TMI Blog1964 (4) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... not exceed 12 in number and if they chose all of them could have entered into the partnership indicates that there was no sinister motive behind the partnership. As the Tribunal misconstrued the provisions of the partnership deed and relied upon irrelevant considerations in coming to the conclusion it did, the High Court rightly differed from the view of the Tribunal. In the circumstances, in view of the decision of this court in Sree Meenakshi Mills' case [1956 (9) TMI 1 - SUPREME Court] a question of law within the meaning of section 66(2) of the Act arose for decision. The High Court rightly answered the question in the negative. Appeal dismissed. - - - - - Dated:- 29-4-1964 - Judge(s) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT [The judgment of Subba Rao and Sikri JJ. was delivered by Subba Rao J. Shah J. delivered a separate judgment.] SUBBA RAO J.--This appeal by special leave is directed against the order of the High Court of Madras in a reference made to it by the Income-tax Appellate Tribunal under section 66(2) of the Indian Income-tax Act, 1922, hereinafter called the Act. The facts that have given rise to the appeal may briefly be stated. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. Learned counsel for the revenue raises before us the following two points, namely, (i) the finding of the Appellate Tribunal was one of fact and that the High Court had no jurisdiction to canvass the correctness of its finding on a reference made under section 66(2) of the Act, and (ii) the conclusion arrived at by the Tribunal was the correct one and the High Court erroneously interfered with it. It is commonplace that under section 66(2) of the Act a reference to the High Court lies only on a question of law. The scope of the provision has been elaborately considered by this court in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax. Therein the scope of the provision has been laid down under different propositions. On the basis of the judgment it cannot be gainsaid that if the order refusing registration goes beyond the scope of the jurisdiction conferred on the Income-tax Officer under section 26A of the Act and the rules made thereunder or if the decision depends upon the construction of the partnership deed or if there is no evidence to sustain the finding of the Tribunal, then the High Court will have jurisdiction to entertain the reference under section 66(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted. " A combined effect of section 26A of the Act and the rules made thereunder 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 the 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 jurisdiction of the Income-tax Officer is, therefore, confined to the ascertaining of two facts, namely, (i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence. Further, the discretion conferred on him under section 26A is a judicial one and he cannot refuse to register a firm on mere speculation, but he shall base his conclusion on relevant evidence. What are the facts in the present case ? The partnership deed is dated April 1, 1950. In the document five persons are shown as its partners. The name of the firm is given, the objects of the partnership business are described, the duration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f their share does not detract from the validity of the partnership ; nor the manner in which the said partner deals with the share of his profits is of any relevance to the question of the validity of the partnership. The document, therefore, embodies a valid partnership entered into in conformity with the law of partnership. But the Tribunal has held that the partnership is not a genuine one for the following reasons : (i) previously the firm entered into a partnership but the registration of the same was rejected ; (ii) under clause 16 of the partnership deed the firms have the right to collect the commission of the entire match production of the larger partnerships whether they effect their sales through the firm or not ; (iii) the books of Gnanam Match Works show unmistakably that the capital was contributed not by Palaniswamy Nadar in his individual capacity but by the larger firm as such ; and (iv) regarding the other three larger firms also the profit derived by their representatives from the assessee-firm was divided amongst all the partners according to their profit sharing ratio in the larger firms. On the other hand, the High Court found, on a construction of the rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s one. 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 5 individuals, though four of them are members of different firms, enter into a partnership expressly to comply with a provision of law, we do not see any question of fraud or genuineness involved. It is a genuine document and it complies with the requirements of law. It is not an attempt to evade tax, but a legal device to reduce its tax liability. The fact that all the partners of all the firms did not exceed 12 in number and if they chose all of them could have entered into the partnership indicates that there was no sinister motive behind the partnership. As the Tribunal misconstrued the provisions of the partnership deed and relied upon irrelevant considerations in coming to the conclusion it did, the High Court rightly differed from the view of the Tribunal. In the circumstances, in view of the decision of this court in Sree Meenakshi Mills' case a question of law wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... every month shall be debited to the respective factories under advice to them. (22) The business of this firm shall have and has no connection with the match manufacturing business carried on now by the partners separately or in partnership with others. (23) Any loss to the firm by way of fire, accident or by any other