1. This reference relates to registration of a firm under the Indian Income-tax Act, 1922. The assessment years under consideration are 1959-60, 1960-61 and 1961-62. By a deed of partnership dated November 11, 1950, a partnership firm was constituted to carry on business in the name of Messrs. Champaklal Jamnadas & Co. It consisted of four partners, namely, (1) Manilal Jamnadas, (2) Keshavlal Ravchand, (3) Champaklal Jamnadas and (4) Dharamshi Maneckchand. The profits of the business were to be shared in the manner indicated with a particular percentage of profits earned by way of brokerage and a different percentage of profits earned in speculation business. Out of these four partners Manilal and Champaklal are brothers. The partnership firm was to carry on business of speculation and brokerage. This firm continued to carry on business till the end of Samvat year 2013, i.e., October 23, 1957, being the accounting year relevant to the assessment year 1958-59. As from the beginning of Samvat year 2014, i.e., October 24, 1957, the firm was reconstituted. Champaklal Jamnadas and Dharamshi Manekchand retired from the firm and Ashokkumar Champaklal, the son of erstwhile partner, Champaklal Jamnadas, was brought in as a new partner. This change was effected by a deed of partnership dated January 8, 1958, and the deed was to be operative with effect from October 24, 1957. Under this deed the three partners, Manilal Jamnadas, Keshavlal Ravchand and Ashokkumar Champaklal, were to have share in the profits of the brokerage business and speculation business as indicated therein. The reconstituted firm also changed the firm name to Messrs. Manilal Jamnadas (Seeds). It was stated in the partnership deed of the reconstituted firm that this firm 'shall succeed to the assets and liabilities of the said concern of M/s. Champaklal Jamnadas & Co.' Champaklal Jamnadas could not continue as a partner as he had become a member of the stock exchange, because as per the rules and regulations of the stock exchange, a member thereof was not permitted to be a member of a firm in which he would have dealings as a broker.
2. In due course the reconstituted firm applied for registration under section 26A of the Indian Income-tax Act, 1922, for the assessment year 1959-60 and it similarly made applications for renewal of registration for the next two years 1960-61 and 1961-62. The Income-tax Officer refused to register the firm holding that the firm had sought registration on the strength of a deed of partnership which was not genuine. He found on examination of the books of account vis-a-vis the partners that Ashokkumar was not a real partner but was an ostensible partner and the real owner of his share was his father, Champaklal. For coming to this conclusion he gave three reasons : (1) The bank account opened with the Bank of Baroda by the firm showed Champaklal Jamnadas as a partner of the firm. Thus, although ostensibly his son, Ashokkumar Champaklal, was a partner, the real partner was Champaklal Jamnadas. (2) Although under the terms of the partnership deed there was a stipulation for payment of interest to the partners, no such interest had been paid to the partners, and (3) Although under the terms of the partnership deed there was no stipulation to pay any salary to any of the partners, Keshavlal Ravchand had, in fact, been paid salary for these years. The appeals preferred by the assessee-firm were disposed of by the Appellate Assistant Commissioner by a common order. He took the view that the last two objections above referred to by the Income-tax Officer had either no basis or had no merit such as to affect the genuineness of the firm. So far as the first objection was concerned, the Appellate Assistant Commissioner pointed out that on enquiry it appeared that the facts stated by the Income-tax Officer were not correct. In the earlier partnership, Manilal Jamnadas and Champaklal Jamnadas were carrying on business in the name of Champaklal Jamnadas & Co., in partnership with two outsiders. Subsequently, Champaklal Jamnadas became a member of the stock exchange and under the rules of the stock exchange he was debarred from becoming a partner in any firm. Accordingly, he retired from the partnership. A new partnership was constituted between Manilal Jamnadas, Keshavlal Ravchand and Ashokkumar Champaklal, the third being the son of Champaklal. The earlier partnership had enjoyed facilities with the Bank of Baroda which refused to extend the same facilities to the reconstituted partnership unless Champaklal's name was associated. In order to obviate the difficulty the firm decided to open a joint account in the names of Manilal Jamnadas, Champaklal Jamnadas and Keshavlal Ravchand and not a partnership account in terms of which Champaklal's name was associated in the bank account with the Bank of Baroda Ltd. He, accordingly, took the view that the firm as constituted by the partnership deed dated January 8, 1958, was a genuine partnership and was entitled to registration for the assessment year 1959-60 and renewal of registration for the subsequent two years. On an appeal by the Income-tax Officer the Tribunal set aside the order passed by the Appellate Assistant Commissioner for all these years. So far as the last two reasons assigned by the Income-tax Officer for refusing registration were concerned, the Tribunal agreed with the finding of the Appellate Assistant Commissioner that the said reasons were either not valid or misconceived. So far as the first reason given by the