation
of this capacity that an object or goal is achieved by the person possessing
the capacity. Achievement of an object or goal is a benefit. This benefit
accrues in favour of the individual possessing and utilising the capacity. Such
individual may, for consideration, utilise the capacity possessed by him even
for the benefit of some other individual. The nature of consideration will
depend on the nature of the contract between the two individuals. [562 A-D] Mulla's
Hindu Law, referred to. & CIVIL APPELLATE JURISDICTION: Civil Appeal No.
1187 (NT) of 1976.
From
the Judgment and order dated 22.7.75 of the Bombay High Court in ITR No. 95 of
1965.
Harish
N. Salve and Mrs. A.K. Verma for the Appellants.
S.C. Manchanda,
K.P. Bhatnagar and Ms. A. Subhashini for the Respondent.
550
The Judgment of the Court was delivered by OJHA, J. - This appeal by special
leave has been pre- ferred against the judgment dated 22nd July, 1975 of the
Bombay High Court in I.T. Ref. No. 95 of 1%5 made under Section 66(1) of the
Indian Income-tax Act, 1922. The as- sessment year under reference was 1%1-62.
Chandrakant
Manilal Shah was the Karta of a Hindu undi- vided family (HUF) and the family
was carrying on business of cloth. Naresh Chandrakant, one of the sons of Chandrakant
Manilal Shah, joined the business on a monthly salary of Rs.100/- since about
April 1959. It was asserted that with effect from 1st November 1959 the business had been convert- ed into a partnership
between Chandrakant Manilal Shah as Karta of HUF and Naresh Chandrakant. The
deed of partnership executed in this behalf on 12th November, 1959 indicated that Naresh Chandrakant had been admitted
as a working partner with effect from 1st November, 1959 having 35 per cent share in the
profits and losses of the firm and the remaining 65 per cent share was held by Chandrakant
Manilal as the Kartas of the HUF. An application was made for regis- tration of
the firm which was dismissed by the Income-tax officer on the ground that there
was no valid partnership.
The
view taken by the Income-tax officer was upheld in appeal by the Appellate
Assistant Commissioner. On further appeal, the Income-tax Appellate Tribunal
also came to the same conclusion that there was no valid partnership and the
business consequently must be taken to continue in the hands of the joint
family. However, at the instance of the asses- see the following question was
referred by the Tribunal to the High Court for its opinion:- Whether on the
facts and in the circumstances of the case, there was a valid partnership under
Annexure 'A' between Shri Chandrakant, as the Karta of the HUF and Shri Naresh,
a member of the family? The High Court by the judgment under appeal answered
the aforesaid question in the negative, in favour of the Revenue and against
the assessee. In doing so, it relied on an earlier decision of that Court in
Shah Prabhudas Gulabchand v. Commissioner of Income-tax, Bombay, 119701 (77) ITR page 870. It is
against this judgment that the assessee has come up in appeal to this Court.
It has
been urged by the learned counsel for the appel- lants that the mere fact that Naresh
Chandrakant had neither separated from the HUF nor brought in any cash asset as
his capital contribution to the partnership 551 but was contributing only his
skill and labour, could not in law detract from a valid partnership being
created. Learned counsel for the respondent, on the other hand, contended that
the view taken in this behalf by the Tribunal and the High Court was correct
and was not only supported by the decision relied on by the High Court referred
to above but also by another decision of the Gujarat High Court in Pitam- berdas
Bhikhabhai & Co. v. Commissioner of Income-tax, Gujarat [1964] (53) ITR
page 341.
Having
heard learned counsel for the parties, we are inclined to agree with the
submission made by learned coun- sel for the appellants. In our view, this
contention derives full support from the view of the Judicial Committee of the
Privy Council in Lachhman Das v. Commissioner of Income-tax, Punjab [1948] (16)
ITR page 35. There the question which fell for consideration was:-
"Whether in the circumstances of this case, there could be a valid
partnership between Lachhman Das as representing a Hindu undivided family on
the one hand and Daulat Ram, a member of that undivided Hindu family in his
individual capacity, on the other?" In other words, the question was the
same as the one arising in the present case but for the difference in the
factual background that, whereas in the ease before the Judicial Committee the
member had brought in his separate capital, the member in the present case
claims only to be a working partner. Does this difference in facts make a dif- ference
in principle? That is the question.
