Existence of sleeping partners not relevant factors.

SRINIVASAN J.

Abdul Rahaman Rowther was the proprietary owner of a tobacco business. He entered into a partnership with his two married daughters and on that basis sought registration of the firm under section 26A of the Income-tax Act. The Income-tax Officer rejected the application holding that the "partnership deed was a sham document", that there was no genuine firm and that the business continued to be that of Abdul Rahaman Rowther alone. On appeal, the Appellate Assistant Commissioner concurred in these findings. He also thought that the interest of the two daughters in the firm was created by alleged gifts of Rs. 25, 000 to each of them by the father, and that the gifts were not valid as there was no handing over of the cash to the daughters. He was also inclined to hold that the making of a gift of a large part of the assets to only two of his daughters in preference to his several other children was unnatural. He further relied on the fact that on an earlier occasion Abdul Rahaman Rowther had also purported to form a partnership, the registration of which had also been rejected. There was a further appeal to the Tribunal, before whom it was contended that the gifts were valid, that the propriety of the gifts by a father to his daughters could not be questioned by the department, that besides being supported by entries in the books of account, a deed of partnership had also been executed by the parties. The Tribunal however was not prepared to accept these contentions. It held that no fresh capital had been brought into the business, that there was only an artificial division of the capital and that some book entries without anything more by way of collateral evidence were not sufficient to complete the gifts ; and the appeal was accordingly rejected The assessee applied under section 66(1) of the Act for a reference to the High Court. His application was dismissed. On his further application under section 66(2) of the Act, this court directed the following question to be referred for determination

"Whether, on the facts and in the circumstances of the case, the assessee-firm was not entitled to registration under section 26A of the Act for the assessment year 1956-57 ?" *

At the outset, we may mention that the refusal to register this same partnership for the earlier year 1955-56, or the fact that Abdul Rahaman Rowther had on a still more previous occasion purported to form a partnership which also was not recognised by the department are really not matters germane to the question which the department and the Tribunal had to consider Indeed, the reference by the Appellate Assistant Commissioner to the last mentioned feature is wholly out of place and suggests some sort of prejudice against the assessee. The questions which had to be considered in the disposal of the application by the assessee are, firstly, whether a genuine partnership did come to exist, and, secondly, if the formation of the partnership was preceded by certain other transactions, which were necessary for the formation of the partnership, whether those transactions were true and valid. Undoubtedly, upon the claim that the petitioner had made gifts to his daughters, which gifts went to form their capital in the partnership, the department was entitled to examine whether the making of the gifts conforms to the law and valid gifts had in fact been made. That is certainly different from questioning the propriety of a father preferring some of his children to the rest. We may mention, for instance, that cases have held that where a joint Hindu family enters into a partition arrangement and pleads for a recognition of the partition under section 25A, it has been held that it is not open to the department to question whether the properties have been properly divided among the members. Equally, whether the assessee, a Mohammadan father, was justified in giving over a half share in the firm's assets to two of his daughters, though he has other issu