M/S.ISHWAR BHUVAN HINDU HOTEL, BOMBAY. vs. C.I.T.-X,BOMBAY.

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICGTION INCOME TAX REFERENCE NO. 73 of 1988 Ishwar Bhuvan Hindu Hotel ... Applicant. vs. The Commissioner of Income Tax ..... Respondent Mr. P. J. Pardiwala for Applicant. Mr. Ashok Kotangale for Respondent. CORAM: V. C. DAGA AND A. S. AGUIAR JJ.

Date:27th June, 2005. ORAL JUDGMENT: (Per A. S. Aguiar J. ) 1. The substantial question of law referred to under section 256(1) of the Income-tax Act for consideration of this court by the Tribunal at the instance of the assessee are as follows: (1) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the Assessment Year 1980-81 no valid partnership could CNR No : HCBM020000771988 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

2 have been formed between I. P. Barot, representing his HUF as Karta and Shri Rajnikant I. Barot, and his son who was member of the said HUF? (2) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the Assessment Year 1980-81 no valid partnership could have been formed between I. P. Barot, representing his HUF as Karta and his son Shri Kamlesh J. Barot, who was member of the said HUF? (3) Whether on the facts and in the circumstances of the case, the assessee firm was entitled to renewal of registration for the Assessment Year 1979-80 and grant of registration for Assessment Year 1980-81 on the basis of decision that may be given by the High Court in R.A. No.1440/Bom/83, pending before the said Court?” 2. The aforesaid questions of law arise out of the order of the Income- tax Tribunal dated 21st January 1986 in ITA nos. 2612 and 6213/Bom/81. The assessee which is a Partnership firm filed an application for continuation of registration for the Assessment Year 1979-80 and for obtaining registration for the Assessment Year 1980-81. The said two applications were dismissed by the Income Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

3 Tax Officer. The first application was dismissed on the ground that no registration had been granted for the Assessment Year 1978-79. The second application was rejected on the ground that the partnership was not valid. The appeals filed by the assessee before the Commissioner of Income Tax (Appeals) against the said orders were dismissed on the basis of the order of the Tribunal in the appeal for the Assessment Year 1978-79. The further appeal to the Tribunal was also dismissed by the Tribunal relying on its order for the Assessment Year 1978-79. The facts relevant for the Assessment Year 1978-79 , which are also relevant for the Assessment Years 1979-80 and 1980-81, are as follows:

The assessee – partnership firm came into existence by partnership deed dated 30.8.1968 between one I. P. Barot and J. P. Barot, in their capacity as Kartas of their respective Hind Undivided Families. The assessee firm was granted registration, which was renewed from year to year upto Assessment Year 1977-78. During the Assessment Year 1978-79 there was a change in the constitution of the said partnership and one Shri Mahesh s/o. Shri I. P. Barot , also a member of the HUF of Shri I.P. Barot, was admitted as a working partner, without capital investment by him with effect from 21st February, 1978 under a fresh deed of partnership dated 23rd Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

4 May 1977 and the shares in profits and losses of the partners in the assessee firm were fixed as follows:

(1) Shri I. P. Barot, HUF 35% (2) Shri J. P. Barot, HUF 35% (3) Shri Mahesh I. Barot, 30% 3. The I.T. O. came to the conclusion that there was diversion of income by the continuing partner I. P. Barot in favour of Shri Mahesh I. Barot who was merely a name-lender. It was further found that the said Mahesh I. Barot was found to be studying in college and not attending the business of the firm and hence the application for registration of the firm was rejected. The Commissioner of Income-tax (Appeals) in appeal from the said order of the ITO., held that merely because Mahesh I. Barot did not attend to the business of the assessee firm for the whole day, the ITO was not justified in coming to the conclusion that he was not a genuine partner. The Commissioner however, upheld the ITO's order of refusal of registration on the ground that Mahesh I. Barot, a coparcener to the HUF has brought no capital of his own and therefore there can be no partnership between him and his undivided Hindu Family represented by his father I. P. Barot. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

