1. This order shall also govern the disposal of Misc. Civil Cases Nos. 587 and 588 of 1971 (Commissioner of Income-tax v. Ratanchand Darbarilal).
2. This is a reference under Section 66(1) and (2) of the Income-tax Act, 1922, at the instance of the revenue, and it pertains to the registration of the firm, M/s. Ratanchand Darbarilal of Satna, under Section 26A of the Act.
3. The relevant assessment year is 1958-59, the corresponding previous year of which was that ending on 28th August, 1957.
4. The facts, shortly stated, are few and simple. A Hindu undivided family consisting of one Murlidhar and his two sons, Ratanchand and Darbarilal, of which Murlidhar was the karta, carried on cloth business at Katni. On 1st March, 1943, there was a partition of the joint Hindu family, as a result of which the two branches of Ratanchand and Darbarilal separated from eich other. On disruption, the joint family business was converted into a partnership business. Dhanyakumar representing the branch of Darbarilal and Jaikumar representing the branch of Ratanchand agreed to carry on the business in partnership under the firm name, M/s. Ratanchand Darbarilal, Katni. Each of the two partners was to have equal shares of 50P each in profit and loss. The firm was granted registration under Section 26A of the Act for the assessment year 1945-46 to the year 1957-58. During the years to come, the business of the firm prospered. The firm acquired various properties, for which the funds were contributed by the two Hindu undivided families. In the year 1950, the firm opened a retail shop at Katni styled '.' Premier Cloth Shop '. In the year 1953-54, the firm opened a branch at Satna for carrying on wholesale business in cloth. That state of affairs continued till the assessment year 1957-58.
5. Up to and including the assessment year 1957-58, the shop at Satna was treated for income-tax purposes as branch of the Katni firm. During the assessment year 1958-59, the assessee claimed that there was bifurcation of the business of the partnership. The claim was that the business carried on by the firm at Satna had been separated from the business carried on by it at the head office at Katni, by constituting two separate and distinct partnerships under the name and style of M/s. S.S. Ratanchand Darbarilal, Satna, and M/s. Ratanchand Darbarilal, Katni. The firm at Satna was brought into existence with effect from 9th September, 1956, i.e., the commencement of the Bhado year on the basis of an instrument of partnership dated 1st November, 1956, It was constituted of three partners: (1) Dhanyakumar, son of Darbarilal, (2) Jaikumar, son of Ratanchand, and (3) Abbaykumar, son of Ratanchand. The 4th, Prasannakumar, minor son of Dhanyakumar, was admitted to the benefits of the partnership. They had equal shares of 25P each. The firm at Katni was reconstituted by an instrument of partnership dated 1st April, 1957. That firm consisted of four partners having equal shares of 25P each--(1) Dhanya-kumar, son of Darbarilal, (2) Abhaykumar, son of Ratanchand, (3) Jai-kumar, son of Ratanchand, and Keshavkumar, son of Dhanyakumar. Their relationship will appear from the following genealogical table:
| | Dhanyakumar
Jaikumar Abhaykumar __________________________|___
| | | |
Keshav- Prasanna- Sunil- Subir-
kumar kumar kumar kumar
6. The statement of the case reveals :
' In the deed relating to Satna business, there was no reference in the recitals to the Katni business. Similarly, in the deed relating to the Katni business, there was no reference to the Satna business. In the Katni books on September 9, 1956, the account of Ratanchand Abhaykumar was debited with Rs. 10,000 and an amount of Rs. 5,000 each was credited to the accounts of Jaikumar and Abhaykumar. In the Satna books, the account of Darbarilal Dhanyakumar was debited with Rs, 8,000 and a corresponding credit of Rs. 4,000 each was given to the accounts of Keshavkumar and Prasannakumar. The account of Keshavkumar was thereafter debited with the sum of Rs. 4,000 and a corresponding credit was given to the Kanti business. In the books of the Katni business, a debit of Rs. 4,000 was given to the account of Satna business and a corresponding credit was given to the account of Keshavkumar. In the Katni business books for the year 2013-14 relevant to the assessment year 1958-59, the profits of Rs. 13,546 were divided and an amount of Rs. 3,386 was credited to the account of Darbarilal Dhanyakumar, Rs. 3,386 to the account of Keshavkumar and Rs. 6,773 to the account of Ratanchand Abhaykumar. It was also mentioned that the credit to the account of Ratanchand Abhaykumar comprised Rs. 3,386 for Abhaykumar and Rs. 3,386 for Jaikumar. In the Satna business, profits of Rs. 29,973 were divided into four equal parts and an amount of Rs. 7,493 was credited to each of the accounts of Daibarilal Dhanyakumar, Ratanchand Abhaykumar, Prasannakumar and Ratanchand Jaikumar. In the case of Katni branch, called Premier Cloth Store, the profit of Rs. 4,444 was divided equally between Darbarilal Dhanyakumar and Ratanchand Abhajkumar ... '
7. Both the Katni and Satna firms separately applied for registration under Section 26A of the Act. The registration was refused in both thecases by the Income-tax Officer, and that refusal was confirmed on appeal by the Appellate Assistant Commissioner.
8. The assessee's claim before the Income-tax Officer that the firm, M/s. S. S. Ratanchand Darbarilal of Satna, was brought into existence with effect from 9th September, 1956, was based on the following circumstances :
(1) On August 9, 1956, the firm, M/s. Ratanchand Darbarilal of Katni, had credited a sufficient amount in the makan lagat khata by debiting the same in equal shares to the accounts of the two Hindu undivided families styled as Darbarilal Dhanyakumar and Ratanchand Abhaykumar.
(2) The account of Ratanchand Abhaykumar was debited with a sum of Rs. 10,000 by giving a corresponding credit of Rs. 5,000 each to the account of Abhaykumar and Jaikumar.
