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Manilal Jamnadas Vs. Commissioner of Income-tax, Bombay City I - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 13 of 1966
Judge
Reported in[1977]109ITR278(Bom)
ActsIncome Tax Act, 1922 - Sections 26A
AppellantManilal Jamnadas
RespondentCommissioner of Income-tax, Bombay City I
Appellant AdvocateS.E. Dastroor, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
- - as regards pravinchandra and subodhchandra, the tribunal also observed that it was not satisfied that they were the real partners and not mere names. commissioner of income-tax [1974]96itr625(orissa) -where it has been clearly stated that two conditions were essential to found the relation of partnership. he pointed out that in both these decisions it has been stated that the two essential conditions to found the relation of partnership are :(a) that there should be an agreement to share the profit as well as the loss of the business, and (b) each of the partners should be acting as an agent of all, and if these two conditions were to exist, the other conditions which might be obtaining in a particular deed giving larger share to one of the partners in the management or ownership.....tulzapurkar, j.1. at the instances of the assessee,. m/s. manilal jamnadas, a firm at bombay, the following question has been referred to us for our determination by the tribunal under section 66 (1) of the indian income-tax act, 1922 : 'whether, on the facts and circumstances of the case, the decision of the tribunal refusing to grant registration to the applicant firm is justified in law ?' 2. the question relates to the assessment years 1959-60 and 1960-61, the corresponding accounting years being s.y. 2014 and s. y. 2015, respectively. the facts giving rise to the question may be stated : prior to october 24, 1957, on which date commenced the year of account of the assessee for the assessment year 1959-60, there was a firm called m/s. champaklal jamnadas. it had come into existence.....
Judgment:

Tulzapurkar, J.

1. At the instances of the assessee,. M/s. Manilal Jamnadas, a firm at Bombay, the following question has been referred to us for our determination by the Tribunal under section 66 (1) of the Indian Income-tax Act, 1922 :

'Whether, on the facts and circumstances of the case, the decision of the Tribunal refusing to grant registration to the applicant firm is justified in law ?'

2. The question relates to the assessment years 1959-60 and 1960-61, the corresponding accounting years being S.Y. 2014 and S. Y. 2015, respectively. The facts giving rise to the question may be stated : Prior to October 24, 1957, on which date commenced the year of account of the assessee for the assessment year 1959-60, there was a firm called M/s. Champaklal Jamnadas. It had come into existence under a deed of partnership dated November 13, 1951. Its partners and their share were as under :

(1) Manilal ... 5 annas.(2) Vasantkumar s/o. Manilal ... 2 '(3) Pravinchandra Manilal ... 2 '(4) Champaklal ... 3 '(5) Subodhchandra Champaklal ... 2 '(6) Ashokkumar Champaklal ... 2 '

3. It appears that Manilal and Champaklal were brothers who were the principle partners in the earlier partnership, M/s. Champaklal Jamnadas, and the other partners were only their sons. This firm had been granted registration under section 26A and so it was a registered firm in the assessment year 1958-59. It appears that some time prior to October 24, 1957, Champaklal purchased a broker's card on the stock exchange in his own name and since, according to the rules of the stock exchange a broker could not at the same time be a partner in any firm which had business in the stock exchange (although he could do business on his own account), Champaklal is said to have retired from the old firm with effect from October 24, 1957, and the new firm called 'Manilal Jamnadas' carried on the partnership business of the erstwhile old firm with new partners having different shares. A new partnership deed was executed on January 8, 1958, under which the new firm was said to be carrying on business under new style called 'Manilal Jamnadas'. The partnership deed referred to the retirement of Champaklal and also stated that the new firm 'shall succeed to the assets and liabilities of the said concern of Messrs. Champaklal Jamnadas'. The partners of the new firm and their respective shares in profit and loss were as under :

Loss Profit(1) Manilal 30% 16%(2) Vasantkumar Manilal 7% 7%(3) Pravinchandra Manilal 7% 7%(4) Vinaychandra Manilal 7% 7%(5) Navinchandra Manilal 7% 7%(6) Jitendra Manilal,minor by his guardian mother, admittedto benefits 7%(7) Nitin Manilal,minor by his guardian mother,admitted to benefits 7%(8) Subodhchandra Champaklal 18%18%(9) Ashokkumar Champaklal 24%24%

4. It will thus be seen that the change in the new firm consisted of (a) omission of Champaklal and (b) introduction of four sons of Manilal, two major and two minor sons. Of the minors, Jitendra attained majority on March 12, 1958. A new deed was then executed on June 20, 1958, under which Jitendra became a fullfledged partner and he bore 7% of the loss, there being a corresponding reduction in the loss percentage of his father, Manilal. Expect this there was no change by the deed executed on June 20, 1958.

