H.N. Seth, J.
1. At the instance of the assessee, Messrs. Chitra Cinema, Varanasi, this court by its order dated 16th of May, 1966, called upon the Income-tax Appellate Tribunal, Allahabad, to submit a statement of the case under Section 66(2) of the Indian Income-tax Act, 1922, in respect of the following question:
'Whether there was no evidence on the basis of which the Tribunal could record the finding that the partnership evidenced by the deed of partnership dated May 2, 1957, was not genuine ?'
2. The assessee, Messrs. Chitra Cinema, Varanasi, claims to be a partnership concern and the relevant assessment years are 1958-59 and 1959-60. This firm was constituted under a partnership deed dated 2nd May, 1957. It consisted of three partners, namely, Sri Jyoti Bhushan Gupta, his wife, Smt. Sulabha Devi Gupta, and their son, Anil Kumar Gupta.
3. According to the assessee, ordinarily, Sri J. B. Gupta was running the Chitra Cinema as his sole proprietary business. Smt. Sulabha Devi had advanced two sums of Rs. 20,000 and Rs. 14,000, total Rs. 34,000, to her husband, Jyoti Bhushan Gupta, on 9th February, 1952, and 23rd February, 1952, respectively. These amounts were advanced on condition that, in case Sri J. B. Gupta was unable to repay the loan, Smt. Sulabha Devi would become entitled to the profits of the cinema business with effect from Diwali of Sambat 2013. Gupta did not repay the loan. Certain differences also arose between the members of the family, with the result that Sri J. B. Gupta and Smt. Sulabha Devi for self and as guardian of her minor sons. Anil Kumar, Sushil Kumar, Chandra Shekhar and Ashok Kumar, referred their disputes to the arbitration of one Sri Radha Raman Prasad, During the course of arbitration proceedings. Anil Kumar became major and he also applied to the arbitrator that his share in the joint properties should be separated. The arbitrator made an interim award on 5th October, 1956, and directed that as from Diwali of Sambat 2013, Sulabha Devi and Anil Kumar Gupta will be entitled to a share of 0-8-0 and 0-4-0, respectively, in the profits of the business run by Sri Jyoti Bhushan Gupta, in the name of Chitra Cinema. This interim award was followed by an award dated 30th April, 1967, in which the aforementioned direction made in the interim award was affirmed. After Sri Radha Raman made his interim award, the parties entered into an agreement dated November 10, 1956, to run the Chitra Cinema in partnership with effect from Diwali of S. 2013 (November 2, 1956). After the interim award was confirmed by the final award on 30th of April, 1957, the parties executed a fresh partnership deed dated May 2, 1957, and applied for the registration of the firm for the years 1.958-59 and 1959-60 under the provisions of Section 26A of the Indian Income-tax Act, 1922.
4. The Income-tax Officer refused registration as, in his opinion, no genuine firm ever came into existence. He, however, held that the status of the assessee was that of an association of persons and proceeded to make the assessment accordingly.
5. In appeal, the Appellate Assistant Commissioner came to the conclusion that prior to November 2, 1956, Chitra Cinema was being run as proprietary business of Sri Jyoti Bhushan Gupta, On that date no change in his status took place and Sri Jyoti Bhushan Gupta continued to run the business in his capacity as an individual. In the result the appeal filed by the assessee was dismissed, but the Income-tax Officer was directed to assess the business carried on in the name of Chitra Cinema as belonging to the individual, Sri Jyoti Bhushan Gupta, and not as belonging to an association of persons as held by the Income-tax Officer.
5. The assessee then filed a second appeal before the Income-tax Appellate Tribunal. The Tribunal upheld the orders of the income-tax authorities refusing registration on the ground that the firm as constituted by the partnership deed dated May 2, 1957, was not genuine. It based its conclusion on the following findings :
'(1) In the year in which Smt. Sulabha Devi is stated to have lent Rs. 34,000 to her husband, the matter came up for consideration before the income-tax authorities and the Tribunal in connection with the assessment of Sri Jyoti Bhushan Gupta. The Tribunal ultimately held that Smt. Sulabha Devi did not lend the money to her husband and consequently included that amount in the assessment of Sri Jyoti Bhushan Gupta. In its opinion the whole proceeding of arbitration adopted by the assessee appeared to be with the object of getting over the adverse finding regarding the said loan and to superimpose upon the Tribunal the finding of the arbitrators that Sulabha Devi had lent Rs. 34,000 to her husband.
(2) According to the agreement, by which the dispute was referred to the arbitrator, the case of the parties was that they had separated and that they wanted partition of their joint family properties. The case of Sri Jyoti Bhushan Gupta throughout had been that the cinema business was his sole proprietary business and that it was not joint family business. In the circumstances no question of partitioning that business arose.