Income-tax Officer was concerned, the Tribunal took a view different from the one that was taken by the Appellate Assistant Commissioner. The Tribunal in its order pointed out that there was no evidence to support the explanation given by the firm for including the name of Champaklal Jamnadas in the bank account opened with the Bank of Baroda; that under clause 8 of the partnership deed the banking account of the reconstituted firm ought to have been opened in the name of the firm, namely, M/s. Manilal Jamnadas (Seeds). However, the banking account was not opened in such a name but was opened in the personal names of three individuals, namely, Manilal, Champaklal and Keshavlal. The Tribunal also pointed out that in the form for opening account 'business or profession' of the account holders was shown as cotton, bullion and seeds brokers. In fact, no such business was carried on by the three persons including Champaklal Jamnadas. Under the deed of partnership of the reconstituted firm the business of the firm was to be that of brokerage, tarvani and as merchants of forward business in gold, silver, arenda, oil seeds, cotton and shares and in any other commodity as may be agreed to by the partners. The Tribunal in view of these facts presumably took the view that the bank account was opened by the firm itself and not by the individuals. The Tribunal applied its mind to the question, 'if Champaklal Jamnadas was not a partner of the firm why should he have been allowed to operate on the account ?' The Tribunal noted the fact that in fact the other two partners had operated the account and Champaklal had not done so, but pointed out that there was clear authority for Champaklal Jamnadas to operate on that account. If regard be had to the stipulations provided in the bank account opening form, then it was clear that not only Champaklal took the risk in respect of the bank account but the other partners also took the risk in respect of Champaklal inasmuch as he had full authority to draw upon the banking account. On these facts, the Tribunal found :
'In these circumstances it appears to us that Champaklal Jamnadas had merely tried to hide behind the facade of the partnership deed by which in his place his son, Ashokkumar Champaklal, was taken as a partner so that on paper it may appear that he had abided by the regulations of the stock exchange and nothing more. We think Champaklal Jamnadas, in these circumstances, must be held to have continued as a partner and that Ashokkumar Champaklal, his son, was merely his nominee. The Income-tax Officer was, therefore, right in holding that the firm, as evidenced by the partnership deed dated 8th January, 1958, was not genuine and in refusing to register the firm under section 26A of the Act accordingly.'
'Whether, on the facts and in the circumstances of the case, the decision of the Tribunal refusing to grant registration of the applicant-firm is justified in law ?'
3. Mr. Dastur, on behalf of the assessee-firm, contended that the Tribunal was not justified in holding on the material on record that the reconstituted firm evidenced by the partnership deed dated January 8, 1958, was not a genuine firm. He submitted that the Tribunal was not justified in holding that Ashokkumar was a benamidar of his father, Champaklal. He submitted that the burden to show that Ashokkumar is a benamidar or nominee of his father is entirely on the revenue and that such burden has not been discharged by the revenue. He pointed out that the particulars given in the form for opening the bank account do not show that Champaklal was a partner; that the contention of the assessee-firm that the bank account had to be opened in the names of the three persons because the bank declined to give the facilities unless the name of Champaklal was joined as one of the account holders, was not challenged in the memo of appeal by the Income-tax Officer before the Tribunal and the Tribunal was not justified in taking the view that there was no evidence in support of the explanation for opening of the bank account, which was accepted by the Appellate Assistant Commissioner. He submitted that a mere look at the particulars given in the bank account opening form will not be sufficient to come to a conclusion whether Ashokkumar is a real partner of his own right or a nominee or a benamidar of his father. Ashokkumar, according to his submission, can only be held to be a benamidar or a nominee of his father if it is shown that the profits of the reconstituted firm coming to the share of Ashokkumar had really gone to Champaklal, his father. Such onus was not discharged by the revenue and he submitted that there was no warrant for the finding that Ashokkumar was a mere nominee or benamidar of his father. Secondly, he contended that even if Ashokkumar is assumed to be a nominee or a benamidar of his father, that by itself will not justify the taxing authority and the Tribunal in refusing registration of the assessee-firm. He submitted that even though Ashokkumar may be a benamidar, the firm is entitled to registration if regard be had to the correct position in law. Lastly, he submitted that the question whether Ashokkumar is a nominee or a benamidar should not be decided in this reference, but it should be left open and his second submission ought to be decided on the assumption that Ashokkumar is a nominee or benamidar and on that assumption the question should be considered whether the Tribunal was justified in refusing registration of the reconstituted firm.