5. The new firm applied for registration first on the basis of the deed dated January 8, 1958, and thereafter on the basis of the deed dated June 20, 1958 under section 26A of the Act. The Income-tax Officer, however, took the view that no genuine firm was in existence and hence he refused registration. He gave principally four reasons for his conclusion that no genuine firm had come into existence under the two deeds, particularly dated January 8, 1958 : (1) Shri Champaklal Jamnadas wanted to keep interest in this partnership and what he did was he withdrew on paper but maintained his share in his group by proportionate increase in the percentage of his two sons; (2) that the firm had opened a bank account in the Bank of Baroda Ltd., Bombay, and on a scrutiny of the opening application form it was manifest that Shri Champaklal Jamnadas was shown as a partner of the firm with full authority to operate on the bank account; (3) that Pravinchandra, son of Manilal, and Subodhchandra, son of Champaklal, were in Government service, the former as the Sales-tax Inspector in the service of the Government of Bombay and the letter as an engineer in the Bombay Port Trust and that, therefore, they could not genuinely become partners while in such service; that Jitendra was a student and was never available in Bombay for the purpose of the business of the firm and that the statements of Pravinchandra, Jitendra, Navinchandra, Vasantkumar, Subodhchandra and Vinaykumar which were recorded by him under section 37 of the Income-tax Act, conflicted with each other and (4) that clause 11 of the partnership deed showed that Shri Champaklal controlled the affairs and management of the firm. He, therefore, concluded that Champaklal Jamnadas has continued to retain his interest in the partnership. In the following assessment year 1960-61 the Income-tax Officer refused renewal of registration for the reasons he indicated in his order passed by him for that year. The assessee appealed to the Appellate Assistant Commissioner who took a contrary view of the material on record and held that the aspects which had influenced the Income-tax Officer in coming to his own conclusion did not affect the question of genuineness of the new firm and he, therefore, directed that registration be granted. The Appellate Assistant Commissioner pointed out that, so far as the bank account was concerned, it was a joint account in the names of Manilal and Champaklal and not in the name of the firm, that the said account was operated for the purposes of the partnership business, that the reasons for associating Champaklal's name was that the erstwhile partnership had an account with the said bank with certain credit facilities which were being denied to the new firm unless Champaklal's name was associated and that joint account in the name of Champaklal and Manilal was opened in order to meet the objection from the bank and that the same had been treated as an account for the partnership. He further pointed out that though both Manilal and Champaklal had the authority to operate that account, in fact it was only Manilal who had operated that account and that the Income-tax Officer's observation that Champaklal was shown as a partner in the account opening form was not correct. As regards the fact that Pravinchandra and Subodhchandra were in Government service, the Appellate Assistant Commissioner observed that though the service conditions of a Government servant may debar him from becoming a partner of a firm without the sanction of the competent authority, it did not in any way affect adversely the genuineness of the firm. He also took the view that though there were some contradictions in the statements of various partners who were examined by the Income-tax Officer, all the partners had given satisfactory answers in regard to essentials of the partnership which had been formed under the new deed the contradictions and discrepancies inter se between their statements were not of much consequence. With regard to clauses 11 and 12 of the partnership deed under which the control management of the affairs of the new partnership had been entrusted to Manilal and Champaklal, he observed that both these persons had wide experience in the business carried on by the firm and as such it was in order for the partners belonging to the Champaklal group to appoint Champaklal as a representative of their group and for the partners belonging to the Manilal group to appoint Manilal as a representative of their group as contemplated by those two clauses of the deed. He, therefore, took the view that the firm was a genuine firm and directed the Income-tax Officer for registration of the firm for both the years. The department preferred appeals to the Income-tax Appellate Tribunal and the Tribunal, having regard to the manner in which the bank account had been opened and having regard to the material clauses contained in the deed of partnership, viz., clauses 9, 11, 12 and 13, came to the conclusion that there was no real retirement of Champaklal on October 24, 1957, and that he had retained all his interest in the business. As regards Pravinchandra and Subodhchandra, the Tribunal also observed that it was not satisfied that they were the real partners and not mere names. However, the Tribunal ultimately took the view that whatever might be the true position of Pravinchandra and Subodhchandra, the position of Champaklal was unquestionably of a partner who had not retired from the erstwhile partnership and who had retained his interest in the partnership business and it, therefore, held that the partnership which had applied for registration could not regarded as genuine and the registration had been rightly refused by the Income-tax Officer.

6. At the instance of the assessee, therefore, the aforementioned question, which has been set out by us at the commencement of the judgment, has been referred to us for out determination by the Tribunal.