(3) The sole consideration on which the partnership was said to have been entered into was the loan of Rs. 34,000 which was disbelieved by the Tribunal in earlier proceedings and there was, therefore, absolutely no reason why the Tribunal should take a different view of the matter in these proceedings.
(4) There was absolutely no evidence on the record to prove that Smt. Sulabha Devi managed the partnership business.'
6. As, in the opinion of the Tribunal, the recitals in the partnership deed, which related to the very fact of formation of partnership were false, the income-tax authorities were justified in disbelieving the existence of partnership. In the result, the appeal filed by the assessee was dismissed.
7. An analysis of the findings recorded by the Tribunal shows that in its opinion the firm was not genuine because the parties wrongly recited the facts which prompted them to enter into the partnership agreement and that there was no material on the record to show that one of the alleged parties, namely, Smt. Sulabha Devi, ever took any part in the management of the affairs of the firm. The entire arbitration proceedings, under the cover of which the partnership deed was executed, appeared to be collusive.
8. Section 26A of the Indian Income-tax Act, 1922, provided that an application could be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners for registration for the purposes of the Act, and that such application was to be made by such person or persons and at such times and was to contain such particulars and was to be in such form and verified in such manner as may be prescribed. According to this section, if a firm had been constituted under an instrument of partnership in which the individual shares of the partners had been specified, the firm would be entitled to registration if an application in this behalf was moved in the prescribed manner. The question, whether the partnership evidenced by the deed of partnership dated 2nd May, 1957, was genuine or not means whether, under that deed, a firm in fact came into existence or not. The document dated 2nd May, 1957, will not evidence a genuine partnership only if it can be shown :
(1) that the recitals contained in the document do not bring into existence a relationship of partners amongst the executants, or that
(2) apparently the recitals in the document show that the relationship between the executants is that of partners in a firm, but the document is a cloak for some other transaction and in fact the executants are not concerned with each other as partners. This may be done by showing that although according to the deed it appears that the business was being carried on for and on behalf of all the executants but in fact it was not being so carried on.
9. Section 4 of the Indian Partnership Act defines partnership as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The persons who enter into a partnership with one another are called individually partners and collectively a firm and the name under which their business is carried on is called the firm name. In the case before us, the deed dated 2nd of May, 1957, clearly recites an agreement between Sri Jyoti Bhushan Gupta, Smt. Sulabha Devi and Sri Anil Kumar Gupta, that the business in the name of Chitra Cinema will be carried on their behalf as a partnership concern with the object that the executants will be entitled to share the profits and losses of the business in the proportion mentioned in the deed. The document, therefore, clearly evidences the formation of a partnership firm within the meaning of the Indian Partnership Act, It cannot, therefore, be said that the firm was not genuine on the first ground.
10. Learned counsel for the revenue contended that, although the document dated 2nd of May, 1957, purports to bring into existence a partnership, in reality it was a cloak for some other transaction. In fact, the business of Chitra Cinema continued to be run by Sri J. B. Gupta as from before and that the document in question was merely a make-belief arrangement. The firm thus brought into existence was, therefore, not genuine.
11. Learned counsel for the assesses, on the other hand, urged that there was absolutely no material on the record to indicate that a partnership as indicated by the deed did not in fact come into existence and that the business of running the Chitra Cinema was owned by Sri Jyoti Bhushan Gupta.
12. In support of his contention that the document dated 2nd of May, 1957, did not bring into existence a partnership firm, learned counsel for the revenue urged that the recital made in the document stating the reason for bringing into existence the partnership was false. If it be so, there was no reason to bring the partnership into existence and it did not in fact come into existence.
13. The reason why the parties entered into the partnership agreement, as stated in the deed, was that a sum of Rs. 34,000 had been advanced by Smt. Sulabha Devi to Sri Joyti Bhushan Gupta on the understanding that in case Sri Jyoti Bhushan Gupta was not able to repay the loan, Smt. Sulabha Devi would be entitled to receive a share in the profits of the cinema. As Sri Joyti Bhushan Gupta did not repay the loan, the arbitrator decided that the business should be run in partnership with effect from the Diwali of S. 2013. It was in pursuance of the direction issued by the arbitrator that the partnership deed was being executed. All the three revenue authorities have found that the case of the assessee that Smt. Sulabha Devi had advanced Rs. 34,000 to Sri Jyoti Bhushan was not correct. They went to the extent of observing that the nakal bahis evidencing the loan said to have been advanced by Smt. Sulabha Devi to Sri Jyoti Bhushan Gupta, appeared to be fabricated. The Tribunal found that the proceedings for arbitration has been introduced with an idea of getting over the finding that the sum of Rs. 34,000 really belonged to Sri Jyoti Bhushan Gupta and had not been advanced by Smt. Sulabha Devi, as recorded by the income-tax authorities in earlier proceedings.
14. Learned counsel for the assessee tried to question the findings of the income-tax authorities on this point. In our opinion, the finding that Smt. Sulabha Devi was not shown to have advanced the loan of Rs. 34,000 to Sri Jyoti Bhushan Gupta is a finding, the correctness of which cannot be questioned before us.