In Lachhman
Das, it had been urged before the High Court for the assessee that, when a Karta
of a HUF could enter into a partnership with a stranger as held by the Privy
Council in P.K.P.S. Pichappa Chettiar v. Chockalingam Pillai A.I.R. 1934 P.C.
192, there was no reason why a coparcener also could not enter into such a
partnership by making contributions in his individual capacity from his
separate funds. This plea was repelled by the High Court on the ground that a
coparcener could not be regarded as a stranger so long as he continued his
connection with his undivided family in the capacity as a coparcener. While
reversing the judgment of the High Court, it was held by the Privy Coun- cil:-
"After careful consideration, their Lordships cannot accept this vicw and
on general princi- ples 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 552 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
Lord- ships 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 individu- al property, not acquired with the
aid of or with any detriment to the joint family proper- ty. 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 transac- tions 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 con- siderations, and the result of a separate act evincing
a clear intention to break away from the family. The error of the Income-tax Offi-
cer lay in his view that, before such a con- tractual relationship can validly
come into existence, the "natural family relationship must be brought to
an end." This erroneous view appears to have coloured this and the subsequent
decisions of the Income-tax author- ities.
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
aforesaid view of the Privy Council was approved by this Court in Firm Bhagat
Ram Mohanlal v. Commissioner of Excess Profits Tax, Nagpur [1956] (29) ITR page
521 but on the facts of that case it was held that the partnership set up in
that case was not valid.
The
above principle has been applied by several High Courts to uphold the validity
of a partnership between the Karta of a HUF and an individual member of the
family where the latter is taken in as a working partner. In I.P. Munav- alli
v. Commissioner of Income-tax, Mysore [1969] (74) ITR page 529, it was held by
the Mysore High Court, after refer- ring to 553 the decision of the Privy Council
in the case of Lachhmandas (supra) and of this Court in the case of Bhagat Ram
(supra):- "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 undivided property" the coparcen- ers 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 copar- cenary cannot become
a working partner of a firm of which he and the family represented by its karta
are the partners. In Lachhman Das's case the coparcener placed at the disposal
of the firm as his capital his separate property, and in the case of a working
partner he con- tributes 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." In Ramchand Nawalrai v. Commissioner of Income-tax, M.P. 119811
(130) ITR page 826, it was held by the Madhya Pradesh High Court as hereunder:-
"it will be clear from the facts of the case of Firm Bhagat Ram Mohanlal
[1956] (29) ITR 521 (SC) that the question whether a coparcen- er can enter
into a valid partnership with the karta of his family by contributing merely
skill and labour did not arise for decision.
The
only question in the case was whether the individual members of a HUF can,
without contributing anything, become members of a partnership constituted
between the karta and strangers. This question had necessarily to be answered
in the negative on the settled view that when a karta enters into a partnership
with strangers it is the karta alone who becomes the partner. The observations
of the Supreme Court that (p.526): "If members of a coparcenary are to be
554 regarded as having become partners in a firm with strangers, they would
also become under the partnership law partners inter se, and it would cut at
the very root of the notion of a joint undivided family to hold that with
reference to coparcenary properties the mem- bers can at the same time be both
coparceners and partners", as contained in the passage quoted above, must
be limited to the facts on which Firm Bhagat Ram Mohanlal's case [1956] (29)
ITR 521 (SC) was decided. The Supreme Court in the same passage referred to the
decision of the Privy Council in Lachhrnandas' case [1948] (16) ITR 35 (PC) and
did not disapprove of it. If a coparcener by contrib- Uting his separate
property can enter into a valid partnership with the karta of his fami- ly, as
held by the Privy Council in Lachhman- das' case, there seems no valid reason
why a coparcener cannot, by contributing merely his skill and labour, enter
into a partnership with the karta. If the former does not cut at the root of
the notion of the joint Hindu family, the latter also does not. Even in the
case of the former, the partnership property will consist of the contribution
made by the karta from the coparcenary property and the contribution made by
the coparcener of his individual property- Both taken together would become
partnership property in which all the partners would have interest in
proportion to their share in the joint venture of the busi- ness of partnership
(Narayanappa v. Bhaskara Knshnappa, AIR 1966 SC 1300, 1304 (para 5). If in such
a situation the coparcener entering into the partnership can be a partner in
relation to coparcenary property contributed for the partnership business,
there can be no difficulty in holding that the same result would follow when
the coparcener entering into a partnership only contributes his skill and labour.