7. The principal question that is required to be decided in the present reference is as to whether the Tribunal's finding that the partnership which had applied for registration for two years in question was not genuine was justified in law or not. Mr. Dastoor appearing for the assessee at the outset invited out attention to the provisions of section 4 of the Partnership Act where the concept of partnership has been defined. He pointed out that under section 4 of the Partnership Act, partnership is defined as the relation between persons who have agreed to share that profits of a business carried on by all or any of them acting for all and that persons who have entered into partnership with one another are individually 'partners' and collectively 'a firm' and the name under which their business is carried on is called the 'firm name'. In other words, according to him, three things are necessary in order to constitute a partnership : (a) There must be an agreement entered into by all the persons concerned to carry on business, (b) there must be an agreement to share the profits of that business, and (c) the business must be carried on by all or any of the persons concerned acting for all; that is to say, there must be an element of agency. He also referred us to two decisions-one of this court reported as Balubhai Gulabdas Navlakhi v. Commissioner of Income-tax : [1962]46ITR492(Bom) and the other of the Orissa High Court reported as Jamnadas Venkataswamy & Sons v. Commissioner of Income-tax : [1974]96ITR625(Orissa) -where it has been clearly stated that two conditions were essential to found the relation of partnership. He pointed out that in both these decisions it has been stated that the two essential conditions to found the relation of partnership are : (a) that there should be an agreement to share the profit as well as the loss of the business, and (b) each of the partners should be acting as an agent of all, and if these two conditions were to exist, the other conditions which might be obtaining in a particular deed giving larger share to one of the partners in the management or ownership of the assets would not negative the existence of a partnership. He pointed out that prior to October 24, 1957, the old firm called 'Champaklal Jamnadas', which carried on business on terms and conditions contained in the deed of partnership dated November 13, 1951, had been granted registration for the assessment year 1958-59 and that upon retirement of Champaklal from that firm a new partnership deed was executed on January 8, 1958, specifying who the partners of the new partnership firm were and also specifying their individual specific shares in the profit and loss account of the new firm and, therefore, on the face of the document as also on the facts which were established in the case all the essentials of the partnership had been established and as such the necessary application to obtain registration having been made within the time prescribed by law ought to have been granted. With regard to the findings recorded by the Tribunal Mr. Dastoor raised the following contentions. In the first place, he contended that the Tribunal's conclusion that Champaklal continued to retain his interest in the new firm was contrary to evidence on record and in fact there was no material on record on the basis of which such a conclusion could be drawn. He further contended that the Tribunal's non-satisfaction about Pravinchandra and Subodhchandra being the real partners was without evidence and contrary to the evidence on record. According to him, the facts that Pravinchandra and Subodhchandra were the employees in the sales-tax department and the Bombay Port Trust, respectively, or that Vasantkumar was practicing as a doctor were irrelevant to the question whether the firm was entitled to be registered. He further contended that irrespective of whether Champaklal retained his interest in the new firm or did not retain his interest in that firm, the firm was entitled to get registration, as according to him, the question whether Champaklal continued to retain his interest in the firm or not was not determinative whether the firm was genuine or not. He, therefore, contended that, on the facts of the case, the Tribunal could not have come to the conclusion that the firm was not a genuine firm. In support of his contentions a number of decisions were cited by him but, in our view, it is not necessary to refer to all those decisions but we would refer to a couple of decisions on which strong reliance was placed by him and which decisions had facts which could be said to be common with the facts in the instant case before us.

8. On the other hand, Mr. Joshi appearing for the revenue contented that there was ample material on record on the basis of which the Tribunal could have come to the conclusion that Champaklal had retained his interest in the new firm and that the new partnership deed was nothing but a deed of make-believe document and that, therefore, the Tribunal was justified incoming to the conclusion that the partnership of which the registration was sought was not a genuine partnership. In that behalf he laid stress upon three or four aspects of the matter which emerged on record pointing to an inference that the new firm could not be regarded as a genuine firm and the deed or document was nothing but a veneer disguising under it the erstwhile partnership wherein Champaklal was a predominant partner and had his interest. In any case he urged that if on the material that are available on record two views were possible and the view taken by the Tribunal could not be said to be capricious or unreasonable, the finding of the Tribunal could not be disturbed by this court and the question referred to this court will have to be answered accordingly.

9. In order to appreciate the rival submissions that have been put forth before us it would be necessary to consider the relevant and material facts and aspects which have emerged on record. It is true that the old partnership called M/s. Champaklal Jamnadas which carried on business under the deed of partnership dated November 13, 1951, had been granted registration under section 26A of the Act for the assessment year 1958-59. It does appear that some time prior to October 24, 1957, Champaklal purchased a broker's card on the stock exchange and according to the rules of the stock exchange, a broker could not at the same time be a partner in any firm which had business in the stock exchange (although he could do business independently on his own account). The old firm had business on the stock exchange and, therefore, Champaklal is said to have retired from the firm with effect from October 24, 1957. It is also not disputed that the new firm commenced its business from October 24, 1957, onwards and in respect thereof a new partnership deed was executed on January 8, 1958, under which the new firm was styled as 'Manilal Jamnadas'. It would be relevant to refer to some of the recitals as well as the operative part of the document as, in our view, they would be having a bearing on the question with which we are concerned.