(3) In the Satna books, similarly the account of Darbarilal Dhanyakumar was debited with a sum of Rs. 8,000 by giving a corresponding credit of Rs. 4,000 each to the account of Keshavkumar and Prasanna-kumar.
(4) Subsequently, a credit of Rs. 4,000 in the account of Keshavkumar was transferred in the books of the Katni firm.
9. On the scrutiny of the books the Income-tax Officer found that the entries in the account books were subsequently interpolated to show the capital contributions of the incoming partners. The entries were, in fact, made on 9th September, 1957, and the figure ' 7 ' was later on changed to ' 6 '. That was accepted by the assessee before the Appellate Assistant Commissioner. In dealing with that aspect, that is what he states :
' All these discrepancies, to which a reference has been made in the foregoing paragraphs, have been accepted by the appellant's representative. It is agreed by him that the figure of 57 was changed to 56, and that nakal entries transferring a sum of Rs. 5,000 to the account of Jaikumar and Abhaykumar from the Hindu undivided family account maintained in the name of Ratanchand Abhaykumar were made subsequently and are interpolated.'
10. The Income-tax Officer's view apparently was that the assessee's claim was 'an after-thought', and the pre-existing branch was merely camouflaged as a firm though, in reality, it was nothing but a branch. He, therefore, refused to register the firm on two grounds. In the first place, the firm constituted by the instrument of partnership dated November 1, 1956, was not a genuine firm and, secondly, the firm, if any, so constituted was not valid in law. The reasons for so holding, inter alia, were that:
(1) during the accounting year, the head office supplied cloth worth Rs. 48,867 at cost price without keeping any margin of profit, as before;
(2) the purchases and sales were mostly effected from the head office;
(3) whenever loans were required by the Satna shop, they were arranged for by the head office. The loans were taken by the head office, i.e., under the name of the Katni firm and then the amounts in question were transferred to the Satna shop;
(4) when the Satna shop had to make payments for its purchases, the money was remitted by the head office;
(5) the head office controlled the finances and the business activities of the Satna shop as before, i.e., there was no change in the circumstances, and the Satna shop was treated to be a branch of the Katni firm;
(6) the recitals in the partnership deed suggest that the alleged partnership was merely a reconstitution of an already existing firm. Such a reconstitution could have been possible if there was already a firm in the name and style ' Ratanchand Darbarilal ', Satna. If there was no such firm in existence, there could be no possibility of admitting any one as partners. The partnership deed was, therefore, legally void and inoperative ;
(7) the alleged partnership was merely an extension of the already existing firm, and there can be no severance of that business into two by merely executing separate instruments of partnership and adopting separate firm names;
(8) the creation of the new partnership at Satna was never disclosed to the bankers and the bank account still stood in the name of the Katni firm;
(9) no share capital was contributed by Keshavkumar ;
(10) the entries in the account books were subsequently interpolated to show contribution of capital by the new partners;
(11) the members of the two Hindu undivided families could not be brought in as partners without effecting a partial partition of their respective Hindu undivided families.
11. On appeal, the Appellate Assistant Commissioner, upheld the decision of the Income-tax Officer, stating :
'.........it appears to me that the members of the Hindu undividedfamilies have been introduced as partners without bringing about any partial partition of the respective Hindu undivided families. As I have indicated earlier, the Hindu undivided family of Ratanchand Abhaykumar consists of two partners, viz., Abhay and Jaikumar. The capital account which stood in the name of the Hindu undivided family Was not divided between the two members and instead a sum of Rs. 10,000 was debited to the account of the Hindu undivided family and a corresponding credit of Rs. 5,000 each was given to the accounts of Abhaykumar and Jaikumar, which were opened subsequently. In this connection it was submitted by the counsel that in the books maintained by the Hindu undivided familythere had already existed separate accounts in the names of Abhaykumar and Jaikumar. It was represented by him that both the members were living and messing separately and were dividing the profits received from the firm. It was, therefore, not necessary for the capital account that stood in the books of the firm to be divided between the two members. In this connection he also placed reliance on the judgment of the Supreme Court in Umacharan Shaw & Bros. : 37ITR271(SC) the case already cited earlier. However, the facts in this case are distinguishable because in the other case no capital account as per the books of the firm was maintained at all and, therefore, the assessee relied upon a bkati-khata which was maintained separately showing not only the division of profits in the accounts of the various partners but also the withdrawals. Here, in this case, there is a capital account in the name of the Hindu undivided family and, therefore, a partition of the Hindu undivided family business could have only been brought about by making relevant entries in the capital account as per the books of the firm itself.
In the case of the other Hindu undivided family, viz., Darbarilal Dhanyakumar, it is admitted that there is no division of profits between Dhanyakumar and his two sons, i.e., Keshavkumar and Prasannakumar, shown as partners respectively in Katni and Satna business. The capital account that stood in the books of the Katni firm, therefore, continued to be that of the Hindu undivided family. It was submitted by the appellant's representative that by transferring a sum of Rs. 4,000 each to Keshavkumar and Prasannakumar the said two partners could be said to have become partners on the strength of funds which belonged to them. Therefore, although 0-4-0 share in the Katni firm belonged to Keshavkumar and similarly 0-4-0 share in the Satna firm belonged to Prasannakumar ia their personal capacities, they had still their right in the remaining profit which fell to the share of Darbarilal Dhanyakumar because that account continued to remain as that of the Hindu undivided family. What the counsel contends is not true because Dhanyakumar has filed a return in respect of his share of profit both from Katni as well as Satna firms in his individual capacity showing his two other minor sons as dependants. It would, therefore, appear that after the transfer of a sum of Rs. 4,000 each to the account of Keshavkumar and Prasannakumar from the Hindu undivided family account of Darbarilal Dhanyakumar, the latter account became the individual account of Dhanyakumar. Surely, Keshavkumar, Prasannakumar could not have separated from the Hindu undivided family by taking only a sum of Rs. 4,000 each when the capital account in the name of the Hindu undivided family showed a substantial balance. It is an accepted proposition of law that before persons who have been pre-viously assessed as Hindu undivided family can claim to be separately ' assessed as members of a contractual partnership, they must establish that the joint family business has been partitioned. Persons cannot at one and the same time be members of a joint Hindu family in respect of a joint family property and also be members of a firm of which such property forms the assets.'