4. Mr. Joshi, on the other hand, on behalf of the revenue contended that when a question is referred on the footing of facts and circumstances of the case, the question has to be decided having regard to the facts found by the Tribunal. He pointed out that the Tribunal has clearly found that the reconstituted firm is not a genuine partnership because Champaklal has continued to be a partner thereof. He submitted that if Champaklal continued to be a partner of the reconstituted firm, then this firm notwithstanding the execution of the deed dated January 8, 1958, cannot be regarded as a genuine firm. Secondly, he submitted that the contention of Mr. Dastur that Ashokkumar is not a nominee or a benamidar of Champaklal cannot be accepted. He pointed out that under clause 8 of the deed of partnership of the reconstituted firm the banking accounts of the partnership firm if and when necessary were to be opened in the name of Messrs. Manilal Jamnadas (Seeds) in such bank or banks as may be approved by all the partners and banking account or accounts shall be operated by all or any of the partners as mutually agreed. He submitted that the new account which had been opened with the Bank of Baroda if it is to be treated as an account of the reconstituted firm, will show that it is Champaklal who is the real partner and not Ashokkumar. The particulars given in the account opening form show that all the three account holders were liable for any of the amounts that may be payable to the bank. He submitted that this circumstance by itself was sufficient to show that Champaklal continued to be a partner. In any event, he submitted that this circumstance in the alternative at least must show that Ashokkumar is a nominee or a benamidar of his father, Champaklal. In short, his submission is that, if the finding of the Tribunal that the reconstituted firm is not a genuine firm is justified, then the order refusing registration of the firm is justified. However, in the alternative, if on facts this court finds that Ashokkumar is a nominee or a benamidar of Champaklal, then, in view of the decision cited by Mr. Dastur, he has not controverted the position that the firm on that basis will be entitled to registration.
5. We shall take up the last contention that has been urged by Mr. Dastur, namely, whether it is necessary for us to decide whether Ashokkumar is a nominee or a benamidar of his father, Champaklal. On this question the Income-tax Officer has held that the reconstituted firm is not a genuine partnership and he has given a finding that Ashokkumar was not a real partner but he was an ostensible partner the real partner being his father, Champaklal. The Appellate Assistant Commissioner, on the other hand, has taken the view that the firm is a genuine partnership and is entitled to registration. While the Tribunal in second appeal has confirmed the finding of the Income-tax Officer that the firm is not a genuine firm it has also given a finding to the effect that Champaklal has continued to be a partner and his son, Ashokkumar, is merely his nominee. If we proceed on the footing that the firm is not a genuine partnership, as found by the Tribunal, then naturally there can be no controversy whatsoever that the application for registration can never succeed. Thus, it will not be possible for us to accept the last contention urged by Mr. Dastur that the question whether Ashokkumar is a nominee or a benamidar should not be decided by us. In fact, the very frame of the question speaks of 'on the facts and in the circumstances of the case'. As pointed out by the Supreme Court in Karnani Properties Ltd. v. Commissioner of Income-tax : 82ITR547(SC) and in Commissioner of Income-tax v. Manna Ramji and Co. : 86ITR29(SC) , the expression 'on the facts and in the circumstances of the case' means on the facts and circumstances found by the Tribunal and not on the facts and circumstances that may be found by the High Court on a reappraisal of the evidence. In the absence of a question whether the findings were vitiated for any specific reason the High Court has no jurisdiction to go behind or question the statement of fact made by the Tribunal. Thus, it will not be possible for us to decide this question on the assumption that Ashokkumar is a nominee or a benamidar of Champaklal.