10. The two material recitals which are to be found in the documents run thus : 'AND WHEREAS the said Champaklal Jamnadas Shah retired from the said firm (partnership) as from Kartak Sud 1st of S.Y. 2014, i.e., 24th day of October, 1957, leaving the said business to be carried on by the continuing partners for their benefit. AND WHEREAS this new firm as constituted under the name and style of Messrs. Manilal Jamnadas shall succeed to the assets and liabilities of the said concern of M/s. Champaklal Jamnadas ...' Clause 2 of the deed indicates the names of 7 partners who constituted a firm of M/s. Manilal Jamnadas. Clause 3 states that the partnership shall be deemed to have commenced business as from Kartak Sud 1st of S.Y. 2014 corresponding with 24th October, 1957, and that the said partnership shall be at will. Clause 5 indicates the nature of the business that was to be undertaken by the new partnership and clause 7 specified the respective shares of the partners in the profit and loss of the firm. Clauses 9, 11 and 12 are material and they run as follows :

'9. Banking account or accounts if and when necessary may be opened in the name of the partnership firm with bank or banks approved by all the parties hereto and the account shall be operated by any of the partners as mutually agreed upon .....

11. It is agreed that in the matter of internal administration, Shri Manilal Jamnadas will act as the representative of the parties of the second, third, sixth and seventh parts and two minors, viz., (1) Vasantkumar Manilal, (2) Pravinchandra Manilal, (3) Vinaychandra Manilal, (4) Navinchandra Manilal, (5) Jitendra Manilal and (6) Nitin Manilal and SHRI CHAMPAKLAL JAMNADAS SHAH will act as a representative of the parties of the fourth and fifth parts, viz., (1) Subodhchandra Champaklal and (2) Ashokkumar Champaklal. All the business of the partnership firm shall be carried on by Shri Manilal Jamnadas & Shri Champaklal Jamnadas acting in the aforesaid manner and their decisions regarding accounts, policy and management shall be final.

12. It is further agreed by the parties hereto that in case any difference of opinion in any matter regarding internal management, accounts, etc., of the business of the partnership firm arises, the decision of the said Manilal Jamnadas Shah and the said Champaklal Jamnadas Shah will be final and binding on all partners.'

11. On a consideration of the aforesaid material parts of the new deed of partnership dated January 8, 1958, two or three aspects emerge very clearly. In the first place, the deed recites that Champaklal has retired from the erstwhile partnership leaving the said business to be carried on by the continuing partners for their benefit and that the new firm 'shall succeed to the assets and liabilities of the said concern of M/s. Champaklal Jamnadas'. Under clause 9 the banking account was to be opened in the name of the partnership firm with bank or banks approved by all the parties to the deed and that 'the account shall be operated by any of the partners as mutually agreed upon.' In other words, the parties under clause 9 decided that the authority to operate the bank account belonging to the partnership should be conferred only upon one or the other partners of the firm and that such authorised partner should operate the bank account. Clause 11 and 12 in clear terms bring out the position that was ascribed to Manilal and Champaklal so far as carrying on of the partnership business was concerned and the matters connected therewith the their position when any dispute arose between the partners inter se. Under clause 11 a clear indication is available that the partners who constituted the new firm belonged to two groups-group of Manilal and the group of Champaklal the sons of Manilal forming part of the first group and the sons of Champaklal forming part of the second and under clause 11 it has been provided that Manilal shall act as a representative of the partners belonging to his group Champaklal will act as a representative of the partners belonging to his group and that the business of the partnership firm shall be carried on by Manilal and Champaklal acting in the aforesaid manner and that their decision regarding accounts, policy and management shall be final. Similarly, under clause 12 it has been provided that in case any differences of opinion in any matter regarding internal management, accounts, etc., of the business of the partnership firm were to arise, the decision of Manilal and Champaklal will be final and binding on all the parties. These two clauses unquestionably indicate that though the respective sons of Manilal and Champaklal had been made parties to the new partnership deed, the entire business of the new firm was to be carried on by Manilal and Champaklal as representatives of their respective branches and their decision regarding accounts, policy and management was to be final. Reading clauses 11 and 12, therefore, the conclusion is inescapable that though Champaklal is said to have retired from the erstwhile partnership he has retained for himself the entire control of the new partnership firm and power had been conferred upon him along with the Manilal to take decisions regarding accounts, policy and management of the new firm. In other words, virtually Manilal and Champaklal have been declared to be the persons who are carrying on the business of the new partnership.

