1. The assessee in this reference is a partnership firm consisting of three brothers who became partners by a partnership deed dated November 12, 1958, and there is no dispute that since its formation, the partnership firm was registered under the provisions of the Indian I.T. Act, 1922. The three brothers who were the partners originally were members of an HUF and they brought about a partition of the joint family by an oral partition on November 10, 1958, which was later reduced to writing on November 11, 1958. The HUF had extensive movable and immovable property. After the partition of the joint family, the three brothers by a partnership deed agreed that the running HUF business which was essentially a business in all kinds of grains and seeds was to be carried on as a partnership business with effect from November 12, 1958. The initial capital of the partnership was to be Rs. 75,000 to be equally contributed by all the three partners. According to the partnership document, the profits and losses were to be distributed at the end of the accounting period according to the share of each partner, which was 1/3rd, but 1/4th of the profits were to be credited in the reserve fund.
2. For the assessment year 1961-62, the partnership firm was assessed as a firm and the ITO made an order under s. 23(6) of the Indian I.T. Act, 1922, allocating the income of the partnership firm to the share of each of the three partners.
3. The commissioner of Income-tax, Poona, however, in exercise of his powers under s. 33B of the Indian I.T. Act, 1922, took the view that admittedly the HUF had not enough cash on the date of the alleged partition and, therefore, according to the learned commissioner, simply crediting Rs. 25,000 to the account of each coparcener and giving corresponding debit to the partition account, does not amount to any partition. The Commissioner took the view that partition could be recognised only if a particular asset is taken out from the HUF and he found that in the instant case 'an asset not worth even one naya paise was taken out from the Hindu undivided family.' The entries in the accounts were thus treated as paper entries. The Commissioner took the view that there was no partial partition of the HUF and the business assessed as of the alleged firm factually belonged to the HUF. As the orders of the ITO were held to be erroneous, as they were prejudicial to the interests of the revenue, the Commissioner set aside those orders under s. 33B of the Act and directed the ITO to assess the income from the business in the hands of the HUF.
4. In the appeal filed by the assessee before the Tribunal, the Tribunal found that there was no denial of the fact that the stock-in-trade of the joint family business and cash on hand have been physically divided. This was evident, according to the Tribunal, from the fact that the partnership firm had taken over the stock-in-trade, and with regard to the actual cash in hand that the books of the joint family showed that a sum of Rs. 6,000 had been divided among the coparceners on November 11, 1958. The Tribunal further found that there was no material on record to show that the coparceners continued to treat the said stock and cash as joint family property. The Tribunal differed from the view of the Commissioner that the entries passed in respect of a sum of Rs. 75,000 which was agreed to be the capital of the firm showed that the partnership was not genuine. According to the Tribunal, this showed that there was an agreement to contribute capital and, therefore, the entries could not be disregarded. Accordingly, the Tribunal set aside the order of the Commissioner and held that the partnership firm was entitled to the benefits of registration as originally granted by the ITO. Arising out of this order of the Tribunal, the following question has been referred under s. 66(1) of the Indian I.T. Act, 1922 :
'Whether, on the facts and in the circumstances of the case, the assessee was entitled to registration ?'
5. The answer to the question would depend on whether the Commissioner was justified in holding that there was no partition of the joint family at all, or whether the view taken by the Tribunal that the joint family had dispute was the correct view. Now, it is difficult for us to accept the contention raised by Shri Joshi that the Commissioner was justified in taking the view that there was no partition on the footing that no item of joint family property was taken out and partitioned, because, according to the Commissioner, that joint family did not have a cash balance of Rs. 75,000. It is well established, so far as the partition of a joint Hindu family is concerned, that it is open to any member of a family to bring about the severance of the joint family status and that can be done by a definite and unequivocal indication of his intention to separate himself from the family and enjoy his share in severely (See Mulla's Hindu Law, 14th Edn., para. 325). There is enough material on record to show that there was a full and complete partition between the members of the joint family in this case, the three brothers, who are now partners of the partnership firm. It is no requirement of a valid portion in Hindu law that there should be an immediate actual partition by metes and bounds or divisions of property by metes and bounds in order to bring about the severance of the joint status of the members of the HUF. Cases are not unknown where families may own extensive landed property which cannot be immediately divided by metes and bounds, though there is no dispute with regard to the share of each member of the joint family in the joint family property. Merely because actual division by metes and bounds is delayed, it does not affect the fact of partition or the legality of the partition of the joint HUF. In the present case, the view which the Commissioner has taken that no particular asset is taken out of the HUF and partitioned as such, proceeds, with respect, on a misapprehension of the concept of a partition of the joint HUF. It is rather surprising that in spite of the fact that the Commissioner's order extensively refers to the entries recorded in the books of the HUF, the Commissioner found it fit to doubt the factotum of partition. In annex. 'C', which is the order of the Commissioner, in the debit entry which has been reproduced it has been expressly stated that the 'three brothers have equal shares; movables and immovables are being partitioned; movable properties being appreciable and as no decision is arrived at as to its partition regarding the particulars of assets falling to the share of particular coparcener, hence it is decided to give Rs. 25,000 to each one; Rs. 75,000 are debited to the Watni account and Rs. 25,000 credited to each partner'. It is not the case of the revenue that the share of each partner did not extend to even Rs. 25,000. It is difficult to doubt these entries, in view of the recitals in the partnership deed that there was a partition between the members of the joint family. The entries are significant and would clearly indicate that the joint family had disrupted and some token amount is debited to the share of each member of the joint family and that amount is credited as his contribution to the capital of the partnership firm. Merely because entries have been made in accounts, those entries do not become bogus. On the other hand, they are good evidence not only of the severance of the joint family status but of the genuineness of the partnership firm. Though the matter can be decided on the basis of first principles, we may merely refer to a decision of the Madhya Pradesh High Court referred to by Shri Thakar appearing on behalf of the assessee-firm in Ghewarchand Kewalchand v. CIT : 111ITR391(MP) . The Division Bench of the Madhya Pradesh High Court, in that case, has pointed out that it is settled law that where there is evidence to show that the members of the HUF intend to sever the relationship, then the joint family status is put an end to, though the partition may be total or partial and the statement in a partnership deed executed by the members of the family regarding the portion would be sufficient to effect the partition. In that case, a partial portion was effected in respect of a business of the joint family and a partnership was formed by the members of the HUF in respect of that business which was transferred lock, stock and barrel by the undivided family to the firm and the Division Bench held that evidence of the ascertainment of capital was not a necessary requirement of the law to effect the partial partition.
6. As we have already pointed out, not only is the fact of partition specifically stated in the partnership deed, but the partnership deed refers to the document of partition and the relevant entries in the books of the HUF were produced before the Commissioner. Having regard to the principles of Hindu law, it is clear that the Tribunal was justified in taking the view that the joint family of the three brothers had disrupted and they had formed a partnership firm which was entitled to registration under the Act. The answer to the question referred to us would, therefore, be in the affirmative and against the revenue. The revenue to pay the costs of this reference.