6. It is undoubtedly true that when a plea is raised whether a person is a nominee or benamidar of another, then the burden will be upon the party asserting such a plea to prove that fact. Such fact can be proved on such material on record as may be made available by the parties for deciding the question. It is undoubtedly true as contended by Mr. Dastur that in deciding the question whether Ashokkumar is a nominee or a benamidar of his father, Champaklal, it is a relevant fact to consider whether the profits of the reconstituted firm coming to the share of Ashokkumar had really gone to his father, Champaklal, but neither party has led any evidence on that point in the present case. Mere omission of such evidence will not be sufficient to come to the conclusion that in the absence of such evidence the issue whether Ashokkumar is a nominee or a benamidar of his father, cannot be decided. The deed of partnership in respect of the reconstituted firm was executed on January 8, 1958. It is common ground that this reconstituted firm has taken over the assets and liabilities of the earlier firm which consisted of two of the partners of this firm, namely, Manilal and Keshavlal and two other partners, namely, Champaklal, the father of Ashokkumar and one Dharamshi. Champaklal became a member of the stock exchange and under the rules and regulations of the stock exchange he was precluded from becoming a partner of a firm in which he had dealings of a broker. Thus, Champaklal apparently could not become a partner of the reconstituted firm as, inter alia, the business to be carried on was forward business in a commodity like shares. Clause 8 of the partnership deed is as under :
'8. Banking accounts of the partnership firm if and when necessary may be opened in the name of M/s. Manilal Jamnadas (Seeds) in such bank or banks as may be approved by all the partners hereto from time to time and the banking account or accounts shall be operated by all or any of the partners hereto as mutually agreed.'
7. It is common ground that no account in the name of the reconstituted firm is opened with any bank. All the banking transactions of the reconstituted firm have been done in a banking account opened with the Bank of Baroda Ltd., Zaveri Bazar branch. This account is opened in the names of three persons, Manilal Jamnadas, Champaklal Jamnadas and Keshavlal Ravchand. The instructions given while opening this account show that it will be operated upon by any one of the holders or survivors or survivor of them. It is also stipulated in these instructions that balance, if any, will be payable to or by and securities, if any, will be deliverable to any one of them, survivors or survivor. The address given of the three account holders is this form is Mahajan Building, 1st floor, Zaveri Bazar, Bombay-2. That is the place where the partnership business of the reconstituted firm was to be carried on. The business or profession of the account holders is shown to be 'cotton-bullion and seeds-brokers'. Apart from brokerage and tarvani business, the reconstituted firm was to carry on business as merchants in forward business in gold, silver, arenda, oil seeds, cotton, shares, etc. Merely because, notwithstanding the provisions contained in clause 8 of the deed of partnership of the reconstituted firm, the account is opened in this manner it will not be possible for us to accept the contention of Mr. Joshi that the reconstituted firm is not a genuine firm. The Income-tax Officer also was not right in stating in his order that the form while opening the bank account has been signed by Champaklal as a partner. In fact, the use of the word 'partner' is referred to in the introduction which has been made by Champaklal himself, but this introduction is made by Champaklal as a partner of the earlier firm of Champaklal Jamnadas & Co. As regards the names of the account holders, there is nothing to indicate that Champaklal is shown as a partner of the reconstituted firm. However, he has not only the power to operate the account but he has undertaken to pay a liability that may be subsisting at the foot of this account. It is quite clear from clause 15 of the deed of partnership of the reconstituted firm that all the assets of the earlier firm of Messrs. Champaklal Jamnadas & Co., including tenancy rights and telephone lines, have been treated as the assets of the new partnership. Thus, what is pointed out in clause 15 of the deed of partnership is that Dharamshi has retired from the said partnership firm and as it was not possible