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1966 Supreme(SC) 1
SUPREME COURT OF INDIA
A K Sarkar, J R Mudholkar, R S Bachawat
COMMISSIONER OF INCOME-TAX, PUNJAB
VERSUS
M/S. CHANDER BHAN HARBHAJAN LAL.
Civil Appeal No. 605 of 1963
decided on January 4, 1966.
BISHAN NARAIN, Gopal Singh, J.B.DADACHAN, NIREN DEY, O.C.MATHUR, R.N.SACH
The question of whether a firm is registrable under s. 26-A of the Indian Income-tax Act, 1922, is a substantial question of law that is not settled by the decisions cited by the Tribunal.
Headnote:
INCOME TAX - Registration of firm under s. 26-A - Whether the Rupar firm was registrable under s. 26-A - Whether the Ferozepore firm was a partner in the Rupar firm - Whether there was a sub-partnership between the members of the Ferozepore firm in respect of the share of Gosain Chander Bhan in the Rupar firm - Whether the Rupar firm had a legal existence.
Fact of the Case:
The assessee firm, Messrs. Chander Bhan Harbhajan Lal, was constituted on December 5, 1952, with 14 partners, including Gosain Chander Bhan, who was also a partner in another firm, Messrs. Chander Bhan & Co., of Ferozepore (hereinafter referred to as the Ferozepore firm). The Income-tax Officer rejected the assessee firm's application for registration under s. 26-A of the Indian Income-tax Act, 1922, on the grounds that (1) the deed of partnership did not specify the date of 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 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 clearance certificate, did not notify its constitution to 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 set aside these findings and held that Gosain 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 Ferozepore firm. He held that Gosain Chander Bhan had merely agreed to share his profits and losses in the assessee firm with his other partners of the Ferozepore firm, that such an agreement did not make the other partners of the firm, partners in the assessee firm, and the effect of the agreement was to constitute a sub-partnership only. On further appeal, the Income-tax Appellate Tribunal upheld these findings of the Appellate Assistant Commissioner, and held that those findings were supported by the decisions in Commissioner of Income-tax v. Messrs. Agardih Colliery (A.I.R. 1955 Patna 225.) and Commissioner of Income-tax v. Laxmi Trading Company ((1953) 24 I.T.R. 173.).
Finding of the Court:
The court held that the question of whether the Rupar firm was registrable under s. 26-A was a substantial question of law that was not settled by the decisions cited by the Tribunal. The court also held that the Ferozepore firm was not a partner in the Rupar firm, and that there was no sub-partnership between the members of the Ferozepore firm in respect of the share of Gosain Chander Bhan in the Rupar firm. The court further held that the Rupar firm had a legal existence.
Issues: 1. Whether the Rupar firm was registrable under s. 26-A of the Indian Income-tax Act, 1922. 2. Whether the Ferozepore firm was a partner in the Rupar firm. 3. Whether there was a sub-partnership between the members of the Ferozepore firm in respect of the share of Gosain Chander Bhan in the Rupar firm. 4. Whether the Rupar firm had a legal existence.
Ratio Decidendi: 1. The question of whether the Rupar firm was registrable under s. 26-A was a substantial question of law that was not settled by the decisions cited by the Tribunal. 2. The Ferozepore firm was not a partner in the Rupar firm, because (1) the deed of partnership did not specify the Ferozepore firm as a partner; (2) the Ferozepore firm did not contribute any capital to the Rupar firm; and (3) the Ferozepore firm did not share in the profits or losses of the Rupar firm. 3. There was no sub-partnership between the members of the Ferozepore firm in respect of the share of Gosain Chander Bhan in the Rupar firm, because (1) the deed of partnership did not create a sub-partnership; (2) the members of the Ferozepore firm did not contribute any capital to the Rupar firm; and (3) the members of the Ferozepore firm did not share in the profits or losses of the Rupar firm. 4. The Rupar firm had a legal existence, because (1) the deed of partnership specified the names of all the partners; (2) the partners contributed capital to the firm; and (3) the firm shared in the profits and losses of the business.
Final Decision: The 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.
JUDGMENT
Bachawat, 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 & 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."
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 assessee 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.
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 Ferozepore firm.
By his order dated February 27, 1954, the Income-tax Officer rejected the application under s. 26-A. He held that (1) 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 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 clearance certificate, did not notify its constitution to 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.
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 Gosain 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 Ferozepore firm. He held that Gosain Chander Bhan had merely agreed to share his profits and losses i