12. The other aspect which emerges under clause 9 of the deed in the context of facts which transpired at the time of opening of the bank account is that the bank account was opened with the Bank of Baroda not in the name of the new firm but the title of the account was 'Manilal Jamnadas & Champaklal Jamnadas Jt. A/c'. The account opening form has been signed by Manilal Jamnadas and Champaklal Jamnadas and it would be correct to say that Champaklal Jamnadas has nowhere indicated that he has signed this bank account opening form as a partner of the new firm. It is only in the endorsement pertaining to introduction to the Bank of Baroda that Champaklal Jamnadas has put his signature showing himself as a partner of 'C. Manilal Jamnadas'. The facts stand out very clearly that the bank account was not opened in the firm name but indisputably this account pertained to the new firm and Champaklal had associated himself with the opening of the account of the new partnership firm, in that the said account was a joint account of Manilal and Champaklal. It is true that an explanation has been given that that was done with a view to obviate the objection raised by the bank that certain credit facilities which were till then available to the erstwhile partnership would not be available unless Champaklal's name was associated. But apart from the explanation, it cannot be gainsaid that the account pertaining to the partnership was opened in the joint names of Manilal and Champaklal and Champaklal had associated himself with the opening of the account with the Bank of Baroda. The aspects that Champaklal had retained full control with himself along with Manilal in regard to the carrying on of the business of the new partnership and he had associated himself with the opening of the bank account pertaining to the new firm with the Bank of Baroda, which account was opened in the joint names of himself and Manilal, undoubtedly have some relevance and these facts have to be considered in the context of the so-called retirement of Champaklal from the erstwhile partnership.

13. Added to these aspects which emerge clearly on record, there is yet one aspect which emerges and that is, though Champaklal is said to have retired from the erstwhile partnership, his retirement has not caused any loss to the group of partners belonging to the Champaklal branch in the matter of percentage of share in the profit and loss of the firm. In the erstwhile partnership Champaklal and the partners belonging to his group had 7 annas share in the aggregate in the profit and loss of that firm. Under the new partnership the share of his two sons, Subodhchandra and Ashokkumar, have been increased to 18% and 24% respectively with the result the percentage of profit which the Champaklal group had retained under the new partnership is practically the same, viz., 42%. In this context the Tribunal has observed thus :

'... it is not clear that the difference is between the old position and the new. His (Champaklal) ostensible retirement from the partnership does not appear to make any difference to his powers. It is true that he is no longer acknowledged as a formal partner, but if he and his sons jointly had a share of 7 annas in the rupee before October 24, 1957, the same share after October 24, 1957, is 42%, and the Champaklal group is not much worse off after October 24, 1957.'

14. It will thus appear clear that though Champaklal is said to have retired from the erstwhile firm of M/s. Champaklal Jamnadas as from the date prior to Kartak Sud 1st of S.Y. 2014 under the new partnership deed Champaklal has continued to retain full control and power along with Manilal and his decisions along with Manilal are binding on all the new partners of the new firm and the profit percentage which Champaklal and his group had in the erstwhile has remained the same and that in the bank account which was opened pertaining to the partnership business Champaklal's name had been associated-in fact the account was opened in the joint names of Manilal and Champaklal and it would be difficult to say that these aspects which emerge clearly on record do not render the retirement of Champaklal from the erstwhile partnership a make-believe affair. It was on the basis of this material and other aspects which we have indicated above that the Tribunal has come to the conclusion that the retirement of Champaklal was on paper only and that he retained his interest in the new firm constituted under the partnership dated January 8, 1958, and it is not possible for us to take a view that that finding recorded by the Tribunal could be said to be capricious or unreasonable or a finding based on no evidence at all.

