Law:

Section:

Section 185 of the Income-tax act, 1961 - Firm - Registration - Validity of partnership - Assessee-firm originally consisted of two partners, M and L, on behalf of their respective HUF - P, a junior member of M's HUF, taken into firm as working partner without any contribution from P - ITO and AAC refused grant of registration - Tribunal reversed AAC's order, holding that impugned partnership was valid as p was a working partner - Whether tribunal was right - Held, yes Facts The assessee-firm originally consisted of two partners, M and L, as respective kartas of their HUFs and had 50 per cent shares each. On 1-4-1972, P, a junior member of M's HUF, joined the firm as a working partner. P did not contribute any cash or other assets of his own for investment in the firm. The new profit ratios were determined at 40 per cent each for M and L and 20 per cent for P. The ITO rejected the assessee's application for registration under section 185 for the assessment year 1973-74. On appeal, the AAC sustained the ITO's order on the ground that P could not become a partner in the firm in which his HUF was already a partner through its karta as this would amount to an agreement of partnership by P with himself. The Tribunal, on second appeal, reversed the AAC's order observing (i) that P had been taken as a working partner, and as such, the partnership was valid ; and (ii) that there was no merit in revenue's contention that if the karta of HUF was a partner of the firm in a representative capacity and if junior member did not bring separate property into partnership assets, it would amount to creating a partnership inter se which would cut at root of a joint undivided family. On reference : Held Partnership is a relation arising out of a contract between persons to share the profits of a business. Being a contract, it must be founded on some consideration so that it should be binding. It is not necessary that the consideration should be cash or, property in order that a binding contract comes into existence. It may take the shape of capital, but it may also take the shape of labour and skill which a working partner puts. Hence, the Tribunal was right in holding that as P…

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