Introduction 

It was noted by the Supreme Court that it is illogical to hold that an undivided member of the family can qualify for a share of profits in the family business by offering moneys 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 prosperous. 

Facts

• In this case, Chandrakant Manilal Shah (petitioner) was the Karta of a Hindu undivided family (HUF) and the family was carrying on business of cloth. 
• Naresh Chandrakant, son of the petitioner joined the business on the monthly salary, and it was stated that the business was converted into partnership firm between the petitioner and the son. 
• An application was made for firm registration dismissed by the Income-tax officer because 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. 
• The appeal was then made before the Bombay High Court which dismissed the appeal and confirmed the orders of the Income Tax Appellate Tribunal. 
• The Appeal was then preferred to the Supreme Court. 
• It was contended by the Petitioner 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 and could not in law detract from a valid partnership being created. 
• The respondent contented that Hindu Law did not recognise any contract among the coparceners except in two cases 
  • 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. 

Issues Involved

• Whether there was a valid partnership between the petitioner, as the Karta of the HUF and Mr. Naresh Chandrakant, a member of the family? 

Observations 

• The Supreme Court noted that the main purpose of the business is to earn 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. 
  • The same purpose is, undoubtedly, achieved also when an individual, in place of cash assets, contributes his skill and labour in consideration of a share in the profits of the firm. 
  • With the changing needs of society, skill and labours are certainly assets of that individual and there is no reason why they cannot be contributed as a consideration for earning profit in the business of a partnership. 
• The Supreme Court also noted that the present case is not for avoiding tax liability and hence not a revenue case and therefore the reasoning given by the High Court cannot be sustained.

Conclusion 

The Supreme Court overturned the judgement of the High Court and the Income Tax tribunals and held that the partnership is valid between the petitioners.