In the former case, as stated by the Privy Council in Lachhmandas' case [1948]
(16) ITR 35, the coparcener entering into the partnership, retains his share
and interest in the family property while simultaneously enjoying the benefit
of his separate property and the fruits of its investment. In the same way, it
can be said that in the latter case the coparcener retains his share and
interest in the property of the family while simultane- ously enjoying the
benefits of his skill and labour which he contributes as consideration for
formation of the partnership and for sharing profits.
Learned
standing counsel for the department further sub- 555 mitted that as the profits
earned by a part- nership in which the contribution of capital is only of joint
family funds from the side of the karta would ensure to the benefit of the
entire joint family being earned with the help of the joint family funds, a
coparcener who only contributes his skill and labour for becoming a partner
cannot claim any share in the profits as his separate property and, therefore,
there cannot be any valid partner- ship. Learned counsel in this connection
relied upon the case of V..D. Dhanwatey v. CIT [1968] (68) ITR 365 (SC). Dhanwatey's
case has to be read along with the case of CIT v. D.C. Shah [1969] (73) ITR 692
(SC). In Dhanwatey's case [19681 (68) ITR 365 (SC) a karta of a HUF who entered
into a partnership was paid a salary from the partnership and it was held that
the salary income was the income of the HUF..The basis of the decision was that
the salary was paid because of the investments of the assets of the family in
the partnership business and there was a real and sufficient connection between
the investments from the joint family funds and the remuneration paid to the karta.
In
Shah's case [1969] (73) ITR 692 (SC) also the karta entered into a part- nership
and was paid remuneration. But as the remuneration was paid for the specific
acts of management done by the karta resting on his personal qualification and
not because he represented. the HUF, it was held that the remuneration was his
individual income. Apply- ing the same principle, if a coparcener be- comes a
working partner in a partnership with the karta and gets a share in profits in
consideration of the skill and labour contrib- uted by him, his share in the
profits would be his separate property for the profits coming to his share
would be directly related to his skill and labour and not to be investments of
the joint family funds in the business. The question, however, whether a
coparcener enter- ing into a partnership with the karta does really contribute
any labour or skill for the management of the partnership business in which he
is given a share in profits is a question of fact which will have to be deter-
mined in the light of the circumstances of each case. In case it is found that
there is no real contribution of skill or labour by the coparcener for sharing
the profits, the part- nership will be held to be unreal and ficti- tious but
that is an entirely different thing from saying that there cannot at all be a
valid partnership between the karta and a coparcener when the latter only con-
556 tributes his skill and labour and is merely a working partner. In our
opinion, the argument that as the capital investment in the partner- ship is
only of the funds of the undivided family, there cannot be any partnership,
cannot be accepted.