for Champaklal to be a partner in the new firm the name of Ashokkumar was shown as a partner. The fact that the assets of the earlier firm have been taken over by the new firm will clearly show that the share of the assets which otherwise would have been taken away by Champaklal in the earlier firm will now be held by his son, Ashokkumar, and even though, normally, one would expect a bank account to be opened by the reconstituted firm in the names of its partners, it has been done in the names of two partners and Champaklal, who is the father of Ashokkumar. Under this account, apart from being authorised to operate the account, he has undertaken to pay the liability that may be at the foot of this account. The reason for reconstitution of the firm also should not be overlooked. Champaklal became a member of the stock exchange and under the rules of the stock exchange Champaklal is debarred from having business connections with a firm in which he had dealings of a broker. Thus, it was not possible for Champaklal to be openly a partner in the reconstituted firm which would have, inter alia, dealt in forward business in shares. This material, therefore, was enough for the Tribunal to come to the conclusion that Ashokkumar was a nominee of his father. The fact that Ashokkumar is a nominee of his father is the same thing as that Ashokkumar is a benamidar of his father because the father will be the real owner of the profits which will come to the share of Ashokkumar under the deed of partnership in respect of the reconstituted firm. It is not possible for us to accept the contention of Mr. Dastur that the revenue has failed to discharge the burden to support the finding of the Tribunal that Ashokkumar is a nominee of his father, nor is it possible for us to accept the contention of Mr. Dastur that the reason for opening the bank account in the three individual names including that of Champaklal was the one which was urged before the Appellate Assistant Commissioner. If the assessee-firm wanted to prove as a fact for showing the circumstances under which the bank account was opened with the Bank of Baroda in the names of the three persons, Manilal, Champaklal and Keshavlal, it should have led evidence for that purpose and the Tribunal was justified in saying that in the absence of evidence the explanation sought to be suggested in the course of the arguments cannot be accepted.
8. The question then to be considered is whether simply because Ashokkumar is a nominee or a benamidar of his father in the reconstituted firm, the taxing authorities and the Tribunal are justified in refusing registration of the firm or renewal thereof for the subsequent years. So far as the position in law is concerned, it is well-settled. A firm will be entitled to registration under section 26A of the Act if the following essential conditions are satisfied :
1. The firm should be constituted under an instrument of partnership, specifying the individual shares of the partners.
2. An application on behalf of, and signed by, all the partners and containing all the particulars as set out in the rules must be made.
3. The application should be made before the assessment of the firm under section 23, for that particular year.
4. The profits or losses, if any, of the business relating to the accounting year should have been divided or credited, as the case may be, in accordance with the terms of the instrument, and
5. The partnership must be genuine and must actually have existed in conformity with the terms and conditions of the instrument of partnership, in the accounting year.
9. See the decision of the Supreme Court in R.C.Mitter & Sons v. Commissioner of Income-tax. These conditions are fulfilled in the present case, but it has been found by the Income-tax Officer that Ashokkumar is an ostensible partner and the real owner of his share is his father, Champaklal. So also the Tribunal has found that Ashokkumar is merely his father's nominee. The Tribunal has used the words 'Champaklal has continued as partner' but the correct way of stating this fact would be that, as Ashokkumar was his nominee; Champaklal was the real partner as a person beneficially entitled to the share. It is only on this ground that the Income-tax Officer and the Tribunal have not regarded the firm as genuine. The position in law is well-settled, as will be shown by the decisions which we will refer to, that such cannot be the correct view simply because a person whose name is shown in a partnership deed as a partner is a benamidar of somebody else.
