JUDGMENT K.C. Agrawal, Actg. C.J.
1. The following two questions were referred to this court under Section 256 of the Income-tax Act :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the partnership between the karta of the Hindu undivided family and the coparcener was a valid partnership ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the partnership which came into existence by the partnership deed dated August 28, 1971, was a valid partnership and in granting registration to the assessee ?"
2. The assessment years involved are 1973-74 and 1974-75. The assessee-firm was constituted by a deed of partnership dated August 28, 1971, with effect from September 1, 1970. According to the deed, the firm was constituted by M.P. Jain as representing the Hindu undivided family, being its karta, with 40% share. The other three partners were Vijay Kumar, Vinay Kumar and Anil Kumar, sons of M.P. Jain, each having 20% share. M.P. Jain contributed his share capital out of the Hindu undivided family funds. Vijay Kumar contributed Rs. 7,000 whereas the two others claimed to contribute their skill and labour. In the assessment year 1972-73, the Income-tax Officer refused to register the firm on the ground that the members of the family cannot enter into a contract with the karta of the same Hindu undivided family of which he was a member. The Appellate Assistant Commissioner allowed registration and the Appellate Tribunal affirmed the order of the Appellate Assistant Commissioner.
3. In the year 1973-74, Vijay Kumar introduced Rs. 7,500 as his capital and Anil Kumar Rs. 7,000 as his capital. The Income-tax Officer allowed registration under Section 185(1)(a) to the assessee-firm for the assessment year 1973-74 which was cancelled by the Commissioner of Income-tax under Section 263 of the Income-tax Act. The matter went up in appeal before the Tribunal which reversed the order of the Commissioner of Income-tax and upheld that of the Income-tax Officer's order.
4. Two questions, as stated above, have been referred.
5. The only question in this case was whether a partner could enter into a contract with the karta of the Hindu undivided family. The assessee's case was that a partnership is a contract and that there being no bar under the law for entering into such a contract between the karta and the members of the Hindu undivided family, the Income-tax Officer incorrectly found that the members of the family cannot enter into a contract with the karta of the Hindu undivided family. In CIT v. Gupta Brothers [1981] 131 ITR 492 (All), the High Court held that being a contract and being found on some consideration, such a contract, as was entered into in this case, is valid.
6. Consequently, we answer question No. 1 in favour of the assessee and against the Department. Question No. 2 is consequential. Accordingly, this question is also answered in the affirmative and in favour of the assessee.