The
conclusion reached by us is fully support- ed by a decision of the Mysore High
Court in I.P.Munavalli v. CIT [1969] (64) ITR 529, with which we respectfully
agree. The Bombay High Court in Shah Prabhudas Gulabchand v. CIT [1970] 77 ITR
870 took a contrary view. With great respect and for the reasons give above, we
are unable to agree with In Commissioner of Income-tax, Lucknow v. Gupta Brothers [1981] 131, ITR
492, the Alla- habad High Court took the same view when it said :- "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 consti- tutes
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 contemplatedby the Contract
Act, a valid partnership had come into existence, which ought to have been
registered." Learned counsel for the respondent has laid considerable
emphasis on two points. Firstly, it was urged that Hindu Law does not recognise
any contract among the coparceners inter se except in two cases, namely, where
there is a partial partition and where a coparcener has separate property and
brings in such separate property as capital towards consid- eration for
becoming a partner. While elaborating the first point, it has been urged that
if, even in a case where there is neither partial partition nor any separate
property is brought in by the coparcener as consideration for the part- nership
it is held that a valid partnership can still come into existence, it would
create an anomalous situation inasmuch as such coparcener would be having an
interest in the coparcenary property both as a coparcener and partner.
Reliance
in. this behalf has been placed on the following observations made in the case
of Bhagat Ram Mohanlal (supra):
"If
members of a coparcenary are to be regard- ed as having become partners in a
firm with strangers, they would also become under the partnership law partners
inter se, and it would 557 cut at the very root of the notion of a joint
undivided family to hold that with reference to coparcenary properties the
members can at the same time be both coparceners and part- ners.
The
second point emphasised by learned counsel for the respondent is that skill and
labour cannot be treated as property.
It
must be confessed that the observations made in' the case of Bhagat Ram Mohanlal
(supra) relied upon do appear to support the contention of the Revenue. In the
case of Firm Bhagat Ram Mohan Lal v. 'CEPT[1956] (29) I.T.R. 521 (S.C.), a
partnership had been entered into in 1940 between Mohan Lal (M) and two
outsiders (R&G), M admittedly representing a HUF consisting of himself and
his two brothers Chotelal (C) and Bansilal (B). In 1944, the HUF got divided
and, conse- quently, the firm was reconstituted with five partners viz.
the
two outsiders (R&G), M, C and B. This, according to the Revenue, had
resulted in a "change in the persons carrying on the business"
leading to certain consequences adverse to the assesses in the context of the
Excess Profits Tax Act.
The
firm attempted to get over the difficulty in two ways:
(a) It
was contended that, even initially, in 1940, the firm must be considered as
having been constituted with all the five persons, R, G, M, C and B, as
partners; in other words when M entered into the partnership on behalf of the
HUF, the consequence was that not only he but his two undivided brothers B
& C also became partners in the firm in their individu- al capacity; and
(b) It was suggested that when M entered into the partnership agreement in
1940, all the three coparceners M, C & B, could be regarded as having
entered into the contract as kartas of (i.e, representing) the HUF.
Both
these contentions were negatived. So far as the first contention was concerned,
the Court observed that it could be disposed of as being an afterthought
opposed to the factual findings in the case. However, the Court proceeded to
observe that it was difficult to visualise a situation, which the appellants
contended for, of a HUF entering into a partnership with strangers through its karta
and the junior members of the family also becoming its partners in their
personal capacity. After referring to Lachman Das (supra) and Sunder Singh Majithia
v. CIT [1942] (10) ITR 457, (P.C.) where divided members of a family were held
competent to carry on the erstwhile joint family business in partnership, the
Court pointed out:
558
"But in the present case, the basis of the partnership agreement of 1940 is
that the family was joint and that Mohanlal was its karta and that he entered
into the partnership as karta on behalf of the joint family. It is difficult to
reconcile this position with that of Chotelal and Bansilal being also partners
in the firm in their individ- ual capacity, which can only be in respect of
their separate or divided property.' (Emphasis supplied).
This
was followed by the observations on which Sri Manchanda, learned counsel for
the Revenue has placed con- siderable reliance. Similarly, so far as contention
(b) was concerned, the Court observed that "even if such a conten- tion
could be raised consistently with the principles of Hindu LAW', it was in the
teeth of the pleadings in the case and so could not be allowed to be raised.
