The Commissioner of Income Tax vs Rama Wholesale Cloth Syndicate

P.C. Pandit, J.—The Commissioner of income tax, Punjab, made a petition to this Court u/s 66(2) of the Indian income tax Act, 1922, which was accepted and, as a result thereof the following question of law has been referred by the Appellate income tax Tribunal for the opinion of this Court:

Whether the assessee was entitled to registration u/s 26-A of the Indian income tax Act?

After the partition of the country, there was shortage of cloth all over the country, with the result that its supply and distribution was being controlled by the Civil Supplies Department. This Department had asked the cloth dealers to form Associations in the various districts to import cloth from the mills for onward distribution to the retail dealers. On 22nd July, 1950, 14 whole sale dealers entered into an Organisation and formed ''''Messrs. Wholesale Cloth Syndicate" in Karnal District. According to the income tax authorities, it was an association of persons, while, according to the Syndicate, it was a partnership firm. A regular deed of partnership was drawn up, in which the names of these 14 persons and their shares inter se were specifically enumerated-This deed was signed by all of them. This Syndicate was registered u/s 26-A of the Indian income tax Act, during the assessment proceedings for the year 1951-52. According to the counsel for the Department, this was done under "executive instructions" given by the Central Board of Revenue as a confessional measure because as a matter of fact, the number of the partners in this Syndicate exceeded 20, since every partner was representing his separate firm On 6th September, 1952 when the assessment for the year 1952-53 was going to be made, the assessee-Syndicate filed an application for the renewal of registration. The income tax Officer, however, rejected this application, because he found that the number of partners in this Syndicate exceeded 20, which rendered the partnership deed invalid. He further found that 11, out of these 14 persons were partners of smaller firms and were not acting in their individual capacity. He also noticed that the share-profits from this Syndicate had been taken to the books of their respective firms and divided among the partners of those smaller firms according to their respective shares. Moreover, the share capital in the Syndicate had also been invested by the firms, which they were representing. He also remarked in his order that the concession given by the Government to this Syndicate with regard to registration during the previous year had been withdrawn.

The Syndicate went in appeal to the Appellate Assistant Commissioner, income tax Officer.

The assesses then filed a second appeal before the Appellate Tribunal, which was accepted on the ground that the deed clearly showed that the contracting parties were only 14 and not more and that there was no merit whatsoever in the objection raised by the income tax Authorities. As a result, it directed the income tax Officer to register the Syndicate u/s 26 A of the income tax Act.

The Appellate Tribunal in arriving at its finding that the contracting parties were only 14 and not more, has solely relied on the partnership deed produced in the case. Undoubtedly, the income tax Officer and the Appellate Assistant Commissioner had based their decisions on various other findings of fact. It is pertinent to mention that the Tribunal had not reversed any of those findings. It is an established proposition of law that income tax Authorities can go behind a partnership-deed to find out the true state of affairs. The procedure adopted by the Tribunal in giving the finding merely on the strength of the partnership-deed and without reversing the other findings of fact given by the income tax Officer and the Appellate Assistant Commissioner is, in my opinion, not correct.

The income tax Officer had found:

(a) That the assesses-Syndicate was formed under instructions and orders of the Civil Supplies Department and only the firms dealing in cloth could become partners therein.

(b) The share-profits from this Syndicate had been taken to the books of the respective firms and divided among all the partners of the smaller firms in the same ratio as other business profits.

(c) The share capital in the Syndicate had also been invested on behalf of these smaller firms.

(d) In the previous year, this Syndicate was registered, not because it was legally entitled, but because under some executive instructions the assesses was allowed a concession and the defect of the number of partners exceeding 20 was ignored. This concession, however, had been withdrawn this year.

The Appellate Assistant Commissioner has also found that:

(i) 14 license cloth dealers, 11 out of whom were, admittedly, by themselves separate partnership firms, formed the assessee-Syndicate.

(ii) In 1951-52 registration was granted to the assessee-Syndicate in accordance with the extra-judicial concession allowed by the Central Board of Revenue This concession was later on withdrawn and it was clearly mentioned in the order of revocation that it would apply even to the then pending 1952-53 assessment proceedings.

(iii) It was indirectly admitted by the assessee''s counsel that the capital contribution in the Syndicate came from the partners from their separate partnerships and their shares of profit similarly went there and were distributed in the hands of these partnerships according to the share specifications in these partnerships.

Learned counsel for the assesses-Syndicate submitted that these findings were not based on evidence and were, consequently, vitiated.

After hearing the counsel for the parties, I am of the opinion that the statement of the case is incomplete inasmuch as all the relevant and material facts are not set out therein and I find it difficult to answer the question referred to us c wing to the unsatisfactory nature of the case submitted by the Tribunal. I would, therefore, refer the case back to Appellate Tribunal u/s 66 (4) of the Indian income tax Act, 1922, for a further statement of the case, especially, with regard to the following facts:

What were the executive instructions issued by the Central Board of Revenue under which a concession was given to the assessee-Syndicate with regard to its registrant on and the circumstances under which the concession was later on withdrawn?