12. Then, the Appellate Assistant Commissioner observes:
(1) It is true that the bulk of the purchases were not made from or through the Katni firm, but even in the past the Satna branch made its own purchases.
(2) The fact that really weighs in favour of the revenue is that the entire working capital of the Satna firm had been provided by the Katni firm.
(3) Though Clause (3) of the partnership deed provides that the initial capital of the partnership was to be the amount that was brought forward from the books of account as standing to their respective credit as on September 8, 1956, there was no mention as to the manner in which the new partners, Abhaykumar and Prasannakumar, were to contribute capital or as to how their capital was to be brought in.
(4) The entry showing capital contribution by Abhaykumar and Prasannakumar were interpolated later on.
(5) The business between the two Hindu undivided families, M/s. Dar-barilal Dhanyakumar and M/s. Ratanchand Abhaykumar, continued to be carried on as in the past.
(6) The members of the two Hindu undivided families had been brought in as partners without bringing about any partial partition of their respective Hindu undivided families.
(7) The account of the Hindu undivided family, Ratanchand Darbari-lal was debited with Rs. 10,000 and that of Abhaykumar and Jaikumar credited with Rs. 5,000 each showing their capital contribution. The transfer entry was alleged to have been made on Bhado Sudi 5, Samvat 2013, corresponding to September 9, 1956, but on examination of the bijak nakal, it appears that the entry was actually made on September 9, 1957. The figure 7 was later on changed to 6.
(8) Right till the end of the year, the assessee did not know its mind. The business was continued to be carried on as before. Towards the end of the year, the entries were made so as to conform with the reci* tals in the deeds of partnership.
13. On further appeal, the Tribunal accepted the assessee's contention that the firm, M/s. S. S. Ratanchand Darbarilal of Satna, was entitled to registration under Section 26A of the Act. The operative part of the Tribunal's order reads :
' The assessee has effectively separated the business of Satna from the business of Katni and there is no justification whatsoever for treating the two businesses as one single whole. The aspects emphasized by the income-tax authorities are not such as to justify the clubbing of the two units. There was nothing to stop the Satna branch from purchasing a small portion of its requirement from the Katni business without impairing its separate individuality. The financial arrangement made by the two businesses also did not establish the merging of the two units. If the Katni business transferred some of its borrowed moneys to Satna business without charging adequate interest, that might justify disallowance of a part of the interest on borrowed moneys claimed by the Katni business. But that would not convert the Satna business into a branch of the Katni business. Similarly, intimation to the banks was not decisive in the matter especially when the existing intimation did not run counter to the constitution of the Satna firm as claimed. The name of Satna business was not changed and the partner who had authority to operate continued to be a partner in that business. The only remaining consideration was about the introduction of capital. Assuming that it was done in a clumsy manner, we do not see how it can jeopardise the claim of Satna business to be independent. The new entrants, namely, Dhanyakumar and Prasanna-kumar, could well have been partners or admitted to the benefits of partnership without introducing any capital at all......'
14. Then, the Tribunal concludes:
' We are, therefore, of the view that the objections raised by the income-tax authorities to the Satna business being converted into an independent entity are not strong or sufficient to justify the rejection of the assessee's claim. The Satna business has, therefore, to be taken as an independent unit with its own constitution. The firm running that business has been constituted under a partnership deed with well-defined terms and conditions. The constitution is clearly different from the constitution of the firm controlling the Katni business. We would, therefore, treat that Satna business as separate and distinct from the Katni business. We do not find any valid objection against the registration of the firm owning the Satna business. The profits have been divided in accordance with the provisions of the partnership deed and the entries in the books of accounts of the business were also substantially correct.'
15. Being dissatisfied with the decision of the Tribunal, the revenue applied to the Tribunal to state a case and refer the questions of law that arose from its order under Section 66(1) of the Act. The Tribunal, however, referred the following question under Section 66(1):
' Whether, on the facts and in the circumstances of the case, M/s. Ratanchand Darbarilal, Satna, was entitled to registration under sec-tion 20A of the Indian Income-tax Act, 1922, for the assessment year 1958-59?'
but declined to refer the other questions saying that they involved questions of fact. This court then issued a direction under Section 66(2) requiring the Tribunal to refer the other questions. Pursuant to the direction the questions that have now been referred by the Tribunal under Section 66(2), are:
'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in so interpreting the evidence on record as to come to a finding that the Satna business has to be taken as an independent unit with its own constitution and that it is separate and distinct from the Katni business ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in directing that the firm owning the Satna business should be registered in spite of the fact that the members of the two Hindu undivided families entered as partners inter se without their effecting in the first instance a severance of joint status by partitioning either partially or totally, the assets of the respective two Hindu undivided families ?'
16. The question that was referred under Section 66(2) in the connected case is:
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the profits from the business run in the name and style of M/s. Ratanchand Darbarilal, Satna, shall be excluded from the total income of M/s. Ratanchand Darbarilal, Katni?'