These passages no doubt suggest that, in the Court's view, an undivided member
of a HUF cannot be a partner along with the karta of the family, except where
he furnishes capital in the form of property belonging to him in his individual
right or ob- tained by him on a partition of the family and that the Court left
open the question whether more than one member of a HUF can represent the
family in a partnership with outsid- ers.
It
will be apparent that this Court had rejected both contentions of the assessee
as being an afterthought or contrary to the factual findings in the case. This
was sufficient to dispose of the case. However, the further expressions of
opinion, coming from such an eminent Judge as Venkatarama Ayyar, J., are
entitled to the greatest weight and respect. We, however, think that the scope
of these observations, made in the context of the special facts and
circumstances of the case, has been magnified by the learned counsel for the
Revenue. We may observe, at the outset, that his basic postulate that, under
the Hindu Law, there can be no contract inter se between the undivided members
of the family is basically incorrect. This Court has recognised the validity of
such contract in various situations. For in- stance, an undivided member of a
HUF (including its karta) can be employed by the HUF for looking after the
family business and paid a remuneration therefor: vide, Jitmal Bhuramal v. CIT
[1964] (44) ITR 887 ( S C ) and Jugal Iri- shore Baitleo Sahai v. CIT [1967] (
63 ) ITR 238 S.C. Again on the second contention which was left open,
subsequent decisions of this Court have held that it is open to more than one
member of a HUF to represent the family in partner- ship with strangers. In
Commissioner of Income-tax v. Sir Hukumchand Mannalal and Co. [1970] (78) ITR
18, it was 559 held by this Court:
"The
Indian Contract Act imposes no disability upon members of a Hindu undivided
family in the matter of entering into a contract inter se or with a stranger. A
member of a Hindu undivided family has the same liberty of contract as any
other individual: it is re- stricted only in the manner and to the extent
provided by the Indian Contract Act. Partner- ship is under section 4 of the
Partnership Act the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all: if such
a relation exists, it will not be invalid merely because two or more of the
persons who have so agreed are members of a Hindu undivid- ed family."
This position has also been recognised in Ratanchand Darbarilal v. Commissioner
of Income Tax [1985] (155) ITR 720. In that case, there were two firms, one at Katni
and one at Satna, constituted by two members of an undivided family with
others. The question posed however was whether the Satna firm could be treated
as an independent unit of assessment. This Court held that it was a question of
fact on which the Tribunal's findings were conclusive. In this view, it left
unanswered, as academic, the following ques- tion on which the Commissioner had
sought a reference:
"Whether,
on the facts and in the circum- stances of the case, the Appellate Tribunal was
justified in directing that the firm owning the Satna business should be
registered in spite of the fact that the members of the two HUFs entered as
partners inter se without their effecting in the first instance a sever- ance
of joint status by partitioning either partially or totally, the assets of the
re- spective HUFs?" However, in the course of its judgment, the Court
observed:
"The
High Court obviously fell into an error in proceeding on the footing that,
without a partition or a partial partition,. some of the members belonging to
the Hindu undivided family could not constitute themselves into a partnership
firm. We do not think this view is correct in law. It is a well-settled proposi-
tion applicable to Hindu Law that members of the joint family and even
coparceners can, without disturbing the status of a joint family or the coparcenary,
acquire separate property or run independent business for themselves." 560
Turning now to the specific observations on which reliance has been placed, we
do not think that they should be read as permitting a partnership between the karta
of a HUF and its individual member only when he brings in some capital but not
otherwise. In the context in which they were made, it is seen that they were
only limited to point out that there was no claim before the Court, as in Lachmandas
or Majithia that the other member had brought in any sepa- rate or divided. property
as capital. On the contrary, the claim was that the coparceners of the HUF
other than the karta, who was the co nominee partner, should be regarded as
partners, though they had not entered into any such agree- ment and had placed
neither capital nor services at the disposal of the firm. It was this claim
that was held un- tenable. Much more significance cannot be read into these
observations for, if construed too strictly and in the manner suggested, they
will militate against the possibility of a valid partnership being formed in
two classes of cases about which there can be no doubt. The first is where an
undivided member seeks to become a partner by furnishing capital which has been
held permissible in Lachmandas and approved in Firm Bhagat Ram Mohanlal itself.