5 4. In appeal before the Tribunal reliance was placed on the decision of the Allahabad High Court in C.I.T. vs. Gupta Brothers (131 ITR 492) and the decision of the Madhya Pradesh High Court in Ramchand Nawalrai vs. C.I.T.  (130 ITR 826). Alternatively it was urged that the ITO having exercised the option of assessing Shri I. P. Barot HUF on 20th January 1979 in respect of his share of profit from the assessee firm for the Assessment Year 1978-79, was precluded from treating the assessee firm as an unregistered firm on 20th March 1981. 5. The tribunal following the decision of the Bombay High Court in Shah Prabhudas Gulabchand  vs. C.I.T.,  [1970]  (77 ITR 870) (Bom.), confirmed the decision of the ITO. No finding was given on the original contention of the assessee firm. 6. For the Assessment Year 1979-80 the assessee firm filed Form No.12 for renewal of registration as there was no change in the constitution of the firm for the Assessment Year 1979-80. The renewal was not granted because the registration had not been granted for the Assessment Year 1978-79. For the Assessment Year 1980-81 there was a change in the constitution of the partnership during the previous year relevant to the Assessment Year 1980-81. Two more partners viz., Shri Rajnikant I. Barot, and Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

6 Shri Kamlesh J. Barot were admitted as working partners. These two partners had also not contributed any capital of their own and were members of the respective Hindu Undivided Family which were partners of the said assessee firm. The application for registration was refused by the ITO relying on the decision in the case of Shah Prabhudas Gulabchand (supra) and the firm was treated as an unregistered firm. The order of the ITO was confirmed by the Commissioner of Income Tax (Appeals) relying on the Tribunal's order in the assessee's own case for the Assessment Year 1978-79 in ITA No. 455/Bom. Dated 2.8.1983. 7. The Tribunal by its order dated 2.8.1983 upheld the order of the Commissioner Income Tax and that of the Income-tax Officer who had based his decision on the judgment of the Bombay High Court in the case of Shah Prabhudas Gulabchand (supra) . In the said decision this court noted the legal position as follows: “The ratio of the decisions of the Judicial Committee and he Supreme Court is that a coparcener can never become a partner in the business carried on by a Karta of an undivided family, unless he is separate and is owner of separate property and makes contribution thereof.” Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

7 8. The material point for consideration is whether the ITO was justified in refusing registration of the assessee firm on the ground that there was no valid partnership firm, since (a) the newly added partner, Mahesh I. Barot, was a member of the HUF of Shri I. P. Barot, (b) Mr. Mahesh I. Barot contributed no capital or assets to the partnership firm and therefore could not be said tobe a valid partner of the said firm. 9. The points in controversy in the aforesaid case has been set at rest by the decision of the Supreme Court in the case of Chandrakant Manilal Shah and anr. vs. Commissioner of Income­ Tax (193 ITR page 1), the brief facts of which are as follows: “C was the karta of a Hindu undivided family which carried on business in cloth. N, one of the sons of C, joined the business on a monthly salary in Apri, 1959. With effect from November 1, 1959, the business was converted into a partnership between C, the karta of the undivided family, and N. The deed of partnership dated November 12, 1959, indicated that N was a working partner having a 35 per cent share in the profits and losses of the firm and the remaining 65 per cent share Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

8 was held by C as karta of the family. N did not contribute any cash assets towards the capital of the firm but was contributing only his skill and labour. The Income-tax Officer rejected the firm's application for registration under section 26A of the Income-tax Act, 1922, on the ground that there was no valid partnership, and the Appellate Assistant Commissioner and the Appellate Tribunal, on appeal, upheld the decision of the Income-tax Officer. The High Court, on a reference affirmed the decision of the Tribunal , holding that there was no valid partnership.” 10.The Supreme Court in the said case reversed the decision of the High Court and observed that the mere fact N 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 C, as the karta, and N was valid and the firm was entitled for registration. The Apex Court further observed that it is not correct to say that, under Hindu law, there can be no contract inter se between the undivided members of a Hindu undivided family. The Supreme Court in the said case approved the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

9 judgment of the Mysore High Court in the case of I.P. Munavalli v. CIT [1969] 74 ITR (Mys), of the Madhya Pradesh High Court, in the case of Ramchand Nawalrai v. CIT [1981] 130 ITR 826 and of the Allahabad High Court in the case of CIT vs. Gupta Brothers (1981) 131 ITR  492, to which reference was made in the order of the Tribunal/ However the Tribunal, finding itself bound by the decision of the Bombay High Court in Shah Prabhudas Gulabchand (supra) rightly did not follow the judgment in the aforesaid cases. The Supreme Court in the case of Chandrakant Manilal Shah and anr.  (supra), referred to the decision of the Privy Council in Lachman   Das   v.   CIT   [1948]   16   ITR   35   (PC),  wherein while reversing the judgment of the of the High Court, it was held by the Privy Council, thus: “After careful consideration, their Lordships cannot accept this view and on general principles 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 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 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