17. The contention by the counsel on behalf of the revenue is that the Tribunal has acted without any evidence or upon a view of facts which cannot reasonably be entertained, i.e., its conclusion is so perverse that, as a matter of law, it cannot stand. It is urged that the mere fact that there was a deed of partnership and the fact that the account books, consistently with the rectials in the partnership deed, showed allocation of profits, was not sufficient to establish the truth of a particular partnership. It is further urged that the instrument of partnership was not genuine, and that it merely embodies a bogus transaction for the purposes of avoiding tax. It is argued that the Tribunal should have taken the cumulative effect of all the circumstances, and it was not proper for it to take each circumstance by itself separately while determining whether the firm was genuine or not. With respect to its validity, it is urged that there could be no partnership within a coparcenary and, therefore, the members of the two Hindu undivided families could not be brought in as partners without effecting a partial partition of the respective Hindu undivided families.
18. It is strenuously urged by the learned counsel for the assessee that the finding of the Tribunal that there was a severance of the business at Satna and, therefore, the deed constituted a separate partnership was a finding of fact and the High Court was not entitled to interfere with that finding merely because, on reappraisal of the evidence, it may come to a different conclusion. He further submits that the questions of genuineness of the firm or its validity, were not questions arising out of the order of the Tribunal and, therefore, could not be gone into. Alternatively, he submits that there was no material before the Income-tax authorities to justify their conclusion that the partnership deed did not bring into existence a genuine firm. He contends that the karta of a joint Hindu family could enter into a valid partnership with some of the coparceners of the family, and, therefore, the instrument of partnership dated November 1, 1956, brought into existence a valid partnership in respect of which registration could be granted under Section 26A of the Act. The partnership will not be invalid merely because two or more of its partners are members of a Hindu undivided family and representing the interest of the family. The income-tax authorities were, therefore, not justified in holding that the partnership was not valid in law. Further, he contends that the circumstances taken into consideration by the income-tax authorities, viz., that no share capital was contributed by some of the partners and that the formation of the partnership was not disclosed to the bankers, were not grounds relevant for refusing registration to the firm. Lastly, the learned counsel contends that everyone is entitled to arrange his affairs in such a manner as to reduce his tax liability, and merely because there was bifurcation of the business with the evident object of avoidance of tax, that was not a ground for holding that the instrument of partnership was not a genuine one, or that it merely embodies a bogus transaction for the purpose of avoiding tax.
19. We are satisfied that the order of the Tribunal cannot be supported on any ground whatever, and the questions referred must be answered in favour of the revenue.
20. Since all cases of comparable character must, in our judgement, turn upon their exact facts, we thought it desirable to quote at some length from the statement of the case and the documents annexed thereto. In the light of the circumstances appearing therefrom, our conclusion on facts is--unless we are precluded by a contrary finding of the Tribunal--that the instrument of partnership dated November 1, 1956, did not constitute a genuine and valid firm and, therefore, the firm was not entitled to registration under Section 26A of the Act. No doubt, problems of this character commonly involved mixed questions of fact and law. Where, however, the Tribunal has not been properly instructed upon the principles to beapplied, or there is no evidence to support its conclusions, or where the Tribunal bases its decision partly on conjectures and surmises and partly on evidence, then in such a situation clearly an issue of law arises. More so, when the question referred is :
'Whether, on the facts and in the circumstances of the case......'
21. We cannot treat the conclusions reached by the Tribunal as conclusive statement of facts. The question in the present case has not been determined as a fact conclusive on the court. The Judicial Committee in Sundar Singh Majithia v. Commissioner of Income-tax,  10 ITR 457 stated :
' To decide that an instrument is in this sense not genuine is to come to a finding of fact : whether there was evidence upon which it was open to the income-tax authority to come to such a decision is a question of law.'
22. In Dhirajlal Girdharilal v. Commissioner oj Income-tax : 26ITR736(SC) the Supreme Court observed :
'......if the court of fact, whose decision on a question of fact is final,arrives at this decision by considering material which is irrelevant to the inquiry, or by considering material which is partly relevant and partly irrelevant, or bases its decision partly on conjectures, surmises and suspicions, and partly on evidence, then in such a situation clearly an issue of law arises.........It is well-established that when a court of fact acts onmaterial, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises.'
23. In Umacharan Shaw & Bros. v. Commissioner of Income-tax : 37ITR271(SC) the Supreme Court upon analysis of the circumstances of that case held that there was no material upon which the Tribunal could come to the conclusion that the firm was not genuine and that it proceeded on mere surmises and conjectures and, therefore, the finding of the Tribunal was not binding. In Commissioner of Income-tax v. Sivakasi Match Exporting Co. : 53ITR204(SC) the Supreme Court was dealing with refusal of registration to a firm under Section 26A of the Act, and the question was whether the refusal was correct in law, and held that if there was no evidence to sustain the finding of the Tribunal, then a question of law within the meaning of Section 66(2) of the Act arose for decision, in view of the decision of the Supreme Court in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax : 31ITR28(SC) . In Udhavdas Kewalram v. Commissioner of Income-tax : 66ITR462(SC) the Supreme Court pointed out that the Tribunal performs a judicial function: it is invested with autho-rity to determine finally questions of fact. The Tribunal must, in deciding an appeal, consider with due care all the material facts and record its findings on all the contentions raised by the assessee and the Commissioner in the light of the evidence and the relevant law. An order recorded on a review of only a part of the evidence and ignoring the remaining evidence cannot be regarded as conclusively determining the question of fact raised before the Tribunal. In Commissioner of Income-tax v. S.P. Jain : 87ITR370(SC) the Supreme Court has recently reiterated these principles and stated that the High Court has always the jurisdiction to interfere with the findings of the Tribunal if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination and imports facts and circumstances not apparent from the record or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached not apparent from the record and bases its conclusion on mere conjectures and surmises. In view of these settled principles, the objection of the learned counsel for the assessee must fail.
