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PETITIONER:

CHANDRAKANT MANILAL SHAH AND ANR.

Vs.

RESPONDENT:

COMMISSIONER OF INCOME TAX, BOMBAY-II

DATE OF JUDGMENT24/10/1991

BENCH:

OJHA, N.D. (J)

BENCH:

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.

HEADNOTE:

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

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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

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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

JUDGMENT:

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

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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

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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

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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

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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

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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-

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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

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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

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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

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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

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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

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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

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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.

564