cause during the course of the business of the firm, notwithstanding the fact that the loss might have arisen on the sale of or transaction relating to the match manufacturing concerns of the partners to this deed, shall be borne by this firm and shall be equally divided between the partners to this deed." It is common ground that each partner was concerned in the manufacture of matches either as owner or as partner with others. Sankaralinga Nadar carried on business as a manufacturer of matches with two others in the name of the Brilliant Match Works, Arumughaswamy Nadar as a partner with three others in the name of the Manoranjitha Match Works, Arunachala Nadar as a partner with two others in the name of the Pioneer Match Works, Rajamoney Nadar as a sole proprietor of the Shenbagam Match Works, and Palaniswamy Nadar as a partner with three others in the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h companies should decline to put through its sales business through the assessee firm, the only result would perhaps be that the partnership would not advance moneys or finance to that manufacturing concern ; it might also be that the particular partner interested in the manufacturing concern might stand to lose the benefit of this partnership. But that is not the same thing as to say that those manufacturing concerns themselves had become partners of the assessee partnership." The High Court also observed that the assessee was not concerned with the disposal of the profits received by its partners. Finally, the High Court observed that " an individual member of the partnership is not prevented from engaging in business as member of another partnership. The law does not prohibit such a course and even the income-tax law relating to registration of partnerships only refuses registration when the formation of such partnerships is intended to evade the incidence of income-tax and nothing more. We are not satisfied that the Tribunal correctly appreciated the facts of the present case in coming to the conclusion that the match works were the real parties to this instrument of partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant particulars including each partner's share in the profits and loss, " particulars of the firm as constituted at the date " of the application, and particulars of the apportionment of the income, profits or gains or loss of the business, profession or vocation in the previous year between the partners who in that previous year were entitled to share in such income, profits or gains or loss, where the application is made after the end of the relevant previous year. If the Income-tax Officer is satisfied that there is a firm in existence constituted as shown in the instrument of partnership and the application has been properly made, he has to enter in writing at the face of the instrument or certified copy, as the case may be, a certificate of registration of the partnership under section 26A of the Act. This certificate of registration enures only for the year mentioned therein, but the firm is entitled to obtain renewal of the registration. On the conclusion recorded by the Tribunal that the partnership deed dated April 1, 1950, was in truth an instrument relating to an agreement to carry on business by all the persons who owned the five businesses of which the represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners or their representatives of the five firms to pay commission as stipulated under that clause. Undoubtedly, there is no covenant expressly imposing such liability upon the match factories, but it was open to the Tribunal from the incorporation of such an unusual covenant to infer that the named partners of the assessee were acting as representatives of their respective factories. To assume from the terms of clause 16 that the owners of these match factories were not bound by the covenants contained in clause 16, is to assume the answer to the question posed for opinion. There was also the circumstance that in the books of account of the Gnanam Match Works of which Palaniswamy Nadar was a representative, capital was debited as contributed to the assessee. This indicated that the Gnanam Match Works was directly interested in the partnership. If that factory had made an advance to Palaniswamy Nadar to enable the latter to contribute his share of the capital, the entry in the factory's books of account would have been in the name of its partner and not in the name of the assessee. That also is a circumstance justifying an inference that in entering into the deed dated April 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, those conditions, unless otherwise provided, must be strictly complied with, and if they are not so complied with, the taxing authorities would be bound to refuse to give the taxpayer the benefit claimed. When application for registration of the firm is made, the Income-tax Officer is entitled to ascertain whether the names of the partners in the instrument are of persons who have agreed to be partners, whether the shares are properly specified and whether the statement about the shares is real or is merely a cloak for distributing the profits in a different manner. If all persons who have in truth agreed to be partners have not signed the deed or their shares were not truly set out in the deed of partnership, it would be open to the Income-tax Officer to decline to register the deed, even if under the general law of partnership the rights and obligations of the partners eo nomine thereto may otherwise be adjusted. As a corollary to this, if the requirements relating to the form in which the petition is to be presented are not complied with and the relevant information is withheld, the Income-tax Officer may be justified in refusing registration. In my view the High Court was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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