24. When a document purporting to be an instrument of partership is tendered on behalf of a firm and an application under Section 26A of the Act is made for registration of the firm as evidenced by such instrument, the Income-tax Officer is entitled to inquire whether the instrument is intended by the parties to have real effect as governing their rights and liabilities inter se in relation to the business or whether it has been executed by way of pretence in order to escape liability for tax without intention that it should in truth have effect as defining the rights of the parties between themselves. The question of registration is of vital importance to an assessee in view of certain special benefits accruing therefrom and an unregistered firm is invariably charged as a unit. But registration makes all the difference, for, in that event, the tax is levied on each individual partner in respect of his share in the firm's profit. The gain to the assessee thereby is not inconsiderable. In order to be entitled to this privilege it is, however, essential that a firm should conform to the conditions prescribed by Section 26A and Rules 2 to 6B made under the Act. Further, the Income-tax Officer should be satisfied that the partnership is not only genuine but also a valid one.
25. The crux of the matter is whether there was a splitting up of one business into two. The test to be applied in order to determine whether two businesses are separate businesses or are the same business must be aninter-connection, and interlacing, and inter-dependence between, and a unity embracing, the two businesses. That raises a further question whether there could or could not be any severance of one business from another, unless there was, in the first instance, a discontinuance of the business carried on by the firm as orginally constituted at Satna. The answer to these questions, as it must be, is furnished by the recitals of the deed coupled with the course of dealings between the parties. The instrument of partnership dated November 1, 1956, was executed by and between Dhanya-kumar, Abhaykumar and Jaikumar, described therein as parties of the first, second and third part, respectively, and they in their turn admitted Prasannakumar, minor son of Dhanyakumar, to the benefits of the partnership. Of these, Dhanyakumar, representing the branch of Darbarilal, and Abhaykumar, representing the branch of Ratanchand, were the two partners of the erstwhile firm. The new 'partner brought in was Jaikumar, son of Ratanchand. The preamble to the deed reads;
' Whereas the party No. 1 (meaning Dhanyakumar) and the party No. 3 (meaning Jaikumar) partners in the firm named and styled as S.S. Ratanchand Darbarilal, Satna, carrying on business in the wholesale purchase and sales of cloth at Satna and whereas the party No. 2 (meaning Abhaykumar) who is a member of the Hindu undivided family with party No. 3 (Jaikumar) having decided to be a partner in the said business and joined as partner with effect from September 9, 1956, to which the party Nos. 1 and 3 agreed and whereas all the parties named above having mutually decided to admit S.S. Prasannakumar, minor son of S.S. Dhanyakumar, aged 16 years to the benefits of partnership with effect from the said date and whereas the parties named above having mutually decided to reduce in writing and place in a legal form the terms and conditions of the partnership and the shares held by each of the partners in the firm.
Now this present doth witness and the parties to this deed do hereby declare and stipulate that they are partners in the firm named and styled, S.S. Ratanchand Darbarilal, Satna, with effect from September 9, 1956 and that they admit S.S. Prasannakumar, minor son, aged 16 years of S.S. Dhanyakumar to the benefits of partnership with effect from the same date ...'
26. These recitals are not indicative of the fact that the business of the firm, M/s. Ratanchand Darbarilal at Satna, was discontinued, nor that there was a complete cessation of business on its part there. On the contrary, the recitals suggest that there was a pre-existing partnership, and there was merely a change in the constitution of the firm. Unless the business of the firm at Satna was discontinued either by dissolution of the firm or by a discontinuance of its business at Satna, the business at Satna could not be taken over by any new firm styled as M/s. S.S. Ratanchand Darbarilal,Satna. There was no question of reconstitution of the firm because, in fact, no such firm ever existed.
27. The dissolution and reconstitution of a partnership are two different legal concepts. The dissolution puts an end to the partnership, but reconstitution keeps it subsisting, though in another form. A dissolution followed by some of the erstwhile partners taking over the assets and liabilities of the dissolved partership and forming themselves into a partnership is not reconstitution of the original partnership. A partnership formed after dissolution is a new partnership and not a continuation of the old partnership, for it would be a contradiction in terms to say that what ceased to exist was continued. A reconstitution of a partnership necessarily implies that the firm never became extinct. What it denotes is the structural alteration of the membership of the firm, by addition or reduction of members, and the incidental re-distribution of the shares of the partners. That distinction must be borne in mind in considering the genuineness of the transaction.
28. The essential steps that had to be taken for the formation of a partnership were not there. There was no settlement of accounts or distribution of profits or allocation of capital of the erstwhile firm. On the eve of the partnership, the accounts had to be so fully cast, ascertained and settled, between the members, that each member could know what his rights and obligation were, in the event of the business being wound up. An existing firm cannot acquire the character of a new partnership by mere declaration to that effect by the parties concerned. By merely execut-in two separate partnership deeds, theipartners could not in law bring about the severance of the business of the partnership. The production of a partnership deed or written instrument will not of itself establish partnership, if the agreement is not acted upon, or if the deeds were merely a devise for avoidance of tax. Rowlatt J. in Dickenson v. Gross,  2 TC 614 while confirming the general Commissioner's decision that no partnership existed for tax purposes, said:
' Many people .... think that by putting a bit of paper in a drawer they can make an income-tax partnership......'
29. So also, Rankin C. J. in Bisseswarlal Brijlal v. Commissioner of Income-tax,  4 ITC 365 states: an instrument of partnership is not a magical talisman protecting its executants from the imposition of super-tax.