10. In Aruna Group of Estates v. State of Madras : 55ITR642(Mad) the Madras High Court held that the formation and constitution of a partnership can in no way be affected by the fact that one of the partners is a benamidar for a stranger to the partnership or that a partner holds his share as a manager of his joint family, or that a partner has greed to give a portion of his share to another by constituting a sub-partnership with him. These are incidents which are outside the scope of the partnership arrangement and have no bearing on the truth or reality of the partnership as such, and the registration of a firm cannot, therefore, be refused on the above grounds. If any partner is only a benamidar for a third person, it can only mean that he is accountable to the real owner for the profits earned by him form and out of the partnership; his benami character does not affect his capacity as a partner or his final relationship with the other members of the partnership. In this decision the Madras High Court points out that the vital question, and perhaps the only question, which has to be decided by the officer is the existence or otherwise of a firm in accordance with the tenor and the terms of a written instrument of partnership. If there is no firm in existence and the deed is a mere make-believe and a fiction or if there is a firm but not in accordance with the terms of the deed, the application for registration must fail. The Madras High Court in this case followed the ratio of the decision of the Gujarat High Court in Commissioner of Income-tax v. A. Abdul Rahim & Co. : 43ITR8(Guj) . A similar question had come up for consideration before the Supreme Court in more than one decision. In Commissioner of Income-tax v. A. Abdul Rahim & Co. : 55ITR651(SC) the facts were that V, A and M constituted a partnership having 9 as., 5 as. and 2 as. shares, respectively. K, a nephew of V, was inducted into the partnership as a fourth partner with a 2 as. share carved out of the 9 as. share of V, and a deed was executed by the four persons. The Appellate Tribunal held that K was a benamidar of V but otherwise held that the partnership was genuine. The Supreme Court took the view that registration of the partnership deed under section 26A of the Act could not be refused on the ground that K was the benamidar of V. It is settled law that if a partnership is a genuine and valid one, the Income-tax Officer has no power to reject its registration if the other provisions of section 26A and the rules made thereunder are complied with. When a firm makes an application under section 26A of the Act for registration, the Income-tax Officer can reject the same if he comes to the conclusion that the partnership is not genuine or the instrument of partnership does not specify correctly the individual shares of the partners. But once he comes to the conclusion that the partnership is genuine and a valid one he cannot refuse registration on the ground that one of the partners is a benamidar of another. If the partnership is genuine and legal, the share given to the benamidar will be the correct specification of his individual share in the partnership. The beneficial interest in the income pertaining to the share of the said benamidar may have relevance to the matter of assessment, but none in regard to the question of registration. His benami character does not affect the benamidar's capacity as partner or his relationship with the other members of the partnership. If a partner is only a benamidar for another, it can only mean that he is accountable to the real owner for the profits earned by him from and out of the partnership. Therefore, a benamidar is a mere trustee of the real owner and he has no beneficial interest in the property or the business of the real owner. But, in law, just as in the case of a trustee, he can also enter into a partnership with others. The benamidar of a partner, qua the other partners, has separate and real existence; he is governed by the terms of the partnership deed; his rights and liabilities are governed by the terms of the contract and by the provisions of the Partnership Act; his liability to third parties for the acts of the partnership is co-equal with that of the other partners; the other partners have no concern with the real owner; they can only look to him for enforcing their rights or discharging their obligations under the partnership deed. Any internal arrangement between him and another partner is not governed by the terms of the partnership; that arrangement operates only on the profits accruing to the benamidar; it is outside the partnership arrangement. If a benamidar possesses the legal character to enter into a partnership with another, the fact that he is accountable for his profits to, and has the right to be indemnified for his losses by, a third party or even by one of the partners does not disgorge him of the said character. Thus, this decision of the Supreme Court clearly points out that the genuineness of a firm is not affected by the mere fact that one of the partners in this firm is a benamidar of some other person. The Tribunal has taken the view that Ashokkumar is a benamidar of his father, Champaklal, and it is Champaklal who will be beneficially interested in the share of Ashokkumar, but such a conclusion by itself will not be sufficient to come to the conclusion that the agreement of partnership is not a genuine deed. That such position is clear is also apparent from a subsequent decision of the Supreme Court in Commissioner of Income-tax v. Bagyalakshmi & Co. : 55ITR660(SC) . In our opinion, it is not possible for us to doubt the genuineness of the partnership entered into under the deed dated January 8, 1958, simply because it is found that Ashokkumar is a nominee or a benamidar of his father, Champaklal. Such benami status of Ashokkumar will not come in the way of the partnership being registered under the Act. Thus, in our opinion, the Income-tax Officer and the Tribunal were in error in refusing registration of the assessee-firm. Thus, the question referred to us is answered in the negative, in favour of the assessee. The revenue shall pay the costs of the assessee.