What were the instructions and orders of the Civil Supplies Department under which this Syndicate was formed? Could only the firms dealing with cloth become its partners?

Were the licenses regarding the whole-sale cloth business issued in favour of the 14 partners of this Syndicate or were they issued in the names of the firms ?

Were Sarvshri Gobind Ram and Iqbal Chand, the President and Secretary of the Managing Committee of the Syndicate, partners in Messes. Radha Kishan Kanshi Ram and Messrs. Iqbal Chand-Mohan Lal respectively? If not, why were they introduced in the Managing Committee of the Syndicate?

Was the share capital in the Syndicate subscribed by the various firms mentioned in the partnership-deed or by the partners themselves?

Were the profits of the Syndicate divided among all the partners of the firm, mentioned in the partnership-deed, according to their shares in these partnerships?

The supplementary statement of the case should be sent to this Court within three months from today.

Capoor, J.

I agree that the supplementary statement of the case should be submitted on the lines indicated by my learned brother Pandit J.

ORDER

Dulat & P.C. Pandit, J.

8th February 1965- This order may be read in continuation of the one dated 31st May 1963 passed by Capoor J. and myself by which we had asked for a further statement of the case u/s 66 (4) of the income tax Act, 1922, especially with regard to the six points mentioned therein. The supplementary statement has been received. It is significant to mention that the Tribunal had misunderstood points 3 and 5. What was required of the Tribunal in point No. 3 was whether the licenses regarding the wholesale cloth business were issued in favour of the 14 partners of the Syndicate or they had been issued in the names of the firms whom those partners were representing. The reply sent is that the license was issued in the name of the Syndicate, but it was returned to the Civil Supplies Department, Simla, after the Syndicate was dissolved. It is further stated that the copy of this license was no longer available, as the Department concerned had since been abolished. However, a letter from the Civil Supplies and Rationing Department showed that the wholesale license was issued to the Syndicate and was returned to them. This was not the question on which information was sought from the Tribunal. Similarly in point No. 5 the information required was whether the share capital in the Syndicate was subscribed by the various firms mentioned in the partnership deed or by the partners themselves. The reply sent is that the account-books of the Syndicate showed that the share capital was introduced in the name of the 14 partners themselves. Again, this is not what was required of the Tribunal Of course, the account-books of the Syndicate would show that its share capital was subscribed by the 14 partners. The point to be determined was as to what the account-hooks of the various firms mentioned in the partnership-deed disclosed regarding this matter. That was not done by the Tribunal.

The question for determination in the present case is whether the assessee-firm was entitled to registration u/s 26-A of the income tax Act. This will depend on whether the partners of this firm were 14 as mentioned in the partnership deed or they were more than 20 as alleged by the Department, If latter be the case, then admittedly this firm could not be registered. The appellate Tribunal had found that the partnership consisted of only 14 persons and not more. This finding, as is clear from the order of the Tribunal, is based solely on the interpretation of the partnership-deed. The Tribunal has clearly stated in its order that the preamble to the deed clearly sets out that the contracting parties are 14 and not more. Learned counsel for the Department has contended that the Tribunal had erred in law in arriving at this finding, because (a) the Income tax Authorities could go behind the partnership-deed to find out the true state of affairs; (b) the Tribunal had misconstrued the partnership deed the various provisions of which clearly indicated that the partners thereto were not only 14, who had actually signed this deed, but more than 20 and as such this partnership offended the provisions of section 4 of the Indian Companies Act, 1913, and was, consequently, not liable to registration u/s 26-A of the income tax Act; and (c) there was other convincing evidence to show that the partners of the various firms mentioned in the preamble of this deed were also the partners of this syndicate.

So far as (a) is concerned, reliance by the learned counsel was placed on the decision of P. A. RAJU CHETTIAR AND BROTHERS Vs. COMMISSIONER OF INCOME TAX, MADRAS., , which was approved in Messrs. R.C. Mitter and Sons, Calcutta v. Commissioner of income tax, West Bengal (1959) 36 I. T. R. 104. Learned counsel for the assessee, it may be stated, has no quarrel with this proposition of law.

As regards (b) and (c), the finding of fact given by the Appellate Tribunal that there were only 14 partners of this firm can be reversed only if it can be shown that this finding was based either on the misconstruction of the partnership-deed or that it was based on no evidence or that it was perverse ''see in this connection the Supreme Court decision in SREE MEENAKSHI MILLS LIMITED Vs. COMMISSIONER OF Income Tax, MADRAS., . In the present case, since the finding of the Tribunal is based on the interpretation of the partnership-deed, it cannot be said that the same was based on no evidence. Therefore, the only question to be determined is whether this finding was perverse or based on misconstruction of the partnership-deed. Learned counsel for the Department, in the first instance, submitted that the Tribunal had misconstrued the deed and in this connection he mainly, relied on the following points:

(i) The preamble of this deed clearly showed that the 14 persons referred to therein were not there in their individual capacity, because they represented the various firms noted against their names, as for example, partner No. 1 was mentioned as "Shri Ram Labhaya son of Shri Radha Kishan of Messrs. Radha Kishan-Kanshi Ram;"