30. The material on record tends to support the view of the income-taxauthorities that there was, in fact, no separate partnership during the relevant period. The instrument of the partnership dated November 1, 1956,was executed to create a veneer of partnership for income-tax purposes,while, underneath, the business was carried on as before. There is nothingto show that the business of the firm at Satna was ever discontinued. Nor can it be asserted that there was a succession to that business within the meaning of Section 26(2). There was no settlement of account of profits. There was no capital account of the alleged partners in the books of the business of the firm. The existence of the partnership was not communicated to any outside authority including the bank in which the assessee had an account, and the same was continued even after the partnership was constituted. There was nothing in the deed to show the manner in which the partners brought in had to make their capital contribution. Right till the end of the accounting year, the assessee did not know its mind. The business was continued to be carried on as before. Towards the end of the year, the entries in the account books were made so as to conform with the recitals in the deeds of partnership. The business between the two Hindu undivided families continued to be carried on as in the past. The members of the two Hindu undivided families had been brought in as partners without bringing in any partial partition of the respective Hindu undivided families. The head office controlled the finances and business of -the Satna shop as before, i.e., there was no change in the circumstances and the Satna shop was treated to be a branch of the Katni firm. The theory that there was a separate partnership was merely an after-thought. The account of the two Hindu undivided families M/s. Ratanchand Darbarilal and M/s. Ratanchand Abhaykumar were debited with Rs. 10,000 and Rs. 8,000, respectively, and the incoming partners credited with Rs. 5,000 in the Katni firm and Rs. 4,000 in the Satna firm showing their capital contribution. The transfer entries were alleged to have been made on bhado sudi 5, Samvat 2013, corresponding to September 9, 1956, but on examination of the bijak nakal, it appears that the entry was actually made on September 9, 1957. The figure ' 7 ' was later on charged to '6'. The subsequent interpolation of the entries coupled with these circumstances clearly goes to show that the firm so constituted by the instrument of partnership dated November 1, 1956, was not a genuine firm.
31. Then, the question is whether the partnership constitued under the instrument of partnership dated November 1, 1956, was valid in law. It is settled law that the karta or the adult members of a joint Hindu family, where it is a trading family, may enter into a partnership with a stranger or strangers representing the joint Hindu family. The family as a unit on that account does not become a partner, but only such members as in fact enter into a contractual relation with the stranger, and the partnership will be governec' by the Act. In the management of that business, therefore, the other members of the family have no part to play. The only right that they have against the manager or the karta or the othermembers who entered into partnership representing the family is to call upon him or them to give an account of the business that they have done with the joint family funds. The income and profits which the managing member or members have earned from such partnership would belong to the joint family and the other coparceners would have a right to share such profits with these members of the joint family as a joint family asset. The position of the manager or the managing members in this way, as pointed out by the Privy Council in Annamalai Chetty v. Murugesa Chetty, ILR  26 Mad 544 is analagous to that of a trustee. He or they in such cases occupy a dual position. As between the parties to the contract they are partners and their relationship is regulated by the Partnership Act. They as a rule are personally liable for all the obligations under the contract as against the partners/strangers. In relation to the family members they have a duty to account for the profits that they made. For purposes of income-tax, the income derived is assessed to tax as the income of the Hindu undivided family. Thus, the provisions of three distinct laws are attracted in view of the role that they occupy. In Commissioner of Income-tax v. Bhagyalakshmi & Co. : 55ITR660(SC) the Supreme Court stressed on the necessity of always in such cases keeping in view the principles of the three laws. The Supreme Court observed thus:
' If the distinction between the three concepts is borne in mind muchof the confusion disappears. A partnership is a creature of contract.Under Hindu law joint family is one of status and right to partition isone of its incidents. The income-tax law gives the Income-tax Officer apower to assess the income of a person in the manner provided by the Act.Except where there is a specific provision of the Income-tax Act whichderogates from any other statutory law or personal law, the provision willhave to be considered in the light of the relevant branches of law. Acontract of partnership has no concern with the obligation of the partnersto others in respect of their shares of profit in the partnership. It onlyregulates the rights and liabilities of the partners. A partner may be thekarta of a joint Hindu family; he may be a trustee; he may enter into asub-partnership with others; he may, under an agreement, express orimplied, be the representative of a group of persons; he may be a benami-dar for another. In all such cases, he occupies a dual position. Qua thepartnership, he functions in his personal capacity; qua the third partiesin his representative capacity. The third parties, whom one of the partnersrepresents, cannot enforce their rights against the other partners nor theother partners can do so against the said third parties. Their right is onlyto a share in the profits of their partner-representative in accordancewith law or in accordance with the terms of the agreement, as the case may be.'
32. On the facts of the present case, Dhanyakumar as karta of the Hindu undivided family representing the branch of Darbarilal and Abhaykuraar as karta of the Hindu undivided family representing the branch of Ratanchand sought to give to the coparceners of their respective Hindu undivided families interest as partners in the business which was coparcenary property, with the result that to the extent of 0-8-0 annas share in the business held by Dhanyaknmar as karta of one Hindu undivided family, and with respect to the 0-8-0 annas share in that business held by Abhay-kumar as karta of the other Hindu undivided family, the coparceners as members of the Hindu undivided family would have an interest and they would also be entitled in their own right to 0-4-0 annas share each in the business as partners in their individual capacity. They would thus have an interest both as coparceners and as partners at the same time in what was essentially a joint family business. Such a situation is not permissible and such a partnership is not one which can be constituted under the law.
33. We have been referred to a large number of cases, many of which are familiar in this branch of the law. In Lachhman Das v. Commissioner of Income-tax,  16 ITR 35 the Privy Council stated:
'.........on general principles they cannot find any sound reason todistinguish the case of a stranger 'from that of a coparcener who puts into the partnership what is admittedly his separate property held in his individual capacity and unconnected with the family funds. Whatever the view of a Hindu joint family and its property might have been at the early stages of its development, their Lordships think that it is now firmly established that an individual coparcener, while remaining joint, can possess, enjoy and utilise, in any way he likes, property which was his individual property, not acquired with the aid of, or with any detriment to, the joint family property. It follows from this that to be able to utilize this property at his will, he must be accorded the freedom to enter into contractual relations with others, including his family, so long as it is represented in such transactions by a definite personality like its manager. In such a case he retains his share and interests in the property of the family, while he simultaneously enjoys the benefit of his separate property and the fruits of its investment. To be able to do this, it is not necessary for him to separate himself from his family.........
