The High Court erred in refusing to direct the Tribunal to refer the questions to it.

Headnote:
INCOME TAX - Registration of firm under S. 26-A - Whether the firm was legally constituted - Whether the Ferozepore firm was the partner in the assessee firm - Whether there was a sub-partnership formed by Gosain Chander Bhan with other persons at Ferozepur - Whether in the circumstances of the case, the correct status of the assessee was firm or association of persons and whether registration under S. 26-A of the Indian Income-tax Act could be allowed in this case.
Fact of the Case:

The assessee firm, Messrs. Chander Bhan Harbhajan Lal, applied for registration under S. 26-A of the Indian Income-tax Act, 1922. The Income-tax Officer rejected the application, holding that the firm was not genuine and that the number of partners exceeded 20. On appeal, the Appellate Assistant Commissioner set aside the findings of the Income-tax Officer and held that the firm was genuine and that the number of partners was 14. The Income-tax Appellate Tribunal upheld the findings of the Appellate Assistant Commissioner. The Commissioner of Income-tax applied to the Tribunal under S. 66 (1) of the Act, requiring the Tribunal to refer the following questions to the Punjab High Court: 1.Whether the Income-tax Appellate Tribunal was right in applying the decision of the Patna High Court in the case of AIR 1955 Pat 225 and of the Punjab High Court in the case of 1953-24 ITR 173 (Punj) to the facts of this case. 2. If the answer to question No. 1 is in affirmative whether the rulings noted above lay down a correct law. 3. Whether there is any material to show that there was a sub-partnership formed by Gosain Chander Bhan with other persons at Ferozepur. 4. Whether in the circumstances of the case, the correct status of the assessee was firm or association of persons and whether registration under S. 26-A of the Indian Income-tax Act could be allowed in this case. The Tribunal rejected the application, and held that the questions were concluded by judicial decisions and no useful purpose will be served by referring them again to the High Court. The Commissioner of Income-tax then applied to the Punjab High Court under S. 66 (2) of the Indian Income-tax Act for an order directing the Tribunal to refer the aforesaid questions to the High Court. The High Court dismissed the application, and held that the questions of law were well-settled. The Commissioner of Income-tax now appeals to this Court special leave.
Finding of the Court:

The Supreme Court held that the questions raised by the Commissioner of Income-tax were substantial questions of law and that the High Court erred in refusing to direct the Tribunal to refer the questions to it. The Court further held that the Tribunal erred in holding that the questions were concluded by judicial decisions. The Court directed the Tribunal to refer the questions to the High Court.
Issues: 1. Whether the Income-tax Appellate Tribunal was right in applying the decision of the Patna High Court in the case of AIR 1955 Pat 225 and of the Punjab High Court in the case of 1953-24 ITR 173 (Punj) to the facts of this case. 2. If the answer to question No. 1 is in affirmative whether the rulings noted above lay down a correct law. 3. Whether there is any material to show that there was a sub-partnership formed by Gosain Chander Bhan with other persons at Ferozepur. 4. Whether in the circumstances of the case, the correct status of the assessee was firm or association of persons and whether registration under S. 26-A of the Indian Income-tax Act could be allowed in this case.
Ratio Decidendi: The Supreme Court held that the questions raised by the Commissioner of Income-tax were substantial questions of law and that the High Court erred in refusing to direct the Tribunal to refer the questions to it. The Court further held that the Tribunal erred in holding that the questions were concluded by judicial decisions. The Court directed the Tribunal to refer the questions to the High Court.
Final Decision: The Supreme Court allowed the appeal, set aside the judgment of the High Court and directed the Tribunal to refer the question earlier set out to the High Court.

Judgement

BACHAWAT, J. [for self and Sarkar, J.]: This appeal by special leave is from an order of the Punjab High Court rejecting an application by the Commissioner of Income-tax, Punjab, under S. 66(2) of the Indian Income-tax Act, 1922. On April 21, 1953, 14 partners of the firm of Messrs. Chander Bhan Harbhajan Lal of Rupar (hereinafter referred to as the assessee firm) constituted under the instrument of partnership, dated December 5, 1952, applied to the Income-tax Officer, Project Circle, Ambala, for registration of the firm under S. 26-A of the Indian Income-tax Act. It may be mentioned at this stage that there was another firm of the name of Chander Bhan and Co., of Ferozepore (hereinafter referred to as the Ferozepore firm), consisting of 8 partners and constituted under a deed, dated June 14, 1952 which provided inter alia :

"If any one of the executants enters into business individually or along with another person, all the "partners of the firm shall be entitled to the profit and liable for the loss, accruing from that business according to the shares hereinbefore mentioned."

2. One Gosain Chander Bhan was a partner of both the assessee firm and the Ferozepore firm. In course of proceedings arising out of the application for registration of the asseessee firm under S. 26-A, Harbhajan Lal, one of its partners, stated on January 30, 1954:

"I Harbhajan Lal son of Shri Ram Chand of Rupar solemnly declare that firm M/ s. Chander Bhan Harbhajan Lal consisted of 14 partners as mentioned in the return and deed of partnership. Gosain Chander Bhan was partner not in his individual capacity but on behalf of the firm M/s. Gosain Chander Bhan and Company Ferozepur having about six partners. Other partners are partners in their individual capacity."

It seems that other partners of the assessee firm made similar statements on February 27, 1954

3. The capital of the assessee firm was supplied by Gosain Chander Bhan. It appears that Gosain Chander Bhan had taken the capital from the Ferozepore firm, and the amount was shown as an item in his accounts with the Fezorepore firm.

4. By his order, dated February 27, 1954, the Income-tax Officer rejected the application under S. 26-A. He held that (I) the deed, dated December 5, 1952 did not specify the date of the constitution of the assessee firm; (2) some of the parties to the deed having no experience in the business of the firm were not really partners therein, and the number of partners in the firm had been artificially increased with a view to reduce the taxable liability; (3) the firm was not genuine, as it had no banking account, did not possess the income-tax clearence certificate, did not notify its constitution to the P. W. D. and payments were received from the P. W. D. and payments were received from the P. W. D. in the name of Harbhajan Lal. On appeal, the Appellate Assistant Commissioner, Ambala Branch, set aside all these findings of the Income-tax Officer. The correctness of the decision of the Appellate Assistant Commissioner on these points is no longer challenged.

5. The Income-tax Officer also held that though the deed, dated December 5, 1952, stated that Gosain Chander Bhan was the partner having 6/16th share, in reality the Ferozepore firm was the partner of the assessee firm having 6/16th share therein and consequently, the assessee firm was illegally constituted, because (1) the Ferozepore firm could not legally be a partner in the assessee firm; (2) the total number of partners of the assessee firm was 21, and (3) moreover, the individual shares of the eight partners of the Ferozepore firm were not specified in the deed, dated December 5, 1952. On these findings, the Income-tax Officer rejected the application under S. 26-A. On appeal, the Appellate Assistant Commissioner set aside these findings, and held that Goasin Chander Bhan was the partner of the assessee firm in his individual capacity and not as representative of and on behalf of all the partners of the Fer

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