(ii) The preamble further showed that the 14 firms specified therein were the wholesale cloth licensees of Karnal District and it is these firms which formed a Syndicate for procuring and distributing cloth quota issued to this District; and

(iii) Clause 15 of this deed stated that the entire control of the business of this Syndicate was made over to the Managing Committee consisting of a President, a Vice President a Secretary, a Joint Secretary and a Treasurer. Shri Gobind Ram, who was an outsider, was appointed the President and Shri Iqbal Chand, who too was a stranger, was made the Secretary of this Managing Committee. Both these persons were, however, referred to as ''partners'' in this clause. This clearly showed that even outsiders, and not only the 14 persons, who were the signatories of this document, were the partners of this Syndicate.

So far as point (i) is concerned, the mere mention of the name of the firm against, each partner would not show that all the partners of these firms were also made the partners of this Syndicate. The name of the firm was given simply to identify the person concerned. A Bench of this Court in the Commissioner of income tax, Punjab etc v. The District Ferozepore Registered (Iron and Steel) Stock Holders'' Association Moga 1964 Curr. L. J. (Pb.) 143 held that it was not possible to see how from the deed itself one could conclude that all the nine persons who were mentioned in their individual capacity, but whose description was given as that belonging to certain firms had entered into partnership, as representatives of the firms, for instance, the first party was "L. Braham Dutt son L. Rikhi Ram of Messrs. Rikhi Ram-Mohan Lal, Moga of the first party."

Regarding point (ii), it is not clear on the record as to who were the wholesale cloth licensees. Were they the 14 partners or the firms mentioned against their names? Even in the supplementary statement of the case, as already mentioned above, this matter has not been made clear.

As regards point (iii), it is not correct to say that Shri Gobind Ram or Shri Iqbal Chand were the partners of this Syndicate. Gobind Ram was merely the nominee of partner No. 1 and Iqbal Chand that of partner No. 4.

Under these circumstances, it cannot be said that the partnership-deed had, in any way, been misconstrued by the Appellate Tribunal.

Learned Counsel for the Department then contended that the finding given by the Appellate Tribunal was perverse, because there was other evidence to show that the partners of the various firms mentioned in the preamble of this deed were also the partners of this Syndicate. In this connection, he referred to the facts that the share capital in the Syndicate had been invested on behalf of these firms and the share profits from this Syndicate had also been divided among all the partners of these firms in the same ratio as their other business profits.

This matter has been set at rest by the decision of the Supreme Court in Commissioner of Income Tax, Madras Vs. Sivakasi Match Export Company, , where it was held-

That if the assesses-firm has an existence, the two circumstances relied upon by the Tribunal, namely, that one of the partners of the assessee-firm, brought in the capital from his parent firm, or that the profits earned by some of the partners were surrendered to the parent-firm, would be irrelevant. A partner of a firm can certainly secure his capital from any source, or surrender his profits to his sub-partner or any other person. Those facts cannot conceivably convert a valid partnership into a bogus one.

* * * * * * *

That the Tribunal mixed up the two concepts, viz., the legality of the partnership and the ultimate destination of the partners'' profits. It also mixed up the question of the validity of the partnership and the object of the individual partners in entering into the partnership. If to avoid a legal difficulty, five individuals, though four of them are members of different firms enter into a partnership expressly to comply with a provision of law, no question of fraud or genuineness is involved. Similarly, in Sugar Syndicate Vs. Commissioner Income Tax , it was observed by Subha Rao C.J. and Mohd. Ahmed Ansari J.-

Strangers do not become partners by having a common partner. The position is not different even where the profits of such partners in the partnership are divided between him and the strangers as partners.

For example, where several persons are partners and one of them agrees to share the profits derived by him with a stranger, the agreement does not make the stranger a partner in the original firm, but results in what is called a sub-partnership. It makes the parties to the agreement partners inter se, but it in no way affects the other members of the principal firm. Unless privity of contract be established between persons constituting a partnership and those who are partners of a partner in the partnership, they do not become partners. It is equally clear that sharing profits or advancing money to a -partner for purposes of his paying part of the capital would not render such partners members of the main firm. Sharing of the profits of partners with their partners in the respective firms is no evidence of the intention by the other partners of the assessee-firm to accept the partners of the other partners to be their partners. Nor the sharing of profits is evidence of the intention of the several members of the other firms to accept such other as partners in the assessee-firm. Sub-partners being distinct from partners, it follows that the existence of sub-partners would not affect the number of members of a firm for purposes of section 4 of the Companies Act.

Learned counsel for the Department has thus not been able to show that the finding given by the Tribunal.was perverse. That being so, the Appellate Tribunal was right in holding that the contracting parties to this partnership-deed were only 14 arid not more and that the firm was liable to registration u/s 26-A of the income tax Act.

In view of what has been stated above, the answer to the question of law referred for the opinion of this Court would be in the affirmative. In the circumstances of this case, however, there will be no order as to costs.