The onus of proof lies on the assessee to show that the firm exists in fact and the claim is not a pretence to avoid proper taxation.

1. At the instance of the assessee, the Income-tax Appellate Tribunal has referred the following question of law to this court for its opinion under Sec. 256(1) of the Income-tax Act :

"Whether, on the facts and in the circumstances of the case, the order of the Income-tax Appellate Tribunal refusing to grant registration to the firm is valid in law ?"

2. The material facts are as follows :

The periods under reference are assessment years 1976-77 to 1978-79. Choudhary Kirana Bhandar, Darbhanga, was assessed as a firm consisting of two partners, namely, Hanuman Prasad Choudhary and Murlidhar Choudhary, up to the assessment year 1975-76. On June 30, 1975, Murlidhar Choudhary retired from the business leading to dissolution of the firm. A new partnership allegedly came into existence between Hanuman Prasad Choudhary and Smt. Indu Devi in the name and style of Choudhary Kirana Bhandar. The returns were filed in the name of the said firm for the assessment years in question along with application for registration of the firm. The Income-tax Officer found that Smt. Indu Devi had neither rendered any service to the partnership nor had contributed any capital ; the alleged capital of Rs. 1,001 shown in her account had been finally surrendered and offered for taxation as income in the hands of the alleged firm, Choudhary Kirana Bhandar. In these premises, the Income-tax Officer rejected the application for registration and made assessment in the status of an association of persons. Aggrieved by the order rejecting the application for registration, the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that as there was a duly executed deed of partnership and the profits had been divided between the partners in accordance with the stipulations in the deed, there was no justification to reject the prayer for registration. He observed in this connection that even if one of the partners was a sleeping partner, the firm was still entitled to the benefit of registration. The fact that the alleged capital of Rs. 1,001 in the account of Smt. Indu Devi had been offered for assessment as income in the hands of the firm was inconsequential and did not adversely affect the genuineness of the firm. The Department took the matter to the Income-tax Appellate Tribunal. The Tribunal agreed with the views of the Income-tax Officer and accordingly reversed the order of the Appellate Assistant Commissioner. It held that in order to avail of the benefits of registration as firm, the assessee has to satisfy the Assessing Officer that the instrument of partnership had been given effect to ; that the agreement was bona fide and not mere pretence with a view to avoid proper taxation.

3. Mr. Pawan Kumar, learned counsel for the assessee, has assailed the correctness of the findings of the Tribunal. According to him, contribution of capital money by every partner is not the requirement of law. It is enough if there is an agreement between two or more persons and the business is carried on by some on behalf of all and the profit is shared between them. According to counsel, once the agreement is produced before the Assessing Officer the onus shifts to the Department to prove that the partnership firm was not genuine. He has placed reliance on K. D. Kamath and Co. V/s. CIT [1971] 82 ITR 680 (SC); Himalaya Engineering Co. V/s. CIT [19651 57 ITR 762 (Patna) ; Virendra Kumar Avinash Kumar V/s. CIT [1988] 171 ITR 263 (All) and United Patel Construction Co. v. CIT [1966] 59 ITR 424 (MP).

4. The term "partnership" in the Income-tax Act is used in the same sense as under the Indian Partnership Act. Sec. 4 of the Partnership Act defines "partnership" to be a relationship "between persons who have agreed to share the profits of a business carried on by all or any of them acting for all." There is no dispute that the income-tax rates being favourable to the firm compared to "association of per