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1970 Supreme(Cal) 240
HIGH COURT OF CALCUTTA
SANKAR PRASAD MITRA, K. L. RAY
COMMISSIONER OF INCOME-TAX - Appellant
Versus
HASSANALLY AND SONS - Respondent
Income-Tax Reference 21 Of 1967
Decided On : NOVEMBER 18, 1970
To be entitled to registration under Section 26A of the Income-tax Act, 1922, the partnership business must be shown to have existed in conformity with the terms and conditions of the instrument of partnership.
Headnote:
INCOME TAX - REGISTRATION OF FIRM - GENUINENESS OF FIRM - TERMS OF PARTNERSHIP DEED NOT COMPLIED WITH - REGISTRATION NOT ALLOWABLE.
Fact of the Case:
The assessee firm applied for registration under Section 26A of the Income-tax Act, 1922, claiming that a new partnership had been constituted with seven partners, including the sons of the two original partners. The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim for registration, holding that there was no valid gift from the original partners to their sons, that the new partners continued to draw salaries as employees, and that the terms of the partnership deed were not being complied with.
Finding of the Court:
The Tribunal held that the department had not been able to substantiate its charges that there was no genuine firm in existence and that the apparent state of affairs was not real. The Tribunal directed registration under Section 26A.
Issues: Whether, on a proper construction of the terms of the deed of partnership and taking into consideration all the relevant facts of the case, the Tribunal was right in holding that the said document brought into existence a genuine firm and registration was therefore allowable to the assessee under Section 26A of the Indian Income-tax Act, 1922?
Ratio Decidendi: The court held that the partnership business was not carried on in conformity with the terms and conditions of the deed of partnership. The court noted that the investments of the new partners came out of gifts made by the original partners to their respective sons, and these gifts were made only by making transfer entries in the firm's books of accounts, as, on the date of transfer, the firm did not have sufficient cash in its till. The court also noted that the new partners continued to draw the same salary as they were drawing previously and their names continued to appear in the staff register. The court further noted that the provisions of Clause 12 of the instrument of partnership, which authorized each of the partners to draw cheques on the firm's account, were not given effect to.
Final Decision: The court answered the second part of question No. 1 in the negative, holding that the firm was not entitled to registration under Section 26A of the Indian Income-tax Act, 1922, for the assessment year 1960-61. The court also answered the second question in the negative, holding that the Tribunal was not right in setting aside the assessment in the status of unregistered firm and directing the Income-tax Officer to make fresh assessment in the status of registered firm.
( 1 ) THIS is a reference under Section 66 (1) of the Indian Income-tax Act, 1922. Up to the assessment year 1959-60 the respondent had two partners, namely, Golam Hussain Hasanali and Eusufali Hasanali. They were brothers and had equal shares. The firm was carrying on business in hardware and mill stores and was granted registration under Section 26a of the Income-tax Act.
( 2 ) FOR the assessment year 1960-61, the assessee applied for a fresh registration. It was stated that a deed of partnership dated the 16th March, 1959, had been executed and a new firm had been constituted consisting of seven partners. These seven partners and their respective shares are as follows :
Shares
1. Golam Hussain Hasanali 0-2-0 | 0-8-0 annas
2. Hatimbhoy Molla Golam Ali (son of No. 1) 0-2-0
3. Abbashbhoy Molla Golam Ali (ditto) 0-2-0
4. H. M. Golam Hussain (ditto) 0-2-0
5. Eusufali Hasanali 0-2-0 | 0-8-0 annas
6. Fakruddin Eusufali (son of No. 5) 0-3-0
7. Abbashbhoy Eusufali (ditto) 0-3-0
S. NO Name
( 3 ) IT was claimed that the sons of the two original partners have contributed to the firm's capital out of gifts made by their respective fathers.
( 4 ) THE Income-tax Officer took the view that there was no valid gift because the firm did not have sufficient cash to make the gifts. He pointed out that the gifts were also claimed to have been made only subsequent to the coming into existence of the new firm. The new partners were said to have been employees of the old firm and were taken in as partners because they were unwilling to work only as employees. The Income-tax Officer further pointed out that in the new partnership deed there was no provision for payment of salaries to these new partners, but the accounts of the new firm showed that these new partners were being paid salaries as before. The Income-tax Officer also found that under the partnership deed all the partners were authorised to operate the bank accounts; but it appeared that the account with the Bank of India Ltd. , it was arranged, was to be operated by two partners only, while the account with the Union Bank of India was to be operated by four partners. In these circumstances, the Income-tax Officer was of the opinion that there was no change in the status of the new partners and they continued to be employees and further the apparent state of affairs was not the real state of affairs. He rejected the claim for registration.
( 5 ) THE Appellate Assistant Commissioner agreed with the Income-tax Officer. He expressed the view that a genuine firm had not come into existence for various reasons. Firstly, the new partners continued to draw the amount of salaries formerly drawn by them qua employees. Secondly, the group constituted by Golam Hussain Hasanali and his three sons were still receiving eight annas share in the firm and the group constituted by Eusufali Hasanali and his sons still had eight annas share in the firm. Thirdly, the new partners continued to appear in the pay register maintained for employees. And, fourthly, the statement filed before the Income-tax Officer in respect of salaries "paid to office staff" included also the new partners.
( 6 ) THE Tribunal has held that the department has not been able to substantiate its charges that there was no genuine firm in existence and that the apparent state of affairs was not real. The Tribunal has directed registration under Section 26a.
( 7 ) THE department suggested to the Tribunal that the following question of law be referred to this court :"whether, on a proper construction of the terms of the deed of partnership executed on the 16th March, 1959, and taking into consideration all the relevant facts of the case showing the conduct of the parties and particularly the fact that the alleged object of admitting the sons of the erstwhile partners to the partnership to avoid payment of adequate salary to them has not been achieved, the Tribunal was right in holdin