10 its development, their Lordships 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 individual property, not acquired with the aid of or with any detriment to the joint family property. 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 sch transactions 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 considerations, and the result of a separate act evincing a clear intention to break away from the family. The error of the Income-tax Officer lay in his view that, before such a contractual relationship can validly come into existence, the 'natural family relationship must be Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

11 brought to an end. ' This erroneous view appears to have coloured his and the subsequent decisions of the Income-tax authorities.

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.” 11. The Apex Court in Chandrakant Manilal Shah and anr. (supra), noted that the above principle has been applied by several other High Courts to uphold the validity of a partnership between the karta of a Hindu undivided family and an individual member of the family where the latter is taken in as a working partner. Specific reference is made by the Apex Court to the decision of the Mysore High Court in the case of I.P. Munavalli  (supra), wherein it was held by the Mysore High Court , after referring to the decision of the Privy Council in the case of Lacchmandas [1948] 16 ITR 35 and of the Supreme Court in the case of Firm Bhagat Ram [1956] 29 ITR 521 as follows: “So it is clear that the Supreme Court did not dissent Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

12 from the opinion expressed by the Privy Council that 'in respect of their separate or divided property' the coparceners 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 coparcenary cannot become a working partner of a firm of which he and the family represented by its karta are the partners. In Lachhman Das' case [1948]16 ITR 35 (PC), the coparcener placed at the disposal of the firm as his capital his separate property, and in the case of a working partner he contributes his skill or labour or both as the case may be. If the partnership is permissible in Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

13 one case, it would be difficult to assign any reason for reaching the conclusion that it is not permissible in the other.” 12. Reference is also made to the decision of the Allahabad High Court in  C.I.T. vs. Gupta Brothers (131) ITR 492 wherein the Allahabad High Court observed as follows: “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 constitutes 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 contemplated by the Contract Act, a valid partnership had come into existence, which ought to have been registered.”. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

14 13.The Supreme Court in the case of Chandrakant Manilal Shah (supra) overruled the decision of the Bombay High Court in Shah Prabhudas Gulabchand (supra) and of the Gujarat High Court in the case of Pitamberdas Bhikhabhai and Co., v. CIT [1964] 53 ITR 341 (Guj), observing as follows: “ ...... The two decisions relied on by learned counsel for the respondent in the cases of Pitamberdas Bhikhabhai and Co., v. CIT  [1964] 53 ITR 341 (Guj), and Shah Prabhudas Gulabchand vs. C.I.T., [1970] (77 ITR 870) (Bom.), of the Gujarat and Bombay High Courts, respectively, 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 Hindu undivided family and contributes 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....”. 14.In the present case it is not disputed that Mahesh s/o. Shri I. P. Barot was inducted as a working partner. He was contributing his skill and expertise in running the partnership business and therefore Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

15 it cannot be said that he was not a genuine partner and / or was merely a name-lender. In view thereof the orders of the lower authorities need to be set aside. Accordingly questions 1 and 2 of the reference are answered in the negative and in favour of the assessee and consequentially question no.3 has to be answered in the affirmative, in favour of the assessee.

(V. C. DAGA J.)

(A. S. AGUIAR J.) -x-

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICGTION INCOME TAX REFERENCE NO. 73 of 1988 Ishwar Bhuvan Hindu Hotel ... Applicant. vs. The Commissioner of Income Tax ..... Respondent Mr. P. J. Pardiwala for Applicant. Mr. Ashok Kotangale for Respondent. CORAM: V. C. DAGA AND A. S. AGUIAR JJ.

Date:27th June, 2005. For the reasons recorded separately in the accompanying judgment the court passes the following order: In view thereof the orders of the lower authorities need to be set aside. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42

16 Accordingly questions 1 and 2 of the reference are answered in the negative and in favour of the assessee and consequentially question no.3 has to be answered in the affirmative, in favour of the assessee. (Peethambaran T.P.) P. S. to Judge. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:42 Powered by TCPDF (www.tcpdf.org)