Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991 Equivalent citations: 1992 AIR 66, 1991 SCR SUPL. (1) 546, 1992 UPTC 2 784, 1992 SCC 197, AIR 1992 SUPREME COURT 66, 1992 (1) SCC 76, 1991 AIR SCW 2736, 1992 TAX. L. R. 30, (1992) 60 TAXMAN 106, 1992 (2) UPTC 784, (1991) 4 JT 171 (SC), 1991 KERLJ(TAX) 788, (1992) 1 BANKLJ 401, (1992) 193 ITR 1, (1991) 100 CURTAXREP 91, 1992 CHANDLR(CIV&CRI) 410, AIR 1992 SUPREME COURT 197 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. Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  1 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 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 Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  2 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 JUDGMENT: page 341; disapproved. Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  3 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; 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. 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 Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  4 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 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?" Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  5 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 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. Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  6 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 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 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 Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  7 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- 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 Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  8 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- 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 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. Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  9 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: "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 Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  10 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 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 Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  11 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." 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 Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  12 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 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." 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: Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  13 "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 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 Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  14 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. Chandrakant Manilal Shah And Anr vs Commissioner Of Income Tax, Bombay-Ii on 24 October, 1991  15