15. It was urged by Mr. Dastoor that there was no material or evidence on record to show that there was any agreement whereby Champaklal was a party to the share of profit of the new partnership and unless there was such material on record the conclusion drawn by the Tribunal could not be sustained. It is not possible to accept this submission of Mr. Dastoor for the simple reason that it is not in every case direct evidence or direct material would be available for drawing such a conclusion and it is conceivable in any given a case a conclusion could be drawn from other material which may be available on record. Ordinarily, when a make-believe document is executed we cannot normally expect direct evidence showing that Champaklal had agreed to have a share in the profits of the new firm and an inference in that behalf would have to be drawn from circumstantial pieces of evidence which may be available on record. It would be entirely a different matter if circumstantial evidence is not available on record in which case no inference of the type could be drawn but if there are circumstantial pieces of evidence on record on the basis of which such an inference could be drawn, the finding cannot be regarded as unsustainable as having been recorded without any evidence on record. Mr. Dastoor pointed out that there were two essentials in order to found the relation of partnership, namely, first, there must be an agreement to share the profits, and, secondly, there must be an element of agency present. In our view, both these aspects are present in the instant case, the former is indicated by reason of several circumstances which we have already referred to and the latter by reason of clauses 11 and 12 which are to be found in the deed itself. It cannot disputed that by clause 11 of the deed the new partners had entrusted the entire control and management of the affairs of the new firm to Champaklal and Manilal and in terms the clauses provide that their decision on matters on account, policy and management shall be final, in other words, binding on the rest. The element of agency is, therefore, clearly indicated, in that, whatever Champaklal was to do in the management of the new partnership business would bind all the partners. Unquestionably, persons who were eo nominee parties to the firm would have authority to bind others. It is, therefore, not possible to accept the submission of Mr. Dastoor that the Tribunal's conclusion that Champaklal continued to retain his interest in the new partnership was either contrary to evidence on record or was based on no evidence at all. He most vehemently urged that at the highest all that clauses 11 and 12 indicated was that merely powers had been conferred upon Champaklal along with Manilal to carry on the business and to take decisions on matters of accounts, policy and management of the business but that was not indicative of Champaklal having retained his interest in the profits of the new firm. If clause 11 and 12 were to be considered in isolation, then Mr. Dastoor's submission has some force. But, clause 11 and 12 cannot be considered in isolation or by themselves and have to be considered in the context of other aspects which have emerged on record to which we have already referred above. Having regard to the manner in which the bank account was opened, having regard to the fact that even after the so-called retirement of Champaklal from the erstwhile partnership firm, the percentage of profit which Champaklal group retained was the same in the new firm and having regard to clauses 11 and 12 which are obtaining in the new deed dated January 8, 1958, it would be reasonable and proper on the part of the Tribunal to draw in inference that Champaklal had not really retired from the old firm and had retained his interest in the profits of the new firm and that, therefore, the new partnership deed was merely a make-believe document and was not genuine in respect of which registration could be granted. In the above context we will refer to a couple of decisions on which strong reliance was placed by Mr. Dastoor in support of his contention.