The other is the case of a partnership firm on which more than one part- ner
represents a HUF, the validity of which has been upheld in the cases referred
to earlier. The observations cannot, therefore, be read as precluding altogether
a claim by an undivided member of a HUF that he has in fact agreed to become a
partner along with the karta for genuine and valid reasons. In our view, the
Allahabad, Madhya Pradesh and Mysore decisions rightly held that the
observations in Finn Bhagat Ram Mohanlal do not militate against the formation
of a valid partnership in such cases.
This
takes us on to the second point made by Sri Man- chanda that, though an
undivided member can, by contributing separate capital, enter into a
partnership with the karta qua the family business, he cannot do so by offering
as his contribution to the firm not material capital but only his labour and
skill. With regard to this submission made by the learned counsel for the
respondent that skill and labour cannot be equated with property, it may not be
out of place to refer to some earlier history. As has been stated in Mulla's
Hindu Law, before the commencement of the Hindu Gains of Learning Act, 1930
(hereinafter referred to as the Act) it was settled law that income earned by a
member of a joint family by the practice of a profession or occupation
requiring special training was joint family property if such training was
imparted at the expense of joint family proper- ty. This being so, if such a
member of a joint family were to enter into a partnership with the karta of the
family to carry on business, the fruits even of his skill and labour would have
been property of the joint 561 family and the very purpose of entering into a
partnership namely having a share of his own in the profits of the business
would have been defeated. In this state of law if an agreement was reached
between such member of the joint family and the karta that out of the profits
of the business a defined share will be payable to and be the separate property
of such member, the agreement would have been illegal. Indeed such a member
would have been getting a separate share in the profits of the business without
making any contribution of his own.
However,
an almost complete transformation in the legal position was brought about by
the Act. Sections 2 and 3 of the Act which are relevant in this behalf read as
hereunder:
"2.
In this Act, unless there is anything repugnant in the subject or context, -
(a) 'acquirer" means a member of a Hindu undivided family, who acquires
gains of learn- ing;
(b)
"gains of learning" means all acquisitions of property made
substantially by means of learning, whether such acquisitions be made before or
after the commencement of this Act and whether such acquisitions be the
ordinary or the extraordinary result of such learning;
and
(c)' "learning" means education, whether elementary, technical
scientific, special or general, and training of every kind which is usually
intended to enable a person to pursue any trade, industry, profession or
avocation in life.
3.
Notwithstanding any custom, rule or inter- pretation of the Hindu law, no gains
of learn- ing shall be held not to be the exclusive and separate property of
the acquirer merely by reason of- (a) his learning having been, in whole or in
part imparted to him by any member living or deceased, of his family, or with
the aid of the joint funds of his family or with the aid of the funds of any
member thereof, or (b) himself or his family having, while he was acquiring his
learning, been maintained or supported, wholly or in part, by the joint funds
of his family, or by the funds of any member thereof." 562 As seen above,
the definition of the term "learning" is very wide and almost
encompasses within its sweep every acquired capacity which enables the acquirer
of the capacity "to pursue any trade, industry, profession or avocation in
life." The dictionary meaning of "skill", inter alia, is:
"the
familiar knowledge of any science, art, or handicraft, as shown by dexterity in
execution or performance; technical ability" and the meaning of "labour"
inter alia is: "physi- cal or mental exertion, particularly for some
useful or desired end." Whether or not skill and labour would squarely
fall within the traditional jurisprudential connotation of property e.g. jura
in re propria, jura in re aliena, corpo- real and incorporeal etc. may be a
moot point but it cannot be denied that skill and labour involve as well as
generate mental and physical capacity. This capacity is in its very nature an
individual achievement and normally varies from individual to individual. It is
by utilisation of this capacity that an object or goal is achieved by the
person possessing the capacity. Achievement of an object or goal is a benefit.
