The Commissioner of Income Tax vs The Khanna Grain Syndicate, Khanna

Dua and P.C. Pandit, JJ.—The following questions of law have been referred in compliance with the order of this Court dated 5tli May, 1960:

Whether there was any material before the Tribunal to hold that some of the partners who signed the deed dated the 14th February, 1950 in turn had sub partnership and if so whether those sub-partnerships do not effect the contractual relationship of the 17 persons shown in the deed ?

2 If the partnership is between 17 persons in their representative capacity, then whether the partnership in law exists and if so, whether the said instrument of partnership specifies the individual shares of the partners who are partners of the firm ?

Whether on the facts and in the circumstances of the case, the firm if any, that is constituted under the deed dated the 14th February, 1950, can be registered u/s 26-A and rules (2) to (6) of the income tax rules of 1922 ?

The statement of the case, as forwarded to this Court by the Appellate Tribunal (Delhi Bench}, shows that on the strength of an instrument of partnership dated 14th February, 1950, the assessee the Khanna Grain Syndicate claimed registration of the firm u/s 26-A of the Indian income tax Act. According to the assessee, 17 individuals had joined together and formed a firm styled M/s Khanna Grain Syndicate, Khanna, on 13th April, 1949 for the purpose of purchasing grain and supplying the same to the Government under the Monopoly Procurement Scheme. A partnership deed was executed in their individual capacities. On 16th April, 1951, the income tax Officer wrote a letter to the assessee calling upon the firm to state the status of its partners. It was mentioned in that letter that if the partners were smaller firms, their constitution should also be stated. In reply, the assessee on 20th April, 1951 stated that out of 17 persons, six were Hindu undivided families and 11 were partners. It has also been stated in the statement of the case that the accounts of the assessee disclosed that the profits were distributed to the said 17 individuals. The manager of the assessee, Dhani Ram, was examined by the income tax Officer and he stated that the capital supplied by 11 persons had really come from the accounts of the firms in which they were partners. The income tax Officer concluded that the real partners of the firms were eleven smaller firms and 6 Hindu undivided amities, and the total number of the real partners in the assessee-firm exceeded 20. On this finding, the registration was refused.

On appeal, the Appellate Assistant Commissioner confirmed the order of the income tax Officer.

On second appeal, the Appellate Tribunal came to the conclusion that on a true interpretation of the instrument of partnership read with the application for registration and the accounts of the firm, the real status of the assessee was that of a firm consisting of 17 individuals. As a result of this conclusion, the Appellate Tribunal directed the income tax Officer to register the firm u/s 26-A of the Indian income tax Act.

In this Court, the learned counsel for the Revenue has in a very fair and frank manner befitting of the traditions of the bar brought to our notice an unreported decision of this Court: in the Commissioner of income tax v. Rama Wholesale Cloth SyndicateL.T. Case No. 13 of 1961. Income Tax Case No. 13 of 1961, prepared by my learned brother P.C. Pandit, J. (the other member of the Bench being Dulat, J.), which is an authority for the view that the rinding of fact given by the Appellate Tribunal on the number of partners of a firm can be reversed only if it can be shown that such finding was based either on misconstruction of the partnership deed or was based on no evidence or was perverse. The learned counsel has also appropriately drawn our attention to a decision of the Supreme Court in Commissioner of income tax, Madras v. Sivakasi Match Exporting Co. 53 I.T.K. 204, According to this decision, the combined effect of section 26-A of the income tax Act and the rules made there under is that if the application made by a firm gives the necessary particulars prescribed by the rules, the income tax Officer cannot reject it if there is a firm in existence as shown in tin instrument of partnership. A firm may be said to be not in existence if it is a bogus or not a genuine one or if in law the constitution of the partnership is void. The discretion conferred on the income tax Officer u/s 26-A is, according to this decision, a judicial one and he cannot refuse to register a firm on mere speculation, because he has to base his conclusion on relevant, evidence.

The ratio of the two decisions mentioned ab.ave in my opinion, fully support the order of the Appellate Tribunal. The Tribunal has said in the order:

We have perused the partnership-deed which clearly states that the 17 persons mentioned therein as the contracting parties entered into partnership in their individual capacities. It is possible that some of them in turn had sub-partnership with persons who were associated with them in other businesses. Such sub-partnership, however, did not affect the contractual relationship of the afore mentioned 17 persons in the assessee-firm. We, therefore, direct the income tax Officer to register the assessee-firm u/s 26-A for the year 1950-51.

This conclusion has not been shown on behalf of the Revenue to be either perverse or based on no evidence or inspired by any misconstruction of the partnership deed.

Shri Awasthy has contended that the recitals in the partnership-deed are not conclusive and that it is open to the income tax Officer to go behind such assertions and to find out the real correct position. Conceding that this is so, in my opinion, on the present record, it is difficult to find any material justifying the submission that the number of partners of the assessee-firm exceeds 17. It must be remembered that merely because one of tin partners of the assessee-firm brings in capital from some other firm or the profits earned by some of the partners are surrendered to some other firm, these factors cannot legitimately be considered as relevant for considering the number of partners of the assessee firm seeking registration. A partner can secure his capital from whatever source he likes and also surrender his profits to any other person, even to a person who claims to be his sub-partner. A genuine partnership complying with the requirements of law is entitled to claim registration and a legitimate legal device to reduce its tax liability on the part of a firm cannot be construed to be an objectionable and impermissible attempt to evade the tax and, therefore, cannot be relied upon by the Revenue for refusing to register a firm. The income tax Officer, it appears to be well settled, has no power under the income tax Act to reject the registration of a genuine and a valid partnership, if the other provisions of section 26-A of the Act and the rules made thereunder are complied with.

As a result of the foregoing discussion, we answer the three questions referred in favour of the assessee, but make no order as to costs.