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TMI Blog1964 (4) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... ative capacity formed a partnership to carry on the business of banking and commission agents, the principal business being the marketing of the products of the different match factories in Sivakasi. When the said partnership applied for registration for the assessment year 1949-50, it was refused by the income-tax department on the ground that different firms could not constitute a valid partnership. Thereafter, Sankaralinga Nadar, Arumughaswami Nadar, Arunachala Nadar, Palaniswami Nadar and Rajamoney Nadar, the first four being one of the partners of their respective firms and the last being the sole proprietor of his firm, in their individual capacity entered into a partnership for the aforesaid purpose and executed a partnership deed dated April 1, 1950. They presented the said deed of partnership to the Income-tax Officer for registration. The Income-tax Officer by his order dated October 27, 1952, registered the same under section 26A of the Act ; but the Commissioner of Income-tax, acting under section 33B of the Act, cancelled the registration by an order dated October 23, 1954, and directed the assessment to take place as that of an unregistered firm. On appeal, the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed ; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed." In exercise of the powers conferred by section 59 of the Act, the Central Board of Revenue made the following rules : " 2. Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of section 26A of the Indian Income-tax Act, 1922 (hereinafter in these rules referred to as the Act), register with the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf. Such application shall be signed by all the partners (not being minors) personally and shall be made-- (a) before the income of the firm is assessed for any year under section 23 of the Act, or..." ' 3. The application referred to in rule 2 shall be made in the form annexed to this rule and shall be accompanied by the original instrument of partnership under which the firm is constituted, together which a copy thereof :..." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted through this firm or not and a further commission of half an anna per gross on the sales effected through this firm. This commission will be collected on all kinds of matches produced from the abovesaid factories. The commission of half an anna per gross on the entire production of these factories accrued due at the end of every month shall be debited to the respective factories under advice to them." Clauses 22 and 23 which throw further light on the question raised read : " 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 not disputed that the partnership deed ex facie conforms to the requirements of the law of partnership as well as the Income-tax Act. Under section 4 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istered on the ground that such a partnership was illegal. If the larger firms cannot constitute members of a new partnership, some of the partners of those firms can certainly enter into a partnership shedding their representative capacity if they can legally do so. If they can do so, the mere fact that one of them borrowed the capital from a parent firm--we are using this expression for convenience of reference--or some of them surrendered their profits to the parent firm cannot make it any the less a genuine firm. Nor does clause 16 of the partnership deed detract from its genuineness : that clause does not create any right in the partnership to collect the commission ; in view of the close connection between the assessee firm and the parent firms, the parent firms were expected to effect all their sales through the assessee-firm. If they did not and if they refused to pay commission, the assessee-firm could not enforce its right under the said clause. Clause 22 in express terms emphasizes the separate identities of the assessee firm and the parent firms and clause 23 declares that notwithstanding the fact that the loss to the assessee firm has arisen on the sale or transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1950. There were five partners of the firm (1) N.P.A.M. Sankaralinga Nadar (2) K.S.S. Arumughaswami Nadar (3) K.A.S. Arunachala Nadar (4) K.P.A.T. Rajamoney Nadar and (5) V.S.V.P. Palaniswamy Nadar. Before April 1, 1950, there existed a firm also named Sivakasi Matches Exporting Company which " consisted of a combine of six match factories " at Sivakasi constituted under a partnership deed dated March 12, 1948. Registration of this partnership under section 26A of the Income-tax Act, 1922, was refused on the ground that the partnership deed did not specify the actual shares of the individual partners. Thereafter, a deed forming the partnership which is sought to be registered in these proceedings was executed on April 1, 1950. It was recited in the preamble that originally four out of the five partners had been carrying on business in partnership as representatives of their respective match concerns, and it was found necessary that they should carry on the said business from April 1, 1950, jointly in their individual capacity, and it was agreed to admit into their partnership as and from April 1, 1950, the fifth person, namely, V.S.V.P. Palaniswamy Nadar. The following are the mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airs and that " the actual position as distinguished from the recitals in the partnership deed was that all the partners of the match factories were directly partners of the assessee " and as the names of all the partners were not set out in the deed and the other requirements relating to registration had not been compiled with, registration be refused. The order was confirmed in appeal to the Income-tax Appellate Tribunal. At the direction of the High Court of Madras under section 66(2) of the Indian income-tax Act, 1922, the Tribunal referred the following question : " Whether on the facts and in the circumstances of the case the refusal of registration of the assessee firm under section 26A of the Income-tax Act was correct in law ? " The High Court answered this question in the negative. Against that order, with special leave, the Commissioner of Income-tax has appealed to this court. The Tribunal held that the covenant in the deed of partnership and specially in paragraphs 3 and 16 viewed in the light of the entry in the books of account of Gnanam Match Works debiting the capital contributed in the name of Palaniswamy Nadar to the assessee, and not in the name of its p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of that finding. Section 26A of the Indian Income-tax Act enacts the procedure for registration of firms. By that section on behalf of any firm application may be submitted to the Income-tax Officer for registration, if the firm is constituted under an instrument of partnership, specifying the individual shares of the partners. The application has to be made by such person or persons and at such times and shall contain such particulars and shall be in such form as may be prescribed. It is open to a firm to carry on business without registration under the Indian Registration Act. By obtaining an order of registration, the partners of the firm are enabled to get the benefit of lower rates of tax than those applicable to the whole income of the firm, when charged as a unit of assessment. In the relevant year of assessment if the firm was unregistered the tax payable by it had to be determined as in the case of any other distinct entity and tax had to be levied on the firm itself. If, however, the firm was registered, the firm did not pay the tax and therefore the tax payable by the firm was not determined, but the share of profit received from the firm was added to the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly of other grounds, may not be of much value in deciding whether all the partners of the match factories were intended to be partners of the assessee. It is open to a partner who receives his share in the profits of the firm to dispose of that share in any manner be pleases, and no inference from the distribution of the share of such profits alone can lead to the inference that the persons who ultimately received the benefit of the profits are partners of the firm which had distributed the profits. But the Tribunal adverted to three circumstances. The terms of the deed of partnership purported to impose an obligation to pay commission on the production of the five match factories, representatives of which sought to join as partners eo nomine. Imposition of such an obligation was in the view of the Tribunal inconsistent with the representatives of those factories being partners of the assessee in their individual capacities. Again it was found that Gnanam Match Works had contributed capital to the assessee directly and not through its representative. These two circumstances, coupled with the ultimate distribution of profits by the individual partners among the partners of the match ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence in arriving at the conclusion that each Match factory was the real party in the instrument of partnership, they assumed to themselves jurisdiction which they did not possess. It was not the case of the assessee that there was no evidence on which the conclusion arrived at by the Tribunal could be founded, nor was it the case of the assessee that the conclusion was so perverse that no reasonable body of men properly instructed in the law could have arrived at that conclusion. It is also clear from the record that no such question was even canvassed before the Tribunal. Manifestly such a question could not arise out of the order of the Tribunal, and none such was referred to the High Court. By the question actually referred, the Tribunal sought the opinion of the High Court whether on the facts and circumstances refusal of the application for registration of the assessee was correct in law. If it was the case of the assessee that the conclusion of the Tribunal was based on no evidence, or that it was perverse, the High Court could be asked to call for a reference from the Tribunal on that question. But that was never done. It is true that the object of enacting section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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