In this view of the Hindu law, it is clear that if a stranger can enter into partnership, with reference to his own property, with a joint Hindu family through its karta, there is no sound reason in their Lordships' viewto withhold such opportunity from a coparcener in respect of his separate and individual property.'
34. It was also held by the Privy Council in Sundar Singh Majithia v. Commissioner of Income-tax that there was nothing in the Income-tax Act to prohibit the members of a joint Hindu family from dividing some property while electing to retain their joint status and carrying on business in respect of those properties treating them as its capital. In Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax : 29ITR521(SC) the Supreme Court rules that:
' It is well settled that when the karta of a joint Hindu family enters into a partnership with strangers, the members of the family do not ipso facto become partners in that firm. They have no right to take part in its management or to sue for its dissolution. The creditors of the firm would no doubt be entitled to proceed against the joint family assets including the shares of the non-partner coparceners for realisation of their debts. But that is because under Hindu law, the karta has the right when properly carrying on business to pledge the credit of the joint family to the extent of its assets, and not because the junior members become partners in the business. In short, the liability of the latter arises by reason of their status as coparceners and not by reason of any contract of partnership by them.'
35. The Supreme Court then went on to state:
'This is sufficient, without more, to dispose of this contention. But even apart from this, it is difficult to visualise the situation which the appellant contends for, of a Hindu joint family entering into a partnership with strangers through its karta and the junior members of the family also becoming at the same time its partners in their personal capacity. In Lachhman Das v. Commissioner of Income-tax, it was held by the Judicial Committee that the karta of a joint Hindu family could enter into partnership with an individual member of the coparcenary quoad his separate property. It was also held by the Privy Council in Sundar Singh Majithia v. Commissioner of Income-tax. that there was nothing in the Income-tax Act to prohibit the members of a joint Hindu family from dividing some properties, while electing to retain their joint status, and carrying on business as partners in respect of those properties treating them as its capital. But in the present case, the basis of the partnership agreement of 1940 is that the family was joint and that Mohanlal was its karta and that he entered into the partnership as karta on behalf of the joint family. It is difficult to reconcile this position with that of Chhotalal and Bansilal being also partners in the firm in their individual capacity, which can only be inrespect of their separate or divided property. If members of a coparcenary are to be regarded as having become partners in a firm with strangers, they would also become under the partnership law partners inter se, and it would cut at the very root of the notion of a joint undivided family to hold that with reference to coparcenary properties the members can at the same time be both coparceners and partners.'
36. The principles laid down by the Supreme Court in Firm Bhagat Ram Mohanlal's case would squarely apply to the facts of the preset case. The firm as originally constituted in the year 1943 was formed of two partners, Ratanchand and Darbarilal, the kartas of their respective Hindu undivided families, representing the branches of Ratanchand and Darbarilal, respectively. They represented their sons as kartas of their Hindu undivided families. In such circumstances, their sons could not also enter into partnership in their individual capacity, because, as pointed out by the Supreme Court, that' would cut at the very root of the notion of a Hindu undivided family. The question whether when a joint Hindu family has entered into a partnership with a stranger, through its karta, the junior members of the family could also become partners in their personal capacity, has been considered by some of the High Courts. In Pitambtrdas Bhikhabhai & Co. v. Commissioner of Income-tax : 53ITR341(Guj) the Gujarat High Court held that no such partnership was in law permissible. So also, in Shah Prabhudas Gulabchand v. Commissioner of Income-tax : 77ITR870(Bom) and Manilal Dharamchand v. Commissioner of Income-tax : 78ITR96(Bom) the Bombay High Court has held that such a partnership is foreign to the well-established principles 'governing an undivided Hindu family and could not be valid in law.
37. Strong reliance was placed on the decision in Charandas Haridas v. Commissioner of Income-tax : 39ITR202(SC) . We, however, fail to appreciate the relevance of that decision. Charandas was the karta of a Hindu undivided family consisting of his wife, his three minor sons and himself. He was a partner in six managing agency firms and the share of the managing agency commission received by him as such partner was being assessed as the income of the family. Charandas acting for, himself, his minor sons and his wife entered into an oral agreement of partial partition. That was followed by a memorandum in writing. The Tribunal held that by the document in question, the division, if any, was of the income and not of the assets from which the income was derived, inasmuch as 'the agreements of the managing agency with the managed companies did not undergo any change whatever as a result of the alleged partition', the assets remained joint and the income remained the income of the jointfamily. The Bombay High Court affirmed that finding. On appeal, the Supreme Court held that for an asset of that kind in that case there was no other mode of partition open to the members if they wished to retain the property and yet hold it not jointly but in severally, and that the family took the fullest measure possible for dividing the joint interest into separate interest. The document, not being a pretence and being genuine, was fully effective between the members and there was actually no Hindu undivided family in respect of those assets. The document effectively divided the income. There was, therefore, no material to justify the finding that the income in the share of the managing agency commission was the income of the Hindu undivided family. While dealing with the question, the Supreme Court observed that the fact of a partition in Hindu law might have no effect upon the position of the partner, in so far as the law of partnership was concerned, but it had full effect upon the family in so far as the Hindu law was concerned. Just as the fact of a karta becoming a partner did not introduce the members of the undivided family into the partnership, the division of the family did not change the position of the partner vis-a-vis the other partner or partners. The income-tax law, before the partition, took note, factually, of the position of the karta and assessed him not as partner but as representing the Hindu undivided family. In doing so, the income-tax law looked not to the provisions of the Partnership Act, but to the provisions of the Hindu law. When once the family had disrupted, the position under the partnership continued as before, but the position under the Hindu law changed. There was then no Hindu undivided family as a unit of assessment in point of fact, and the income which accrued could not be said to be that of a Hindu undivided family. There was nothing in the Indian income-tax law or the law of partnership which prevented the members of a Hindu joint family from dividing any asset. Such division must, of course, be effective so as to bind the members; but Hindu law did not further require that the property must in every case be partitioned by metes and bounds, if separate enjoyment must in every case be secured according to the shares of the members.
