Back
1964 Supreme(Pat) 45
PATNA HIGH COURT
V.Ramaswami and R.K.Choudhary JJ.
Himalaya Engineering Co.
Versus
Commissioner Of Income Tax
Miscellaneous Judicial Case No. 607 of 1960 ;
Decided On : FEBRUARY 25, 1964
The genuineness of a partnership cannot be determined based on mere surmises or conjectures, and the absence of separate capital accounts or non-disclosure of the partnership to banks or excise authorities are not relevant factors in determining the genuineness of a partnership.
Headnote:
INCOME TAX - Registration of firm - Genuine partnership - Deed of partnership - Whether genuine - Circumstances not supporting inference of sham partnership - Registration to be granted.
Fact of the Case:
The assessee firm applied for registration under Section 26-A of the Income Tax Act, 1961, with two new partners, the sons of the old partners. The Income Tax Officer and the Appellate Assistant Commissioner refused registration, holding that the deed of partnership was not genuine. The Income Tax Appellate Tribunal also held that the new partners were not genuine partners and the deed of partnership could not be registered under Section 26-A.
Finding of the Court:
The High Court held that there was no material to support the finding of the Tribunal that the instrument of partnership was a sham and nominal document. The Court relied on the principle laid down by the Supreme Court in Umacharan Shaw Brothers v. Commissioner of Income Tax, West Bengal, (1959) 37 ITR 271 (SC), which held that mere surmises or conjectures cannot take the place of proof in determining the genuineness of a partnership.
Issues: Whether the firm constituted under the deed of partnership dated 26th April 1955 should have been registered by the Income Tax Authorities under Section 26-A of the Income Tax Act.
Ratio Decidendi: The Court held that the circumstances relied upon by the Tribunal, such as the absence of separate capital accounts for the new partners and the non-disclosure of the partnership to banks and excise authorities, were not relevant to the question of the genuineness of the partnership. The Court also noted that the Madras High Court in Allauddin Maracair v. Commissioner of Income Tax, Excess Profits Tax, (1952) 22 ITR 545 (Mad), had held that the absence of share capital contribution by the sons at the time of the original partnership did not make the partnership a sham.
Final Decision: The Court answered the question of law referred by the Tribunal in favor of the assessee and against the Income Tax Department, holding that the firm constituted under the deed of partnership dated 26th April 1955 was a genuine partnership and should have been granted registration under Section 26-A of the Income Tax Act.
1. Up to and including the assessment year 1955-56 Messrs. Himalaya Engineering Company, Hazaribagh was constituted of two partners. (1) Shri Durga Ram, and (2) Shri Kirpa Ram, with equal shares. The firm was granted registration under Sec.26-A for the years up to the assessment year 1955-56. For the assessment year 1956-57 the assessed made an application for registration of the firm as constituted under the partnership deed dated the 26th April, 1955. Under this document the partners of the firm were as follows :-
(1) Durga Ram Kashyap ............ -/5/ share
(2) Kirpa Ram Kashyap .............. -/5/- "
(3) Man Singh Kashyap .............. -/3/- "
(4) Karan Singh Kashyap ........... -/3/ "
The two new partners were the sons of the old partners Kirpa Ram and Durga Ram, respectively. The shares of Kirpa Ram and Durga Ram were reduced from 8 annas to 5 annas each and their sons were, given 3 annas each in the profits of the firm. The Income-tax Officer held that the deed of partnership was not genuine and hence refused registration under Sec.26-A of the Income-lax Act. On appeal the Appellate Assistant Commissioner took the same view. On further appeal the Income-tax Appellate Tribunal took the view that Karan Singh and Man Singh were not genuine partners of the firm and deed of partnership dated the 26th April, 1955, could not be registered under Sec.26-A of the Income-tax Act. It was held by the Income-tax Appellate Tribunal that the instrument of partnership was a sham and nominal document and was not intended to be acted upon.
2. Under Sec. 66(2) of the Income-tax Act the Income-tax Appellate Tribunal has stated a case on the following question of law :-
"Whether on the facts and circumstances the firm constituted under the deed of partnership dated the 26th April, 1955, should have been registered by the Income-tax Authorities under Sec.26-A of the Income-tax Act?"
3. On behalf of the assessee learned Counsel submitted that there was no material to support the finding of the Tribunal that the instrument of partnership dated the 26th April, 1955, was a sham and nominal document: Learned Counsel put forward the argument that none or the reasons given by the Tribunal supports the inference drawn by it that Man Singh and Karan Singh were not, real partners of the firm. It was pointed out by that learned Counsel that the Tribunal has stated in the first place that no capital was contributed by Man Singh or Karan Singh. The Tribunal has also referred to the circumstance that the charge of the constitution of the firm was not notified to the Banks in which the assessee had accounts in the name of the firm. The argument was stressed on behalf of the assessee that these circumstances have no relevant bearing on the question whether the partnership deed dated the 26th April, 1955, was a genuine transaction. In our opinion the argument put forward on behalf of the assessee is well founded and must be accepted as correct. In our opinion the present case is governed by the principle laid down by the Supreme Court in Umacharan Shaw Brothers V/s. Commissioner of Income-tax, West Bengal, 1959-37 ITR 271 (SC). In this case the claim for registration of the firm was rejected by the Income-tax Officer on the ground that there was no separate capital account of the partners and the share of profits of each partner was not credited in his account in the ledger. The decision of the Income-tax Officer was affirmed by the Tribunal which held that there was no genuine partnership, especially as the existence of the partnership was not disclosed to the bankers or to the excise authorities who issued the license for the shops and the formation of the partnership was in violation of the Bengal Excise Act, 1911. It was, however, held by the Supreme Court, upon an analysis of the circumstances of that case, that there was no relevant material upon which the Income-tax Officer or the Appellate Tribunal could come to the conclusion that the firm