16. The first case to which we would like to refer is the decision of the Madras High Court in the case of S. S. A. Gangamirthammal & Co. v. Commissioner of Income-tax reported in : [1969]74ITR473(Mad) . In that case four ladies of the age group of over 55 years constituted themselves into a partnership and appointed two persons, one of whom was the son of one of the ladies, as agents to carry on the business of the partnership. The Income-tax Officer examined the four ladies on oath and came to the conclusion that their oral testimony disclosed that it was not a genuine partnership and hence refused registration. It was confirmed by the Tribunal. On a reference, the High Court held that on an overall impassionate scrutiny of the evidence recorded by the officer, there was nothing suspicious about the document and the conditions essential for securing registration under the Act having been observed in that case, it was highly uncharitable of the revenue to characterise the association as a figment of the imagination and hence non-genuine when all the partners who were examined gave out material particulars regarding the business and its activities and without hesitation mentioned and furnished details on the normal working of the partnership and hence the firm was entitled to registration. Mr. Dastoor relied upon this decision for the purpose of contending that even in a case where the entire management of the partnership business had been entrusted by the partners to an outsider, still that aspect had not affected the genuineness of the partnership. He pointed out that in that case four ladies who had constituted themselves into a partnership had appointed two persons, that is to say, two outsiders as their agents to carry on the business of partnership and even then the Madras High Court took the view that the partnership was a genuine partnership and that the refusal of registration, therefore, on the part of the taxing authorities and the Tribunal was wrong. He, therefore, urged that even in the instant case if the management of the new firm had been entrusted to an outsider like Champaklal, that should not be regarded as a factor as having a bearing on the genuineness of the partnership, and, therefore, in his view, clause 11 and 12 of the partnership deed could not have any bearing on the question of genuineness of the partnership. It is not possible to accept this submission of Mr. Dastoor for more than one reason. In the first place, the decision of the Madras High Court will have to be considered in the context of the facts obtaining in that case and the ratio must be confined to the fats of that case. Secondly, the Madras High Court decision is clearly distinguishable on facts. It appears that the Income-tax Office exercising the power under section 37 of the Income-tax Act had undertaken what may be called a most gruelling task of cross-examining of all the four ladies during the assessment proceedings and relying upon some infirmities which had occurred in their statements had taken the view that the partnership constituted by the four ladies in question was not a genuine partnership. In particular reliance was placed upon one of the answers given by one of the four ladies when examined to the effect that the two persons to whom the management had been entrusted by the four ladies were partners in the business, which statement had been corrected by her at a later stage by asserting that the partners of the partnership were the only four ladies in question. The High Court pointed out that the inquisitorial examination conducted by the Income-tax Officer in the course of examination of the four ladies could not be said to be in bona fide exercise of his power to determine whether the partnership was genuine or sham and the revenue was delving deep into the subterranean regions of that partnership to find willy-nilly some ground to reject the application. The High Court further found that the Tribunal had even forgotten to notice that the lapse which one of the ladies had committed while giving her statement had been corrected at a later stage. It was in those circumstances the High Court took the view that on a consideration of the statements given by the ladies as a whole the said partners had given material particulars regarding the business and its activities and without hesitation mentioned and furnished details on the normal working of the partnership and that on an impassionate scrutiny of the evidence recorded by the Income-tax Officer there was nothing suspicious about the document and the conditions which were essential for securing registration were observed in that case and, therefore, the firm was entitled to registration. In the instant case the position is entirely different. There has been no inquisitorial or gruelling cross-examination of the persons examined by the Income-tax Officer under section 37 of the Act but in fact we do find that some material questions which should have been put to these witnesses have not been put by the Income-tax Officer. Apart from this aspect, the Income-tax Officer as well as the Tribunal have relied upon some glaring aspects which emerge from the statements of the various persons who were examined by the Income-tax Officer under section 37 of the Act; for instance, it has been pointed out that Vasantkumar, son of Manilal, who was practising as a doctor and who claimed to have rendered assistance during day-time in the matter of carrying on business of the firm, had given out the names of only one or two employees who were working as servants when admittedly the account books showed that there were as many as 7 employees working in the firm in the year 1959-60 and 4 employees were working in the firm in the year 1960-61. It is also pointed out that this very witness stated that speculation was not done regularly but occasionally but the accounts showed that speculation business was done regularly. It has also been pointed out by the Income-tax Officer that whereas Pravinchandra had categorically stated that all the partners shown in the deed sponsored the idea of forming a firm and that the deed of partnership was drawn out in the presence of all the partners excepting the minor, Nitin, and that Champaklal was also present as an adviser on that occasion, an attempt was being made by a couple of other partners, such as for instance Vinaykumar, to show that when the idea of forming a new partnership was sponsored, all the partners were present but Champaklal was not present. Champaklal himself in his statement made a crude attempt to disown his presence at the time when reconstitution of the new firm was thought of. He stated in his statement that when he decided to retire from the erstwhile partnership it was left to the remaining partners to decide the future of the firm and he was not a party to the reconstitution of the firm. The anxiety on the part of Champaklal in trying to keep himself away from the idea of forming or reconstituting the new firm is perfectly understandable in view of his pronounced stand that he had retired from the erstwhile partnership and had nothing to do with the new partnership firm. But apart from these discrepancies and contradictions which have been pointed out by the Income-tax Officer and the Tribunal in the statement of the various persons who were examined by the Income-tax Officer under section 37 of the Act, the Madras High Court decision is in no way comparable with the instant case. In that case, S. S. A. Gangamirthammal v. Commissioner of Income-tax : [1969]74ITR473(Mad) , there was no question of there being an old firm from which one of the partners wanted to retire and a new firm coming into existence upon such retirement of one of the partners. It was a clear case where the four ladies of a particular age group constituted themselves into a partnership and had appointed an outsider to look after the business of the firm and the question was whether this aspect will have any effect on the genuineness of the partnership or not. In the instant case before us the position in entirely different. It is not a case of partnership having come into existence and thereafter appointing an outsider to carry on the business simpliciter. Here there was an erstwhile partnership of M/s. Champaklal Jamnadas in which Champaklal was one of the principal partners, that Champaklal had purchased a broker's card on the stock exchange and in view of the rules of the stock exchange which obtained he was required to retire from the erstwhile partnership and it was in these circumstance that a new firm came into existence; the deed has recited the retirement of Champaklal leaving the said business to be carried on by the continuing partners for their benefit and that the new firm has succeeded to the assets and liabilities of the old firm; the operative part shows that power and authority has been retained with Champaklal along with Manilal to control the entire affairs of the new firm; further the percentage of the profits which the Champaklal group had in the erstwhile partnership has remained almost the same in the new partnership and Champaklal has also associated himself with the opening of the bank account pertaining to the new partnership-in fact the account has been opened in the joint names of the Champaklal and Manilal. In our view, therefore, the facts of the present case are clearly distinguishable from those obtained in the Madras case and it is not possible to apply the ratio of the Madras decision to this case simply because one of the factors happened to be common, namely, that management of the partnership business has been entrusted to a so-called outsider. In our view, therefore, the ratio of the Madras case would be inapplicable to the facts of the present case.

