1. The following question of law has been referred for decision under Section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessments could not be made in the status of a firm as claimed by the assessee and in setting aside the orders made by the Income-tax Officer and directing him to make assessments afresh in the correct status ?'
2. The facts of the case may be briefly stated. The relevant assessment years are 1961-62 and 1962-63. Pulchand Sarawgi has two sons, namely Ratanlal and Dulichand. Up to 1959-60 the return was filed by Pulchand in the status of Hindu undivided family wherein the three members were shown constituting the family with Pulchand Jain, the father, as the karta of the same. According to the assessee, M/s. Pulchand Ratanlal, Ratanlal Jain, one of the two sons of Pulchand Jain Sarawgi, was given in adoption to one, Balchand Barjotia, on June 16, 1954, and the said adoption was reduced into writing by a registered deed of adoption on the same date. In the returns filed up to the assessment year 1959-60, how
ever, the assessee treated the said Ratanlal Jain as a son of Phulchand Jain and a member of the joint family along with the other brother and the father. The assessee claimed that subsequently there was an agreement between Phulchand and Ratanlal, that is, father and the son, who was given away in adoption, to run the business in partnership with effect from March 29, 1958, relevant to the assessment year 1959-60. The deed of partnership was drawn up on April 19, 1962. No profits were, however, divided between the two alleged partners in the assessment year 1959-60. But in 1960-61, the profits were divided between the two partners. It is also found from the record and not contradicted that the profits were divided between the partners in the relevant assessment years 1961-62 and 1962-63. On these facts the assessee filed its return for the assessment year 1960-61 showing its status as a firm. The Income-tax Officer in his assessment order for the year 1960-61, however, found that Ratanlal managed the business and Phulchand, father of Ratanlal, gave Ratanlal in adoption to one Balchand Barjotia long ago. On that basis the Income-tax Officer determined the status of the assessee, M/s. Phulchand Ratanlal, proprietor Ratanlal Jain, as 'individual' and, accordingly, the assessment for the year 1960-61 was made on February 28, 1961. The assessee accepted that assessment order and it must have paid the assessed tax for the assessment year 1960-61. In 1961-62 the assessee, M/s. Phulchand Ratanlal, filed a return showing its status as 'firm'. The Income-tax Officer, however, in his assessment order for the year 1961-62 passed on September 4, 1963, observed that in the return the status was shown as 'firm' but in the absence of any change of ownership in the business he took the status as 'individual' as before, which necessarily means, as in the assessment year 1960-61. Similarly, the assessee filed return for 1962-63 showing its status as 'firm' but the Income-tax Officer by his assessment order dated September 4, 1963, assessed the assessee treating its status as 'individual' as in the previous year. The assessee preferred appeals before the Appellate Assistant Commissioner in respect of both the assessment years. The Appellate Assistant Commissioner found that the Income-tax Officer correctly determined the status of the assessee as an individual. The assessee then preferred second appeals before the Income-tax Appellate Tribunal. The Tribunal also held in its composite order dated November 24, 1966, that it was not possible to recognise the status as claimed by the assessee as a firm (partnership firm). The Tribunal further found that the rejection of the claim of the assessee that its status was 'firm' did not necessarily mean that the status of the assessee was 'individual' as held by the Income-tax Officer as well as the Appellate Assistant Commissioner.
3. The Tribunal then in its order referred to Section 171(1) of the Income-tax Act and observed as follows :
'Under Section 171(1) of the Income-tax Act, 1961, a Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a Hindu undivided family except where and in so far as a finding of partition has been given under this section in respect of the Hindu undivided family. On the facts presented before us, there is no evidence that after the year 1959-60, there was any partition in the Hindu undivided family of Phulchand Ratanlal to warrant the assessment in the status of an individual. In our opinion, therefore, the Income-tax Officer was not justified in changing the status of assessment. The assessments made by the Income-tax Officer in the status of an individual are, therefore, set aside. The Income-tax Officer may now proceed to make assessments for the relevant years in correct status.'
