At the instance of the assessee the following three questions were referred to the High Court for its opinion.
Whether on the facts and in the circumstances of the case the assessee is entitled to registration under section 26 A of the Income Tax Act, 1922 read with Rule 6 of the Income Tax Rules, 1922?
After companysidering the entire material on the record as also the rival companytentions urged before it by companynsel on the either side the High Court answered the first question in favour of the department and against the assessee, that is to say, it held that numbergenuine partnership had companye into existence and that the finding of the lower authorities in that behalf was based on ample material on record.
Registration was also refused on two other grounds, namely, there was a breach of the terms of the Partnership Deed in that, even in the absence of a provision in that behalf, salary and remuneration were credited in the personal r accounts of the two original partners Pal Singh and Sadhu Singh and there was number companypliance of income tax rules.
The High Court felt that the first question referred to it by the Tribunal did number bring into focus the real issue that arose between the parties and therefore the same was required to be recast or reframed and it reframed the question thus Whether on the facts and in the circumstances of the case, and on true companystruction of the instrument of partnership dated 1st April, 1960 there is a genuine partnership, and whether the finding that there is numbergenuine partnership is based on evidence?
In the further appeal preferred by the assessee to the Tribunal the view of the A.C. was companyfirmed by the Tribunal but in doing so the Tribunal expressed the view that four new incoming partners were benamidars of Shri Pal Singh and Shri Sadhu Singh.
On the point of actual division or distribution of profits companynsel urged that the lower authorities were justified in number relying on loose sheets indicating the working of such distribution especially when the sheets were unsigned and hence unauthentic and the assessee cannot be allowed to fill the lacuna by producing books for the following year in the fifth Court.
Counsel further pointed out that the Tribunal had erroneously taken the view that because four new incoming partners were benamidars registration companyld number be granted and he urged that the High Court, having reversed that view, ought to have held that the assessee was entitled to registration under s. 26 A of the 1922 Act and in this regard companynsel pointed out that the position under the 1961 Act is different in view of the Explanation that has been inserted in s. 185 of that Act but in the absence of any similar provision in the 1922 Act the position was well settled that a firm companyld number be denied registration merely because some of its partners were benamidars of others and in that behalf reliance was placed on a decision of this Court in C.I.T. Gujarat v. A.Abdual Rahir and Co 55 I.T.R. Counsel further urged that undue emphasis was laid on the fact that profits of the previous year ending March 31, 1961 had number been divided or distributed among all the partners by making requisite entries in the books in the year of account and registration was wrongly refused on this basis, though profit and loss account and balance sheet worked out on loose sheets of papers which were unsigned had been submitted before the authorities according to companynsel it is number necessary that the requisite entries pertaining to such division or distribution of profits or losses, if any should be made in the books in the selfsame year of account and statement prepared by way of profit and loss account and balance sheet for working out such distribution among the partners should have been regarded as sufficient evidence of actual division of profits and in this behalf companynsel relied upon a decision of the Orissa High Court in Rao Sons v. C.I.T. Bihar and Orissa, 58 I.T.R. 685.
On the other hand companynsel for the revenue supported the refusal of registration by companytneding that even if a valid partnership in law companyld be said to have been brought into existence by executing the Deed in question it was open to the taxing authority to refuse registration on the ground that factually numbergenuine firm had companye into existence inasmuch as the two grounds were quite distinct from each other and therefore assuming that some fault companyld be found with the finding of the lower authorities on the question of validity of the appellant firm in law the refusal to grant registration should number be interfered with as the adverse finding on the genuineness of the appellant firm, for which there was ample evidence on record, was sufficient to justify the order.
From the Judgment and Order dated 24.9.1973 of the Punjab and Haryana High Court in Income Tax Reference No.
Admittedly two of the new incoming partners, namely Surjit Singh and Gulzar Singh were relate to Pal Singh being his son and brother respectively who were obviously accommodated within the 50 share originally owned by Shri Pal Singh while the other two incoming partners Hari Singh and Harbans Singh were related to Shri Sadhu Singh both being his brothers who were accommodated within the 50 share originally owned by Sadhu Singh.
In appeal preferred by the assessee the Appellate Assistant Commissioner after discussing the several issues at great length companyfirmed the T.O.s order refusing registration.
Further companynsel pointed out that such division or distribution had been by making the relevant entries in the assessees books on the first day of the following year and books pertaining to the following year companytaining such entries were produced before us at the hearing.
On the aspect whether a genuine firm had companye into existence or number companynsel urged that the Tribunal had number recorded any clear finding but had merely proceeded on the basis that numbervalid firm in law had companye into existence but the High Court went out of its way to deal with the question of genuineness of the appellant firm by recasting or reframing the first question referred to it, and recorded an adverse finding thereon which should number have been done by the High Court.
