Commissioner of Income Tax vs Brij Bhushan Lal Suresh Kumar

S.S. Sodhi, J.—The two questions of law referred for the opinion of this court read as under :

"(1) Whether, on the facts, the Tribunal has been in error in law in holding that there is no legal bar on the ''karta'' of a Hindu undivided family to enter into a partnership with a co-parcener of his own family ?

(2) Whether, on the facts, the Tribunal has been in error in law in holding that the Appellate Assistant Commissioner rightly reversed the Income Tax Officer''s order cancelling the registration u/s 186(1) of the Income Tax Act, 1961 ?"

To set out the relevant facts, Brij Bhushan Lal, as "karta" of the Hindu undivided family, derived income from property and shares in a number of firms. On November 1, 1963, a sub-partnership agreement was executed by the said Brij Bhushan Lal with his son, Suresh Kumar, a co-parcener in the Hindu undivided family to share the profits derived from the firm, Brij Bhushan Lal Suresh Kumar. The profits of this firm were agreed to be divided between Brij Bhushan Lal and Suresh Kumar in the ratio of 10 : 6. This partnership was granted registration for the assessment years 1964-65 and 1965-66. In other words, the sub-partnership was allowed registration for the assessment year 1964-65 and such registration continued in terms of Section 184(7) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), for the assessment year 1965-66.

In the meanwhile, the Income Tax Officer, dealing with the partial partition case of the Hindu undivided family of Brij Bhushan Lal, which took place in the previous year relevant to the assessment year 1971-72, after recording that there was no partition in the family, held that Suresh Kumar did not contribute any capital to this sub-partnership firm of Brij Bhushan Lal Suresh Kumar and proceeded thereafter to cancel the registration u/s 186(1) of the Act for the assessment year 1965-66. This order was upheld in appeal by the Appellate Assistant Commissioner. The Tribunal, however, decided the appeal in the assessee''s favour. This is the factual background leading to the present reference.

The answer to the first question is provided by the judgment of the High Court of Madhya Pradesh in Ramchand Nawalrai Vs. Commissioner of Income Tax, , where it was held that a co-parcener can enter into a partnership with the karta of his Hindu undivided family by contributing his skill and labour instead of his separate property. This is also the view of the Supreme Court as expressed in Ratanchand Darbarilal Vs. Commissioner of Income Tax, M.P., .

It is also pertinent to note that on the facts, there is a clear finding recorded by the Tribunal that Suresh Kumar, one of the partners of the firm, was a genuine partner and that he contributed his labour and skill to it.

Such being the position, both in law and in facts, question No. (1) has clearly to be answered in the negative, in favour of the assessee and against the Revenue and, as a consequence, question No. (2) must be answered in the affirmative again in favour of the assessee and against the Revenue.

This reference is disposed of accordingly. There will, however, be no order as to costs.