4. The operative portion of the judgment of the Tribunal merely says that, since the assessee has not been able to establish its status as a firm (partnership firm), there was no justification for the Income-tax Officer to treat the status of the assessee as an individual and, therefore, the assessment made on the basis of individual status was set aside and the Income-tax Officer was directed to make assessments for the relevant years in the correct status, that is to say, as Hindu undivided family, because the assessee claimed its status as a firm which was rejected by the Income-tax Officer who treated the assessee as an individual. The Tribunal also found that the assessee's claim of the status of firm was not made out and the Income-tax Officer was wrong in holding its status as an individual and, therefore, the Tribunal referred to Section 171(1) of the Income-tax Act and directed the Income-tax Officer to make assessments in the correct status of the assessee.
5. In the above premises the above question of law has been referred. The question that arose before the Tribunal for determination is whether the assessee may be treated as 'firm', as claimed in the returns of income submitted for the assessment years 1961-62 and 1962-63.
6. It is common case that a partnership firm may be formed even without a written document. Section 4 of the Indian Partnership Act defines 'Partnership' as follows:
'Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.'
7. Thus, to form a partnership there must be an agreement between the partners to share the profits of a business and the business is to be carried on by all or any of them acting for all.
8. In the case of K. D. Kamath and Co. v. Commissioner of Income-tax : 82ITR680(SC) the Supreme Court has observed at page 693 as follows:
'In certain decisions of the High Courts the two essential conditions necessary to form the relation of partnership have been stated to be: (1) that there should be an agreement to share the profits and losses of the business, and (2) that each of the partners should be acting as agent for all. Though those two conditions, by and large, have to be satisfied when the relationship of partners is created between the parties, we would emphasise that the legal requirements under Section 4 of the Partnership Act to constitute a partnership in law are: (1) there must be an agreement to share the profits or losses of the business ; and (2) the business must be carried on by all the partners or any of them acting for all. There is implicit in the second requirement the principle of agency.'
9. In the order of the Tribunal the reasons given for coming to the conclusion that the assessee's status is not a firm, are as follows :
'(1) The appellant claims that the partnership started with effect from March 29, 1958, in the accounting year 2015 R.N. relevant to the assessment year 1959-60, but as already stated the profits were not divided between the two alleged partners that year.
(2) For the assessment year 1959-60, the appellant submitted a return in the status of a Hindu undivided family and it was assessed in that status,
(3) It is not understood that if there was actually an agreement for partnership on March 29, 1958, why did the deed of the partnership was drawn up 4 years later, on April 19, 1962.
(4) There is no explanation why the bank account was not opened in the name of the firm for about 4 years from the start of the alleged partnership.
(5) The so-called deed of partnership dated April 19, 1962, was not produced before the Income-tax Officer when the proceedings for the assessment for the relevant assessment years 1961-62 and 1962-63 were going on.
(6) The assessments were completed on September 4, 1963, and the deed was first filed before the Income-tax Officer on December 11, 1963.'
10. On the above grounds the Tribunal found that the claim of the appellant to the status of a partnership firm was unfounded.
11. It is quite clear from the statement of the case as well as from the orders of the Income-tax Officer, Appellate Assistant Commissioner and the Tribunal that in the year 1959-60 the assessee was assessed as a Hindu undivided family. The return was filed by Phulchand as the karta of the Hindu undivided family. The assessment was made on the basis of the
status as Hindu undivided family. Both, the assessee as well as the department accepted that position in the year 1959-60, In the year 1960-61, the return of income was filed by Ratanlal Jain as proprietor of M/s. Phulchand Ratanlal and the status of partnership-firm was claimed. The Income-tax Officer, however, as stated hereinabove, did not accept the status of the assessee as partnership-firm, but, on the other hand, accepted it as an individual. Assessment was made for the year 1960-61 against the assessee treating its status to be an individual. The assessment order was not challenged and that position was accepted both by the assessee and the department. In 1961-62 and 1962-63, the returns were filed on behalf of the assessee claiming the status of a firm. On the basis of the earlier assessment orders, that is to say, of the year 1960-61, the Income-tax Officer assessed the assessee for 1961-62 and 1962-63, treating its status to be an individual. Against these two assessment orders appeals were preferred as stated above.