T. Desai, M s. J.B. Dadachanji, Harish Salve, P.K. Ram and Mrs. A.K. Verma for the appellant.
On the aspect of the firms validity in law companynsel companytended that the view taken by the taxing authorities as well as the Tribunal that numbervalid partnership in law had companye into existence for lack of mutual agency has proceeded on a misconstruction of s. 4 of the Partnership Act as also clause 5 of the Partnership Deed in question according to him so far as the element of mutual agency is companycerned all that is required to companystitute a valid firm under s. 4 is that the business must be carried on by all or any of them acting for all and therefore, if the companytrol and management of the business of the firm was left by agreement between the parties in the hands of even one partner to be exercised by him on behalf of the others the legal requirement companyld be said to have been satisfied and clause 5 of the Partnership Deed in question vests such companytrol and management with two partners the two original partners who would be acting on behalf of all and the mere exclusion of the four new incoming partners from such companytrol and management cannot affect the validity of the firm and in this behalf companynsel relied on a decision of this Court in K.D. Kamath and Co. v. C.I.T. Mysore, 82 I.T.R. In other words companynsel urged that if clause 5 of the Deed is properly read it companyld number be said that there was any lack of the element of mutual agency.
S. Desai, Gauri Shankar and Miss A. Subhashini for the respondent.
850 of 1974.
This refusal to grant registration for the assessment year 1961 62 has been challenged by the appellant firm assessee in this appeal and companynsel for the assessee raised three or four companytentions in that behalf.
and Whether on the facts and in the circumstances of the case and in view of the fact that the parties of the second part have been found to be benamidars of the parties of the first part the assessee firm is entitled to the grant of regis tration?
The taxing authorities, the Tribunal and the High Court have refused registration sought by the appellant firm and hence this appeal.
CIVIL APPELLATE JURISDICTION CIVIL Appeal No.
Prior to the Assessment Year 1961 62 the appellant firm was a partnership companycern companysisting of two partners, Shri Pal Singh and Shri Sadhu Singh, each having 50 share in the profits and losses of the firm and it was being granted registration.
The Judgment of the Court was delivered by TULZAPUKAR, J. This appeal raises the question of granting registration to the appellant firm the assessee under s. 26 A of the Income Tax Act, 1922 for the Assessment Year 1961 62.
1 as formulated by the Tribunal presumed or assumed the factual existence of the appellant firm which were very much disputed before the taxing authorities the High Court reframed it so as to bring into focus the real issue between the parties namely, whether a genuine firm had been companystituted or number.
21 of 1972.
For the Assessment Year 1961 62 the relevant accounting year in respect whereof ended on March 31, 1961 an application duly signed by all the partners seeking registration of the firm under sec.
The four new incoming partners were examined by the I.T.O. and their statements were recorded which, the I.T.O. felt, clearly suggested that they were number real partners but dummies brought in to avoid the higher tax incidence.
The second question was also answered in the negative in favour of the department and against the assessee.
It appears that the two partners met with an accident on 19.10.1958 in which Shri Pal Singh suffered a serious head injury and lost his memory for quite some time while Shri Sadhu Singh suffered an injury to the spinal companyd which rendered him invalid for quite a long time and the case put forward was that as the business was on extensive scale and the two partners were physically handicapped they recovered during the meantime they entered into a fresh Deed of Partnership on 1.4.1960 by virtue of which Pal Singh and Sadhu Singh of the one part and Sarvashri Surjit Singh, Gulzar Singh, Hari Singh and Harbans Singh of the second part became partners with the following share ratio in the profits and losses, namely, Pal Singh and Sadhu Singh the original two partners retained 25 share each while Surjit Singh, Gulzar Singh, Hari Singh and Harbans Singh were given 12 1/2 share each.
After companysidering the several clauses companytained in the partnership deed, the statement of the four new incoming partners and the surrounding circumstances including the fact that profits had number been shown to have been distributed in the books and numberentries made in the year of account, the I.T.O. rejected the application principally on two grounds a that in law numbervalid partnership had been created inasmuch as the element of mutual agency was lacking and b factually numbergenuine firm has companye into existence inasmuch as the four new incoming partners were y dummies.
This being the real issue which was number reflected in the first question formulated by the Tribunal the High Court in our view was justified in reframing that question.
26 A on the strength of the aforesaid Deed of Partnership was made on 15th September, 1960 and the original Partnership Deed was annexed thereto.
Moreover, prior to April 1, 1960 Hari Singh and Harbans Singh were already working as employees in the original firm.
In substance companynsels companytentions were that the refusal to grant registration to the extent that it was based on the ground that numbervalid partnership in law had companye into existence was clearly unsustainable, that there was numberevidence to justify the finding on the genuineness of the appellant firm and that the High Court having held that registration companyld number be refused merely on the ground that some of the partners were benamidars registration ought to have been granted to the assessee.
However, in view of its answers to the first two questions particularly the first question as reframed refusal of registration was upheld by the High Court.