38. The other decisions relied upon by the learned counsel are distinguishable on facts. In Umacharan Shaw & Bros. v. Commissioner of Income-tax three brothers formed a joint Hindu family governed by the Dayabhaga School of Hindu law. The family carried on the business of sale of foreign liquor and the licences for its three shops were held in the different names of the members but not in the name of the family. The family was disrupted, and the three members entered into a deed of partnership which was registered, by which they agreed to carry on the business in partnership. They opened a separate book of accounts which they calledthe bali khata which purported to show the capital contribution and accounts of the partners as well as the division of profits amongst them. The applications for an order that the family had effected a partition and for registration of the partnership were rejected and the profits of the business continued to be assessed in the hands of the joint family. The claim for registration was rejected by the Income-tax Officer on the grounds that there was no separate capital account of the partners and that the share of profits of each partner was not credited in his account in the ledger. He placed no value to the bati khata maintained by the partners. The Tribunal affirmed the decision of the Income-tax Officer holding that there was no genuine partnership as the existence of the partnership was not disclosed to the bankers or to the excise authorities and further that the formation of the partnership was in violation of the Bengal Excise Act, 1911. On appeal the Supreme Court held that there was no material on which the Income-tax Officer or the Tribunal could come to the conclusion that the firm was not genuine. They merely acted on surmises and conjectures, and their conclusion was the result of suspicion which could not take the place of proof. Consequently, the Supreme Court directed that the firm should be registered under Section 26A of the Act. While dealing with the question of registration the Supreme Court held that there was nothing to establish that the bati khata which showed the capital account of the partners was not genuine or that it was not regularly maintained in the ordinary course of business; and that there was nothing to show any transgression of the provisions of the Bengal Excise Act, Incidentally, the Supreme Court observed that the maintenance of the bank accounts in the names of the holders of the excise licences and not in the name of the firm, was in accordance with the provisions of the partnership deed and could not be said merely to furnish a veneer of partnership while the family continued without disruption.
39. In Commissioner of Income-tax v. Sir Hukumchand Mannalal & Co. : 78ITR18(SC) the firm was formed under a deed to carry on the business of ' managing and selling agents ' of Hukumchand Mills Ltd. Sir Hukumchand and his son, Rajkumarsingh, were the two of the five partners. They represented the interest of the Hindu undivided family of Sir Hukumchand and his sons. The Tribunal affirmed the order of the Income-tax Officer refusing registration of the firm. On reference, the High Court held that the firm was entitled to registration under Section 26A of the Act, as there was nothing in law which prevented two or more coparceners of a Hindu undivided family, representing the joint family, from entering into a partnership with a stranger or strangers. That view of the High Court was affirmed in appeal by the Supreme Court. That case reiterates thewell-settled principles that one or more members of a Hindu undivided family may enter into a contractual relation in the nature of a partnership with a stranger and they qua the stranger become partners, and that also while considering an application for registration of a firm under Section 26A of the Act, the Income-tax Officer is not concerned to determine in whom the beneficial interest in the share in the partnership vests. The same principle is involved in Ramakrishna Transports v. Commissioner of Income-tax : 68ITR107(AP) where two of the coparceners representing the Hindu undivided family entered into partnership with strangers. The decision of the Mysore High Court in I.P. Munavalli v. Commissioner of Income-tax [I969] 74 ITR 529 turned on its peculiar facts. There, the father as the karta of a Hindu undivided family entered into a partnership with his undivided son as a working partner, and the question was whether a valid partnership came into existence. The Mysore High Court, after referring to the decision of the Privy Council in Charandas Haridas v. Commissioner of Income-tax and that of the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Income-tax, stated :
' If a partner by putting into the partnership by way of his capital his separate property or the property which he obtained at a partition on division and thus can become a partner with the family represented by its karta, it is difficult to understand how such a partnership cannot come into being and why a coparcener who continues to remain a member of the coparcenary cannot become a working partner of a firm of which he and the family represented by its karta are the partners. In Lachhman Das's case 5 the coparcener placed at the disposal of the firm as his capital his separate property, and in the case of a working partner he contributes his skill or labour or both as the case may be. If the partnership is permissible in one case, it would be difficult to assign any reason for reaching the conclusion that it is not permissible in the other.'
40. That was a case of its own kind. We do not think it necessary for our purposes to go into the question whether a coparcener merely by contributing his skill or labour or both can, without more, enter into a partnership with a Hindu undivided family represented by its karta.
41. In view of the foregoing, our answers to the questions referred must be:
(1) The firm, M/s, S.S. Ratanchand Darbarilal, Satna, was not entitled to registration under Section 26A of the Indian Income-tax Act, 1922, for the assessment year 1958-59.
(2) The Appellate Tribunal was not justified in so interpreting the evidence on record as to come to a finding that the Satna business had tobe taken as an independent unit with its own constitution and that it was separate and distinct from the Katni business.
(3) The Appellate Tribunal was not justified in directing that the firmowning the Satna business should be registered in spite of the fact that themembers of the two Hindu undivided families entered as partners inter sewithout their effecting, in the first instance, a severance of joint status bypartitioning, either partially or totally, the assets of the respective twoHindu undivided families.
(4) The Appellate Tribunal was not justified in holding that the profitsfrom the business run in the name and style of M/s. S.S. RatanchandDarbarilal, Satna, shall be excluded/from the total income of M/s. Ratanchand Darbarilal, Katni.
42. The Commissioner of Income-tax shall have the costs of this reference. Hearing fee Rs. 100 in each case, if certified.