12. While giving the grounds for holding that the assessee has failed to establish its status as a partnership-firm, it is found that the Tribunal considered the return and the assessment order of 1959-60 and also considered the fact that the profits of the firm were not divided between the two alleged partners for the year 1959-60. But the fact that the profits for the years 1960-61, 1961-62 and 1962-63 were divided between the two partners were not at all taken into consideration by the Tribunal. One of the factors that is necessary to consider for determining the question whether there is a partnership-firm or not is whether there is sharing of profits or loss, as the case may be. In the instant case, though there was no division or profits between the two partners in 1959-60, but in fact the profits were divided between the partners for the year 1960-61 and also thereafter, that is, for the years 1961-62 and 1962-63, which has not been disputed or doubted in the order of the Tribunal. This important factor was not considered by the Tribunal. So, in our opinion, one of the two requirements' which requires consideration to determine the existence of a partnership-firm was overlooked by the Tribunal. On the other hand, the Tribunal laid stress on the assessment order of 1959-60, in which year the profits were not divided. Even if the profits of the partnership were not divided between the two partners in 1959-60 but if from 1960-61 onwards the profits were divided between the two partners in the books of accounts of the partnership-firm, then that may be a relevant circumstance pointing to the existence of a partnership-firm. But this material circumstance appearing on the record was not considered by the Tribunal.
13. Regarding the second requirement that the business of the firm shall be managed by all the partners or by any of them acting for all, we find that in the assessment order of 1960-61, the Income-tax Officer found that
Ratanlal managed the business. In the same assessment order the Income-tax Officer has found that Phulchand, father of Ratanlal, gave Ratanlal in adoption to one Balchand Barjotia long ago. The fact that Ratanlal was managing the business of the assessee-firm, M/s. Phulchand Ratanlal, has not been considered by the Tribunal in arriving at its decision that the assessee has failed to establish its status as a firm.
14. The third reason given by the Tribunal is that, though the agreement for partnership was on March 29, 19.58, the deed was drawn up on April 19, 1962, only. The delay in putting the terms of the parnership into a registered deed may raise some suspicion about the agreement but the suspicion is not sufficient to rule out the agreement in 1958.
15. Another circumstance mentioned hereinabove as ground No. (4) for arriving at the conclusion by the Tribunal is that there was no explanation why the bank account was not opened in the name of the firm for about four years from the start of the alleged partnership. But there is nothing on record to show that the account of the assessee was opened in any bank and in the name of any other person during that period. There is a clause in the partnership deed which says as follows:
'That the bank account or accounts when opened shall be in the firm name and shall be operated by the partner or partners as agreed upon.'
16. Since there is nothing on record to show that the bank account of the assessee was opened in any other person's name, this circumstance that there was no explanation as to why the bank account was not opened in the name of the firm for about four years from the start of the alleged partnership appears to be neutral circumstance. That apart, it is submitted as the bar that during that period there was no branch of any bank at Dimapur and as soon as a branch was opened, account in the name of the partnership-firm was opened. 'Whatever that may be, the circumstance of not giving an explanation for not, opening a bank account for about four years appears to us to be neutral to come to the finding of the Tribunal.
17. The other circumstances referred to by the Tribunal, mentioned in ground Nos. (5) and (6) above, are that the partnership deed was not produced, before the Income-tax Officer when proceedings for assessment years 1961-62, and 1962-63 were going on and that the deed was first filed on December 11, 1963, although the assessments were completed on September 4, 1963. It is submitted by the learned counsel for the assessee that this was filed in connection with an application under Section 184 of the Income-tax Act for registration of the firm.
18. We have already found that to constitute a partnership-firm it is not necessary that there must always be a written document putting therein the terms of the partnership. On a consideration of the materials on
record we find that, in arriving at the conclusion that the assessee could not establish its status as a firm, the legal requirements under Section 4 of the Indian Partnership Act to constitute a partnership were not considered as discussed hereinabove. But some materials were considered which are not very relevant for the purpose. Some circumstances were considered which may at best raise a suspicion about the genuineness of the firm. But mere suspicion is not enough to discard the claim of the assessee.
19. In the instant case, the assessee had filed the return for the relevant two assessment years wherein it claimed its status as a firm. Those returns were duly verified in accordance with law, The assessee also produced the books of accounts which disclosed that the profits of the firm were divided between the partners during the assessment years 1961-62 and 1962-63. In the assessment order for the assessment year 1960-61, the Income-tax Officer found that Ratanlal was managing the business of the assessee-firm. Without considering these material requirements for the constitution of a partnership-firm, the Tribunal could not have lawfully come to its conclusion regarding the claim of the status of the assessee.
