PANDEY J. - This reference has been made in pursuance of an order dated 3rd April, 1964, which we made on an application filed by the assessee under section 66(2) of the Income tax Act, 1922. The question formulated for our opinion is :
'Whether there is any evidence to support the Tribunals finding on the point that the partnership formed by Jamnadas, Gokuldas and Tapubhai was not genuine, and whether the Tribunal was justified in refusing registration of the firm under section 26A ?'
The facts material for this reference are these. Under the name and style of Messrs. United Patel Construction Co., two brothers, Jamnadas and Gokuladas, were carrying on, as partners, the business of exectuting contracts was dissolved on January 13, 1958, and its business was taken over by another firm of the same name, which was formed on 14th January, 1958, and constituted by Jamnadas, Gokuldas and their third brother, Tapubhai. The first two executed a partnership deed on the same date and sent it to Junagadha where Tapubhai afixesd his thumb mark to it. In the deed it was stated that Tapubhai had agreed to join the firm as a dormant partner and the loan which he had advanced to the old firm as appearing from its books would be his contribution to the capital of the firm. The new firm applied for registration under section 26A of the Act. The Income tax Officer refused registration on the ground that the partnership as described in the deed dated 14th January, 1958, did not exist. Two successive appeals against that refusal were dismissed by the Appellate Assistant Commissioner and the Tribunal. Subsequently, the Tribunal dismissed the assessees application under section 66(1) of the Act on the ground that no question of law arose out of its order.
The considerations which led the Tribunal to affirm the conclusion that the partnership was not genuine were these :
(i) When examined, Tapubhai showed his complete ignorance about when he joined the firm, what the capital of the business was, what contracts were taken by the firm and what amount was outstanding in the books of the firm as due to him.
(ii) Tapubhai had not, so far, withdrawn any profit from the firm.
(iii) The circumstances in which the partnership deed was brought into existence.
It is true that mere execution of a deed of partnership cannot be regarded as conclusively establishing the existence of a partnership and the Income tax Officer is entitled to enquire whether the instrument is intended by the parties to be really effective as governing their rights and liabilities inter se in relation to the partnership business or whether it is only a pretense to escape liability for tax. But a conclusion that a partnership is not genuine cannot be grounded only on suspicion. So, where certain minors were admitted to the benefits of a partnership and there were some circumstances of suspicion suggesting that the minors might be the nominees of their father, the inference drawn by the Tribunal that the minors were the fathers nominees was set aside : Again, where the inference against the genuineness of a partnership was grounded on considerations having no bearing on its existence or genuineness, we held that there was no material on which the conclusion could be rested : Murlidhar Kishangopal v. Commission er of Income-tax. The Supreme Court also indicated in that where such a conclusion was unreasonable and not justified either by the partnership law or common human experience, it cannot be supported. In Champaran Cane Concern v. State of Bihar S. K. Das J. observed at page 1741 :
'Now, partnership or no partnership is ordinarily a question of fact, but we agree with learned counsel for the assessee that it is a mixed question of fact and law in the sense that if the authorities who have to ascertain questions of fact apply a wrong principle of law in instructing themselves as to what they have to find, then their finding of fact is not conclusive because they have done it according to wrong principles.'
In Commissioner of Income-tax v. Sivakasi Match Exporting Co. the conclusion of the Tribunal, which had misconstrued the provisions of the partnership deed and relied upon irrelevant considerations, was not accepted. In view of all these authorities, it must be taken as firmly established that the Tribunals finding on the point will be insupportable if it is based on evidence or upon irrelevant considerations or upon a view of facts which could not reasonably be entertained.
In the instant case, it is said that the facts that Tapubhai did not know exactly when he joined the firm, what the capital of the business was, what contracts were taken by the firm and what amount was outstanding in the firm as due to him indicated that he was not a partner at all. Since Tapubhai is illiterate, it is not surprising if he could not give the exact date of the partnership contract. Further, it is common knowledge that not all partners necessarily take an active part in the partnership business. A partnership may often comprise some member who is not generally known to be interested in the conduct of the business or adventure. Undoubtedly, his advance is risked in the business, but he is satisfied with whatever return he can get for his advance and he does not participate in the management. Such a partner is called a dormant (or popularly, sleeping) partner. In this case, Tapubhai was such a partner. That being so, he could not be expected to be aware of the details of the partnership business and it cannot reasonably be inferred from his ignorance about these details that the partnership is not genuine.
The fact that one of the partners had not at all withdrawn his share of profits and allowed them to accumulate is no ground for inferring that the partnership is not genuine. Champaran Cane Concern v. State of Bihar 2 is a direct authority on the point.
We do not see anything in the way in which the partnership deed was brought into existence as lending support to the Tribunals conclusion. The Tribunal itself stated that the fact that an old stamp paper was used for the partnership deed had no significance. When Tapubhai did execute the deed and, in terms of that deed, his loan account was transferred to his capital account, we do not see how the fact that he signed the deed at Junagadha lends any support to the conclusion that the partnership is not genuine.
Upon a consideration of the circumstances, which the Tribunal relied upon for its conclusion that the partnership is not genuine, we are of the view that there is no material relevant to the matter on which that conclusion could be rested. Therefore, our answer to the formulated question is that there is no evidence to support the Tribunals conclusion that the partnership is not genuine and its refusal to register the firm under section 26A of the Act is unjustified.
The assessee shall have its costs of this reference. Hearing fee, Rs. 100.