Seetharam Reddy, J.
1. In this reference at the instance of the Revenue, the question for our answer is : 'Whether, on the facts and in the circumstances of the case, the sub-partnerships are entitled to the benefits of registration under the Income-tax Act, 1961, for the assessment year 1971-72'
2. A single statement of case has been drawn up in respect of three assessees, though for a common assessment year 1971-72.
3. The facts in R.A. No. 661 of 1976-77 are similar to those in R. A. Nos. 662 and 663 of 1976-77 : Uppala Rameswar Rao and Company, Nizamabad, is a sub-partnership constituted by a partnership deed dated December 28, 1969. Sri Uppala Rameswar Rao has one-third share in the firm of K. Narasa Reddy and others, Warangal, a group of Sindhi contractors with effect from October 1, 1969. Since the said Rameswar Rao found it difficult to contribute the required capital towards his share, he entered into an agreement with eight others who agreed to provide him with necessary funds on their being taken as partners in respect of the shares in the said named firm. Consequently, the assessee's sub-partnership came into existence by a partnership deed dated December 28, 1969, and thereafter it applied to the Income-tax Officer treating the said sub-partnership as an association of persons mainly on the ground that the sub-partnership contravened the provisions of section 14 of the Abkari Act. On appeal, however, the assess succeeded against which the Revenue took the matter to the Tribunal which confirmed the order of the Income-tax Officer following the judgment of this court in R.C. No. 25 of 1973 which is reported in Addl. CIT v. Degaon Gangareddy G. Ramkishan and Co. : 111ITR93(AP) . The Tribunal, in fact, held that 'the facts in the instant case are on all fours with the facts found in the decision of the Andhra Pradesh High Court (R.C. No. 25 of 1976). In view of the decision of the Andhra Pradesh High Court the departmental appeals must fail.'
4. We too concur with the same, the decision of this court in R.C. No. 25 of 1973 reported in Addl. CIT v. Degaon Gangareddy G. Ramkishan and Co. : 111ITR93(AP) may be adverted to. There, the facts in brief : For the assessment year 1964-65, a partnership firm 'A' was constituted on October 15, 1962, and obtained a license under the A.P. (Telangana Area) Abkari Act. Subsequently one of the partners 'R' could not raise the necessary funds towards his share; so 'R' and 11 others executed a partnership deed constituting another partnership firm 'B' and agreed to finance 'R' on condition of sharing profits and losses that accrue to the share of the said 'R' on condition of sharing profits and losses that accrue to the share of the said 'R' in the main firm. Thereafter the application for registration of the said partnership firm 'B' being made, was rejected by the Income-tax Officer on the ground that carrying on business without a stipulated licence under the Abkari Act is illegal and the sub-partnership firm 'B' was ab initio void. Appeal therefrom failed but on further Appeal to the Tribunal it was held that the sub-partnership firm was a different entity from the main firm and that the business of the sub-partnership firm was entirely different from that of the main firm and so it was entitled to registration.
5. Held on a reference (headnote) :
'that it was open to a partner of a registered firm either to earn income that falls to his share by himself and enjoy the entire income and make himself liable for losses, if any, or in the alternative, agree to divert a portion of his income or loss to strangers, by constituting another sub-partnership firm, provided they agree to be partners of the sub-partnership, there is no prohibition under the law of partnership or under the provisions of the income-tax law or the rules made thereunder, prohibiting a partner from entering into such sub-partnership with strangers and sharing of profits and losses in respect of his share in the main firm. In such cases, the second partnership firm is described as a sub-partnership firm, which concept if fairly settled and is recognised in India.
Unless privity of contract is established between the business of the main firm and that of the sub-partnership firm, the members of the sub-partnership firm do not become partners of the main firm. As a sub-partnership firm is a different and distinct entity. In the instant case, the partners of the sub-partnership firm are entitled to share the profits and losses which accrue to the share of 'R' in the main partnership firm, the business of the sub-partnership firm is described in its partnership deed as financing of the capital of 'R'. In the circumstances, it cannot be said that the sub-partnership firm did not carry on any business. As long as the sub-partnership firm exists and is found to be a genuine one. It is entitled to registration under the Income-tax Act.'
6. Hence, without any further discussion on merits in view of the aforesaid decision and for the same reasons, we reject this reference by answering the question raised herein in the affirmative and in favour of the assessee. No costs.