20. The learned counsel for the assessee submits that before coming to the conclusion that the assessee's status is a Hindu undivided family, the Tribunal ought to have decided what would be the effect of the adoption as found by the Income-tax Officer in his assessment order for the assessment year 1960-61. If the adoption is valid, it is submitted, Ratanlal Jain goes out of the family of Phulchand Jain and the old Hindu undivided family cannot have Ratanlal as a coparcener from the date of the adoption.
21. That there was an adoption of Ratanlal Jain by Balchand Barjotia long ago has been accepted by the Income-tax Officer in his assessment order for the year 1960-61, to which we have already referred. So, if the status of the assessee is that of a Hindu undivided family, then Ratanlal ceases to be a coparcener of the assessee, Hindu undivided family. The effect of adoption, if valid, on the Hindu undivided family as found in 1959-60 also will have to be examined before deciding the status of the assessee as a Hindu undivided family in 1961-62 and 1962-63. Without considering this aspect of the matter, the Tribunal was not legally correct in coming to the conclusion that the status of the assessee in the assessment years 1961-62 and 1962-63 was a Hindu undivided family.
22. Thus, on the facts and circumstances of the case, we find that the Tribunal was not right in holding that the status of the assessee could not be held to be 'firm' as claimed by the assessee and on the basis of that finding the Tribunal was also not right in setting aside the order of the Income-tax Officer and in directing him to make reassessment of the assessee for the relevant years in the status of a Hindu undivided family.
23. Mr. G.K. Talukdar, the learned standing counsel for the department, vehemently submits that the question of law referred is concluded by the finding of fact and the court in a reference is required by law to accept the finding of fact arrived at by the Tribunal. The submission that a finding of fact arrived at by the Tribunal has to be accepted in answering a reference is correct. But, if the Tribunal arrives at a finding of fact on the basis of which a question of law or a mixed question of law and fact has to be decided, and in arriving at that finding it does not consider the materials that are required by law to be considered but, instead, considers some circumstances which are more or less irrelevant, such a finding will be perverse and not binding for the purpose of determination of the question of law referred. Any decision based on such perverse finding of fact will not be justified in law. A finding of fact which is arrived at without materials on record or in arriving at which essential ingredients which are required by law to be considered are not considered but irrelevant materials are considered, will be a perverse finding losing the sanctity of finding of fact in such matter. If the law requires that in order to determine a question certain facts must be considered, then the Tribunal must consider those facts if those are on record but, if without considering those facts on record, it comes to any finding such a finding, even though it appears to be a finding of fact, cannot be sustained in law and acted upon.
24. In the instant case, Section 4 of the Partnership Act is very eloquent and we have already referred to the interpretation given to it by the Supreme Court in K. D. Kamath & Co. v. Commissioner of Income-tax. The question that was before the Tribunal was whether the assessee is a firm or not. For that purpose two most material questions are : (1) whether there is sharing of profits between the partners ; and (2) whether there was management of the business of the assessee by all the partners or any one of them for all. In the instant case the profits of the assessee-firm were divided between the two partners, namely, Ratanlal and Phulchand, for the assessment years 1960-61, 1961-62 and 1962-63 and the findings of the Income-tax Officer in his assessment order of 1960-61 are that the business was managed by Ratanlal and that Ratanlal was adopted by Balchand Barjotia. While determining the question whether the assessee is a firm, the Tribunal failed to consider the essential requirements of a partnership-firm, but on the other hand, the Tribunal travelled to some circumstances which are remotely relevant or at the most which may raise some suspicion as to the genuineness of the firm, and, therefore, the finding of fact that the assessee is not a firm cannot be said to be justified in law on the basis of such perverse finding. Consequently, the finding to the effect that the
assessee is to be treated as a Hindu undivided family and should be assessed afresh as such is also not justified in law find the Tribunal is not justified in setting aside the orders made by the Income-tax Officer and directing him to make assessments afresh as Hindu undivided family.
25. We, accordingly, answer the question referred in the negative and against the department.
Baharul Islam, J.
26. I agree.