This benefit accrues in favour of the individual possessing and utilising the
capacity. Such individual may, for consideration, utilise the capacity
possessed by him even for the benefit of some other individual. The nature of
consideration will depend on the nature of the contract between the two
individuals. As is well known, the aim of business is earning of profit. When
an individual contrib- utes cash asset to become partner of a partnership firm
in consideration of a share in the profits of the firm, such contribution helps
and at any rate is calculated to help the achievement of the purpose of the
firm namely to earn prof- it. The same purpose is, undoubtedly, achieved also
when an individual in place of cash asset contributes his skill and labour in
consideration of a share in the profits of the firm. Just like a cash asset,
the mental and physical capac- ity generated by the skill and labour of an
individual is possessed by or is a possession of such individual. Indeed, skill
and labour are by themselves possessions. "Any posses- sion" is one
of the dictionary meanings of the word 'proper- ty'. In its wider connotation,
therefore, the mental and physical capacity generated by skill and labour of an
indi- vidual and indeed the skill and labour by themselves would be the
property of the individual possessing them. They are certainly assets of that
individual and there seems to be no reason why they cannot be contributed as a
consideration for earning profit in the business of a partnership firm. They
certainly are not the properties of the HUF but are the separate properties of
the individual concerned.
To
hold to the contrary, we may observe, would also be incompatible with the
practical, economic and social reali- ties of present day living. We no longer
live in an age when every member of a HUF considered it his duty to place his
personal skill and labour at the services of the family with no quid pro quo
except the right to share ultimately, on a partition, in its general
prosperity. Today, where an undi- vided member of a family 563 qualifies in
technical fields - may be at the expense of the family - he is free to employ
his technical expertise else- where and the earnings will be his absolute
property; he will, therefore, not agree to utilise them in the family business,
unless the latter is agreeable to remunerate him therefor immediately in the
form of a salary or share of profits. Suppose a family is running a business in
the manufacture of cloth and one of its members becomes a tex- tile expert,
there is nothing wrong in the family remunerat- ing him by a share of profits
for his expert services over and above his general share in the family
properties. Like- wise, a HUF may start running a diagnostic laboratory or a
nursing home banking on the services of its undivided mem- bers who may have
qualified as nurses and doctors and prom- ising them a share of profits of the
'business' by way of remuneration. This will, of course, have to be the subject
matter of an agreement between them but, where there is such an agreement, it
cannot be characterised as invalid. It is certainly illogical to hold that an
undivided member of the family can qualify for a share of profits in the family
business by offering moneys - either his own or those de- rived by way of
partition from the family - but not when he offers to be a working partner
contributing labour and services or much more valuable expertise, skill and knowl-
edge for making the family business more prosperous.
For
the reasons discussed above, we have reached the conclusion that the decisions
referred to above which sup- port the contentions of learned counsel for the
appellants lay down the correct legal position. The two decisions relied on by
the learned counsel for the respondent in the cases of Pitamberdas Bhikhabhai
and Co. and Shah Prabhudas Gulabchand of the Gujarat and Bombay High Courts
respective- ly 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 a
HUF and con- tributes only his skill and labour, no contribution of any
separate asset belonging to such parruer is made to meet the requirement of a
valid partnership. Reverting to the facts of the instant case it is noteworthy
that it is not the case of the Revenue that the partnership between Chandrakant
Manilal Shah as karta of HUF and Naresh Chandrakant was fictitious or invalid
on any other ground. Consequently, the judgment of the High Court cannot be
sustained.
In
view of the foregoing discussion, this appeal suc- ceeds and is allowed. The
judgment of the High Court is set aside and the question referred to the High
Court is an- swered in the affirmative, in favour of the assessee and against
the Revenue. In the circumstances of the case, however, there shall be no order
as to costs.
N.P.V,
Appeal allowed.
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