17. The next case on which reliance was placed by Mr. Dastoor was a decision of the Patna High Court in the case of Himalaya Engineering Company v. Commissioner of Income-tax reported in : [1965]57ITR762(Patna) . In that case a firm was reconstituted by admitting two sons of the old partners. Registration was refused to the firm as reconstituted on the grounds that the deed was a sham, as no capital was contributed by the new partners, and the change in the constitution of the firm was not notified to the banks in which the old firm had accounts. The Patna High Court held that the fact that no share capital was contributed by some of the partners or the fact that the reconstitution was not disclosed to bankers were not grounds for refusing registration to the firm. There was no material before the income-tax authorities to support the conclusion that the firm was not genuine and, therefore, the firm was entitled to registration. This decision was relied upon again by way of comparing some facts which obtained in that case with similar facts obtaining in the present case. What was pointed out was that in that case the change in the constitution of the firm was not notified to the bank in which the old firm had the account and presumably the account as it stood in the bank continued to be operated by the new firm. Relying on this aspect which obtained in that case Mr. Dastoor contended before us that even in the instant case notwithstanding reconstitution of the firm no bank account was opened in the name of the new firm with the Bank of Baroda but a joint account in the names of Manilal and Champaklal was opened under the signatures of these two persons and that the association of Champaklal with the opening of the banks account had been explained on the basis that unless his name was associated the bank was not prepared to extend certain credit facilities which it had extended to the erstwhile partnership. He also pointed out that in the instant case also clause 6 of the document merely stated that the capital required for the business shall be contributed or arranged by the parties as may be mutually agreed between the parties. In other words, there was no definite obligation cast upon the partners to contribute any particular capital at the time when the firm was reconstituted. Here again, the decision would be clearly inapplicable. It is not the question as to whether the association of the name of Champaklal with the new firm's bank account while opening the same with the Bank of Baroda has been properly explained or not. The association of Champaklal with the bank account of the partnership firm which was opened has to be considered in the context of the question as to whether the so-called retirement of Champaklal from the erstwhile partnership was real or not and it was in that context that the aspect that Champaklal was associated with the opening of the bank account of the new firm in the Bank of Baroda assumes considerable significance and this association taken along with other aspects which have emerged on record has led the Tribunal to the conclusion that the retirement of Champaklal was not real and that he continued to retain his interest in the profits of the new firm. The ratio of this decision in Himalaya Engineering Co. v. Commissioner of Income-tax : [1965]57ITR762(Patna) , therefore, cannot apply to the instant case.

18. We may mention that several other decisions were cited by Mr. Dastoor at the Bar but we do not think it necessary to refer to those decision in detail as, in our view, those decisions turn on the peculiar facts which obtained in each one of those cases.

19. There is yet one aspect on which a contention was raised by Mr. Dastoor and that pertains to two partners, Subodhchandra and Pravinchandra. It was not disputed before us that Subodhchandra, son of Champaklal, was an engineer in the Bombay Port Trust while Pravinchandra, son of Manilal, was working as a sales-tax inspector in the service of the Government of Bombay. It was urged by Mr. Dastoor that these fact as also the fact that Vasantkumar was practising as a doctor should be regarded as irrelevant for determining whether the firm was entitled to registration or not and his further contention was that the Tribulnal's non-satisfaction about Subodhchandra and Pravinchandra being the real partners was also without any evidence on record. His contention was that, at the highest, the fact that Subodhchandra and Pravinchandra were in Government service may subject them to disciplinary action at the hands of the Government if they are found to have engaged themselves in carrying on any other business. But, that would not have a bearing on the question whether the partnership was genuine or not. In the first place, it must be pointed out that the Tribunal has not based its finding that the new partnership was not a genuine one on the ground that these two individuals, viz., Subodhchandra and Pravinchandra were in Government service and as such could not be regarded as real partners of the firm. It was on a consideration of material that was available on record that the Tribunal observed that it was not satisfied that Subodhchandra and Pravinchandra were real partners and not mere names. But, the Tribunal has gone to observe specifically that, 'In any case, whatever the true position of Subodhchandra and Pravinchandra, the position of Champaklal as stated above cannot be doubted.' In other words, it was more on the aspect of Champaklal's retaining his interest in the profits of the new partnership that the Tribunal has recorded a finding that it was not a genuine partnership and, therefore, registration should be refused. Moreover, the doubt entertained by the Tribunal as to whether Subodhchandra and Pravinchandra were real partners in the new firm cannot be said to be based on no material whatsoever. Admittedly, these two persons were in Government service, and, secondly, answers were elicited from both the persons when they were examined by the Income-tax Officer some of which were at any rate contrary to the facts as disclosed by the books of account and the other material on record. In our view, therefore, nothing much turns on this observation made by the Tribunal against which Mr. Dastoor has levelled his attack.

20. Having regard to the above discussion, we cannot say that the finding recorded by the Tribunal that Champaklal had retained his interest in the profits of the new partnership firm was without any material on record whatsoever and, therefore, the finding that the so-called new partnership was not genuine also could not be said to be based upon no evidence at all. It is true that there is no direct evidence to show that Champaklal had agreed to share the profits of the new partnership business but the inference in that behalf is drawn by the Tribunal by relying upon the other facts and aspects which have emerged on record to which we have already referred.

21. In the result, we feel that registration was rightly refused by the Tribunal. The question is, therefore, answered in the affirmative and against the assessee. Assessee will pay the costs of the reference to the revenue.


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