1960 (11) TMI 3 - SC - Income Tax

Whether on the facts and in the circumstances of the case the decision of the Tribunal that the firm is not genuine and not registerable under section 26A of the Indian Income-tax Act is right in law ? Held that - A question of law arises out of the order of the Tribunal namely whether in the facts and circumstances found by the Tribunal there was material to come to the conclusion that the partnership firm constituted by the deed of partnership dated November 16 1949 was not genuine? We would accordingly allow these appeals set aside the order of the High Court of Mysore dated October 8 1958 and direct that the Tribunal be required to state a case on the question indicated above and refer it to the said High Court. Appeal allowed.

Issues:
Appeal against High Court's dismissal of petitions under section 66(2) of the Indian Income-tax Act regarding the genuineness of a partnership firm for assessment years 1950-51 to 1954-55.

Analysis:
The case involved three appeals by special leave challenging the High Court of Mysore's decision to dismiss petitions under section 66(2) of the Indian Income-tax Act. The dispute centered around the genuineness of a partnership firm formed between K. R. Setty, his wife Nagaratnamma, and his brother-in-law V. Setty, concerning the Krishna Flour Mills. The partnership deed was executed on November 16, 1949, and was initially for five years, later extended to March 31, 1955. The appellant sought registration of the firm under section 26A of the Act for assessment years 1950-51 to 1954-55, which was consistently rejected by the income-tax authorities and appellate bodies. The Tribunal concluded that the firm was not genuine, leading to the appellant's appeal to the High Court under section 66(2) for a reference on the question of law regarding the firm's genuineness. The High Court upheld the Tribunal's decision, prompting the appeals to the Supreme Court.

The appellant contended that the Tribunal's inference of the firm's lack of genuineness was based on suspicion and surmise rather than facts. The Tribunal's findings included the capital contributions of the partners, V. Setty's accumulated profits and withdrawals, Nagaratnamma's non-withdrawal of profits, and K. R. Setty's correspondence with tax authorities post-partnership. The Tribunal's conclusion was that the partnership was not genuine based on the conduct of the parties, despite no explicit indication of suspicious conduct between the partners. The appellant argued that the inference drawn by the Tribunal was unreasonable and not supported by partnership law or common experience, as the partners had made their capital contributions and operated the business as per the partnership deed.

The Supreme Court found that a question of law did arise from the Tribunal's order, focusing on whether, based on the facts found, there was sufficient material to conclude that the partnership firm was not genuine. The Court disagreed with the Tribunal's reasoning and held that the partnership's genuineness was not adequately disproved by the facts presented. Consequently, the Court allowed the appeals, set aside the High Court's order, directed the Tribunal to state a case on the question of the firm's genuineness, and referred it back to the High Court. The appellant was awarded costs for both the High Court and the Supreme Court. Additionally, the Court dismissed three petitions for special leave under article 136 of the Constitution, as they were rendered moot by the decision in the appeals.

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