1. The assessee, Messrs, Brijlal Madanlal, is a firm which originally consisted of three partners, namely, Mandanlal Paliram, Kishorilal Fatechand and Anardevi, widow of Brijlal Paliram. With effect from 1st November, 1959, Anardevi retired from the firm and Madanlal and Kishorilal continued to be the continuing partners of the firm. By an instrument of partnership dated 6th April, 1960, the continuing partners are said to have admitted one Mrs. Chandrakaladevi Deviprasad, wife of Deviprasad Brijlal, in the partnership with effect from 1st November, 1959. An application for registration of the firm was made on 1st April, 1960, and a copy of the instrument of partnership was filed.
2. With a view to verify the genuineness of the new firm, the ITO wanted to examine the new partner, Chandrakaladevi, and he, therefore, issued a summons under s. 131 of the I.T. Act, 1961. She did not appear before the ITO on 2nd March, 1966, on which day she was summoned to appear. A letter, however, came to be written by someone on her behalf that she had gone to her native place in Rajasthan. An intimation was, therefore, sent to the firm about the absence of Chandrakaladevi and the two other partners were asked to produce Chandrakaladevi on 14th March, 1966. On that day also Chandrakaladevi did not appear and she was again stated to be out of the Bombay at Khamgaon. The assessee's representative made a statement in writing before the ITO that Chandrakaladevi was admitted to the firm only because of her bringing in a capital of Rs. 50,000 and she had not been taking any active interest in the administration and management. She was stated to be only a financing partner. The ITO found that there was no reference to the contribution of Rs. 50,000 by Chandrakaladevi in the instrument of partnership. He took the view that merely by giving or advancing an amount to the firm did not make that party a partner in the form unless it is specifically so stated in the terms and conditions of the deed. The ITO, theerefore, took the view that it was not proved that Chandrakaladevi was a partner and that the firm had really only two partners, which position, however, was not reflected in the instrument of partnership. He, therefore, declined to grant registration.
3. When the matter was taken in appeal to the AAC, he took the view that the ITO had summoned Chandrakaladevi because he wanted to collect evidence and wanted to find out whether the recitals in the partnership deed were correct. Evidence of Chandrakaladevi not having been made available, the AAC held hat in respect of the assessment year 1961-62, the firm had failed to prove the genuineness of the constitution of the partnership in spite of reasonable opportunity being given to it. He, therefore, confirmed the order of the ITO.
4. The firm took the matter in appeal to the Tribunal. The tribunal took the view that whether Chandrakaladevi was a partner or not could only be found by subjecting her to cross-examination and her refusal to appear before the I.T. authorities was sufficient to draw an adverse inference against the assessee in this respect. The Tribunal has observed in its order that the representative of the assessee was even unable to file a copy of the partnership deed before the Tribunal. Holding that the ITO sought to find out the truth about the partnership deed, but Chandrakaladevi had kept herself away from the ITO, the Tribunal reached the conclusion that Chandrakaladevi was a mere dummy. The appeal filed by the assessee, therefore, came to be dismissed.
5. At the instance of the assessee, the question which has now been referred to us is :
'Whether, on the facts and in the circumstances of the case, the claim for registration was rightly refused ?'
6. Mr. Mehta, appearing on behalf of the assessee, has challenged the view of the I.T. authorities and the Tribunal that the genuineness of the partnership was not proved and it is argued that all the authorities have proceeded merely on a suspicion that Chandrakaladevi was not in fact as partner.
7. It is difficult to see how on the facts found in this case it is possible for the learned counsel for the assessee to argue that registration of the firm has been refused merely on a suspicion. The application for registration was made under s. 26A of the Indian I.T. Act, 1922. The conditions which are essential for registration of the firm under s. 26A are well settled. They are :
(1) On behalf of the firm an application should be made to the ITO by such persons and at such times and containing such particulars and being in such form and verified in such manner as are prescribed by rr. 2 to 6B.
(2) The firm should be constituted under an instrument of partnership.
(3) The instrument must specify the individuals shares of the partners.
(4) The partnership must be valid and genuine and must actually exist in terms specified in the instrument.
8. When an application for registration of a firm is made to the ITO, it is open to the ITO to verify whether the partnership is really a genuine partnership or whether the partnership is a shame one. Merely because names of certain partners are specified in the deed of partnership and their shares are also specified, the partnership does not automatically become a genuine partnership and the ITO is entitled to examine whether each of the partners mentioned in the deed of partnership is a real partner and whether the shares specified are real and whether the profits which are to be distributed under the deed will truly be the profits of the individuals who have been shown as partners. If the ITO finds that there is no genuineness in respect of any one of these, it is open to the ITO to reject the application for registration on the ground that no genuine partnership has been brought into existence by the partnership document.
9. In the instant case, the ITO wanted to examine the third partner, Chandrakaladevi, who is said to have introduced a sum of Rs. 50,000 by way of capital. He was entitled to find out by cross-examination Chandrakaladevi whether she had really contributed a sum of Rs. 50,000 and whether she had really been taken as a partner in the firm. Chandrakaladevi had not appeared before the ITO. She was supposed to appear on 14th March, 1966. If she was not available on 14th March, 1966, because, according to the assessee, she had gone to Khamgaon, the assessee could well have asked for some time which may or may not have been granted by the ITO. But it does not appear from the record that any attempt was made by the assessee to see that Chandrakaladevi appeared before the ITO, so that the ITO could ask her such questions as he though necessary to ascertain whether Chandrakaladevi was really taken as a partner or whether her name was merely included in the deed of partnership. The ITO could also have found out from Chandrakaladevi how she had made a contribution of Rs. 50,000 and whether the money belonged to her or whether the money belonged to any one of the partners and introduced into the firm by way of capital contribution of Chandrakaladevi. If Chandrakaladevi was not made available for questioning before the ITO, it is difficult to see why it was not made available for questioning before the ITO, it is difficult to see why it was not open to the ITO to draw an adverse inference against the assessee. Once it is found that it is not established that Chandrakaladevi was really taken as a partner, the claim to genuineness of the partnership must fall to the ground. The fact that there was a partnership document did not necessarily mean that the partnership was genuine. In our view, there was no other course open to the ITO in view of the failure of the assessee to produce Chandrakaladevi than to reject the application for registration.
10. Accordingly, the question referred to us is answered in the affirmative and in favour of the revenue. The assessee to pay the costs of this reference.