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TMI Blog1980 (8) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... 966-67 ? 2. Whether the aforesaid liability as held by the Appellate Tribunal was a legal and enforceable liability ? " The three assessees, hereinafter referred to as the three Singhania Brothers, representing their respective HUFs, are partners in a firm known as M/s. J. K. Hosiery Factory and the controversy in these references relates to their claim that an amount of Rs. 4,51,002 standing to the debit of each of them in the books of the firm should be accounted for and deducted in computing their respective wealth for the assessment years 1965-66 and 1966-67. Briefly stated, the, facts giving rise to the aforesaid controversy are that the three Singhania Brothers along with one Sri J. P. Agarwal had been carrying on a partnership business under the name and style of M/s. J. K. Hosiery Factory. By means of a deed dated 27th October, 1941, a company known as M/s. J. K. Cotton Spinning and Weaving Mills Ltd., created a trust known as Kamla Town Trust which purported to be a public charitable trust. The three Singhania brothers were designated as its trustees. Subsequently, the company filed Suit No. 40 of 1945, in the Court of the Civil judge, Kanpur, praying for the rectificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court which answered the same, vide its judgment dated 4th December, 1970 (since reported in [1971] 81 ITR 557-J. K. Hosiery Factory v. CIT). This court held that the objects underlying the rectified trust deed could not be described as public charitable objects and that at any rate they were a mixture of charitable and non-charitable objects. Accordingly, the trust created by the document dated 27th October, 1941, and as rectified by the decree of the civil judge dated 18th August, 1945, was invalid. It also held that the finding recorded by the I.T. authorities that the three Singhania brothers along with Sri J. P. Agarwal were the partners of the firm was borne out by the material on the record and that the said finding was not vitiated in any manner. It appears that while the aforementioned proceedings for the assessment of the firm, M/s. J. K. Hosiery Factory for the assessment year 1947-48, were going on, the company, M/s. J. K. Cotton Spinning and Weaving Mills Ltd. took proceedings to enable it to amend its memorandum of association so as to expressly authorise it to create a public charitable trust. This amendment was sanctioned by the High Court under the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the conduct of business that was being carried on in the name and style of M/s. J. K. Hosiery Factory of which the Kamla Town Trust and J. P. Agarwal were the ostensible partners (real partners being the three Singhania brothers and J. P. Agarwal), a deed of dissolution dated 10th January, 1949, was drawn up and it was signed by the three Singhania brothers as trustees of Kamla Town Trust of the first part and J. P. Agarwal of the second part. According to this deed the firm J. K. Hosiery Factory was to stand dissolved with effect from I St January, 1949, and the Kamla Town Trust was to get a sum of Rs. 21,98,828 as reduced by certain tax liability from Sri J. P. Agarwal and that all assets, credits and effects of the firm were to be held by Sri J. P. Agarwal. Subsequently, the three Singhania brothers and J. P. Agarwal again executed fresh partnership deed on 25th February, 1949, and agreed to carry on the business in the name of M/s. J. K. Hosiery Factory with effect from 1st January, 1949. Sri J. P. Agarwal brought the entire assets of the firm which were received by him under the deed of dissolution dated 10th January, 1949, into the new firm as part of the capital contribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire assets and liabilities of the old business were taken over by the new firm. It would mean that the liability of J. P. Agarwal to the trust became the liability of the firm. It is certainly an enforceable liability. The trust has been showing it as its assets while the assessee has been showing it as its liability. J. P. Agarwal is no longer a partner in the firm. Only the three Singhania brothers are partners having one-third share each and there are debits in that proportion, in their accounts, of its liability. In our opinion, therefore, it was legal liability of the assessee which was clearly deductible from the total wealth in its wealth-tax assessment and we direct accordingly." A perusal of the aforementioned observations made by the Tribunal shows that in its opinion after the decision of this court in Kamla Town Trust case [1975] UPTC 195, it could not but be held that Kamla Town Trust was a valid public charitable trust right from its inception on 27th October, 1941. While the partnership deed between Kamla Town Trust and J. P. Agarwal was being dissolved on 10th January, 1949, J. P. Agarwal undertook to pay a sum of Rs. 21,98,828 minus taxes, etc., to Kamla Town Trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad High Court in J. K. Hosiery Factory v. CIT [1971] 81 ITR 557 ? The Tribunal refused to state the case in respect of the aforesaid question by observing that question No. 2 as framed cannot be referred because it presumed the liability to be a fictitious liability. The department did not thereafter approach this court to have the statement of case called from the Appellate Tribunal on the aforementioned question of law. He contended that as the Tribunal has refused to state the case on the question as to whether the liability mentioned in the books of M/s. J. K. Hosiery Factory for payment to Kamla Town Trust was genuine or fictitious, it is not open to this court to, while answering the two questions referred to it by the Tribunal, go into this question and that we have to proceed on the basis that as found by the Tribunal, J. P. Agarwal was, under the dissolution deed dated 10th January, 1949, liable to pay a sum of Rs. 21,98,828.71 after deducting taxes, etc., from it to Kamla Town Trust. It is well settled that in a reference made under s. 256 of the I.T. Act, the High Court can only answer the question which has been referred to it for opinion. It cannot proceed to discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires us to answer whether the liability as held by the Appellate Tribunal was a legal and enforceable liability. It appears to us that while referring question No. 2 and stating the case in, respect thereof the Income-tax Appellate Tribunal was in fact referring question No. 3 as formulated by the Commissioner of Wealth-tax in his application for making a reference to the High Court filed before the Income-tax Appellate Tribunal. Question No. 3 so formulated by the Commissioner thus ran thus: " Whether, on, the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in holding that the aforesaid liability can be legally enforced by the trust against the firm of M/s. J. K. Hosiery Factory ?" Reading question No. 2 in the light of question No. 3 formulated by the Commissioner in his application filed before the Appellate Tribunal, it appears to us that the scope of question No. 2 merely is as to whether in the circumstances of the case and as a consequence of execution of the partnership deed dated 25th February, 1949, the Kamla Town Trust acquired a legal enforceable right in respect of the amount mentioned in question No. 1 as against the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm, agreed to discharge the liability of J. P. Agarwal to Kamla Town Trust; and 2. That the Kamla Town Trust had agreed to treat the new firm as its debtor in place of J. P. Agarwal. So far as the first of the aforementioned two conditions is concerned, we find that the liability of, Sri J. P. Agarwal to pay the amount in question to Kamla Town Trust was created under the deed dated 10th January, 1949, which had been signed by the trustees of the Kamla Town Trust on the one hand and J. P. Agarwal on the other. In the partnership deed dated 25th February, 1949, executed by the three Singhania brothers (described as parties of the first, second and third part) and J. P. Agarwal (described as party of the fourth part) it was mentioned thus: " Now, this identure witnesseth and it is hereby mutually agreed by and between the parties hereto as follows:... 4. The parties hereto of the first, second and third parts hereby accept the covenants and stipulations contained in the deed of dissolution dated 10th January, 1949, and made between the party hereto of the fourth part of the said trustees as if the said covenants and stipulations were made between all the parties hereto and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory and that it has also been shown in the books of the trust as due from M/s. J. K. Hosiery Factory. This circumstance, according to him, is sufficient to indicate that Kamla Town Trust had agreed to accept M/s. J. K. Hosiery Factory as its debtor in place of J. P. Agarwal and if the Tribunal has, acting upon this circumstance, ruled that an enforceable legal liability had been created against M/s. J. K. Hosiery Factory, it cannot be said that the Tribunal has not applied its mind to the crucial question and that its finding is based on no material. It may be that the fact that the amount in question is shown in the books of the trust as due from J. K. Hosiery Factory is a circumstance relevant for the purposes of appreciating whether the trust had agreed to accept the firm as its debtor in place of J. P. Agarwal, but then in the circumstances of the present case, this fact by itself can, in our opinion, not provide sufficient basis for holding that such an agreement between Kamla Town Trust and the partners of the firm in fact existed. It is significant to note that in this case despite changes in the constitution of the firm which were made from time to time the business was thr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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