15. The document dated 2nd May, 1957, can be divided into two parts-
(1) recital about the reason why the parties entered into an agreement to run the business in partnership, and
(2) the agreement arrived at between the parties about the manner in which the business was to be run and its profit shared by the executants.
16. Even if it be a fact that the recitals made in the document about the reason why the agreement had been entered into is incorrect, it does not mean that in fact there was no agreement between the parties to run the business on behalf of all of them and to share its profits in particular proportion. The fact that the reason given for arriving at an agreement is wrong may be taken into consideration in conjunction with other circumstances, for coming to the conclusion that in fact there was no partnership agreement, and that the agreement was a sham transaction. It may be possible to conclude that the partnership agreement was sham if there are circumstances to indicate that profits of business were not being shared by the partners in the manner provided in the partnership deed or that the business was being carried on as if it belonged to one partner only and as his sole proprietary business. There is, however, complete absence of material in this case which may lead to any such inference. Wrong recital of the reason for the agreement by itself would not be evidence of the fact that in fact there was no agreement. Parties may in fact enter into a partnership agreement but may for some ulterior reason not state the reason for entering into that agreement correctly.
17. Only other reason indicated by the Tribunal for concluding that the agreement was sham was that there was no material to indicate that Smt. Sulabha Devi participated in running the business. It may be mentioned that the Tribunal has confined its observation to Smt. Sulabha Devi's non-participation in the business alone. It is not stated that there was no material to indicate that Anil Kumar also did not participate in running the business. The Income-tax Officer, in his order, indicated that after the interim award was given by the arbitrator, a hire-purchase agreement regarding the cinema was entered into with Messrs. Westrex Co. India Ltd. on 11th of February, 1957. This agreement was signed by Sri J. B. Gupta and his son, Sri Anil Kumar Gupta. This shows that at least Sri Anil Kumar Gupta participated in running the business along with his father, Sri Jyoti Bhushan Gupta. Both the Income-tax Officer and the Tribunal appear to have proceeded on the ground that before there can be a partnership, it is necessary that all the partners should participate in the running of the business and inasmuch as there was no material to indicate that Smt. Sulabha Devi Gupta also participated in the running of the business, a partnership agreement did not come into existence. This hypothesis, on the basis of which the Income-tax Officer and the Tribunal proceeded, is clearly erroneous. Section 4 of the Partnership Act defines partnership as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The section itself postulates that it is not necessary that the business should in fact be carried on by all the partners and that all of them should participate in running the same. So long as the business is being carried on by any party on behalf of all the parties to the agreement, with a view to share its profits, the provisions of Section 4 of the Partnership Act will apply and a firm would exist. The partnership deed dated 2nd of May, 1957, provided that Sri Anil Kumar Gupta was to look after the proper working, management, maintenance, etc., of the cinema and was to consult Sri Jyoti Bhushan Gupta and Smt. Sulabha Devi from time to time. The partnership deed does not place the responsibility for actual running of the business on Smt. Sulabha Devi. In the circumstances, the fact that Smt. Sulabha Devi did not participate in running the business does not go to show that in fact there was no agreement between the parties to run the business in partnership or that the agreement dated 2nd May, 1957, was a sham agreement. In our opinion, a wrong mention of the reason in the partnership deed for bringing into existence a partnership and that certain steps, by way of arbitration, were taken before entering into the agreement which were not consistent with the finding recorded by the income-tax authorities in earlier proceedings, coupled with the fact that Smt. .Sulabha Devi did not participate in the management and running of the partnership business, cannot be evidence of the fact that the partnership agreement as contained in the document dated 2nd of May, 1957, was not given effect to and that no partnership came into existence. These facts do not show that the business was not being carried on by Jyoti Bhushan Gupta and Anil Kumar on behalf of all the three partners. Apart from strongly criticising the assessee's case that Smt. Sulabba Devi had advanced a sum of Rs. 34,000 to Sri Jyoti Bhushan Gupta and contending that the arbitration proceedings appeared to be motivated, the learned counsel for the revenue could not point to any circumstance which went to show that after the document dated May 2, 1957, was executed the business of Chitra Cinema was in fact not run on behalf of the three executants. We are accordingly of the opinion that material on the record as set out in the statement of the case, and in the orders of the revenue authorities, is not such on the basis of which a finding that the partnership in question, was not genuine, can be recorded.
18. In the result, we answer the question in the affirmative and as follows :
19. There was no evidence on the basis of which the Tribunal could record the finding that the partnership evidenced by the deed of partnership dated May 2, 1957, was not genuine.
20. The question having been answered in favour of the assessee, the assessee will be entitled to its costs which we assess at Rs. 200. Counsel's fee is also assessed at the same figure.
Question answered in the affirmative.