1. By this reference under Section 256(1) of the I.T. Act, 1961, hereinafter referred to as 'the Act', the Income-tax Appellate Tribunal, Indore Bench, has referred the following question of law to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, the assessee constituted a valid partnership firm in law and was entitled to registration under the provisions of the Income-tax Act for the A. Y. 1969-70?'
2. The material facts giving rise to this reference, as set out in the statement of the case, briefly are as follows : The Gwalior Maize Products Ltd. carried on business at Mandsaur of manufacturing starch from maize. The company granted a lease of its factory to one Rajaram Gupta. Before the expiry of this lease, the company faced financial difficulties and the debenture-holders of the company took possession of the property of the company. They instituted a suit against Rajaram Gupta for eviction. A compromise was arrived at in that suit, and in terms of the compromise a decree was passed by the court. Under this decree, Rajaram Gupta was allowed to remain in possession of the factory up to 30th June, 1968, on conditions embodied in the decree. The factory was, however, sold by the debenture trustees on 19th December, 1967, to Shri Subodh Kumar Gupta, Shri Suryakant Gupta and Shri Shrikant Gupta. These three persons executed a deed of partnership on 29th December, 1967, and the partnership was to come into force in accordance with the terms of the deed with effect from 19th December, 1967, the date when the factory was purchased by the firm. All the three partners were given equal shares in the firm. On 22nd May, 1968, this firm granted a lease of the factory to M/s. Rajaram & Brothers, Mandsaur, for a period of five years with effect from 19th December, 1967. For the assessment year 1969-70, the assessee filed an application before the ITO seeking registration of the assessee-firm under Section 185 of the Act. The ITO was of the view that as the assessee did not carry on any business during the relevant previous year, the assessee was not entitled to registration. The ITO accordingly declined to grant registration to the assessee. Aggrieved by that order, the assessee preferred an appeal before the AAC, who allowed the appeal. The department, therefore, preferred an appeal before the Tribunal. The Tribunal came to the conclusion that as no business was carried on by the assessee in the relevant previous year, it was not entitled to registration. At the instance of the assessee, the Tribunal has referred the aforesaid question of law to this court for its opinion.
3. According to the Tribunal, the assessee was not entitled to registration because the assessee did not carry on any business activity in the relevant previous year. The Tribunal has, however, observed that there was no dispute that all other normal incidents for constituting a valid partnership agreement existed in the case of the assessee. The short question for consideration, therefore, is whether failure to carry on any business in the relevant previous year can be a ground for refusing registration under the Act when the Tribunal has found that a valid partnership agreement was in existence.
4. Now, the relevant provisions of Section 185(1) of the Act are as follows:
' 185. Procedure on receipt of application.--(1) On receipt of an application for the registration of a firm, the Income-tax Officer shall enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and--
(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year ;
(b) if he is not so satisfied he shall pass an order in writing refusing to register the firm.'
5. The ITO has undoubtedly jurisdiction to enquire into the genuineness of the firm. If it is found that there was no intention on the part of the partners that any business should be carried on by the firm, then the ITO would be justified in holding that no 'partnership', as defined by Section 4 of the Partnership Act, 1932, had come into existence. In the instant case, the Tribunal has not found that there was no intention on the part of the partners that any business should be carried on by the firm. On the contrary, the finding is that there was in existence a valid partnership, but it was held to be not entitled to registration as the partnership did not carry on any business in the relevant previous year. The question as to whether a partnership firm carried on any business in the relevant previous year will not be relevant in determining as to whether there was in existence during the previous year a genuine firm. The Tribunal has thus refused registration on a ground which could not be held to be relevant for refusing registration. Learned counsel for the department urged that we should direct the Tribunal to send a supplementary statement of case giving its finding on the question as to whether the assessee intended to carry on any business. The contention cannot be upheld. The Tribunal has given a specific finding that but for the fact that no business was carried on in the relevant previous year, all other incidents for constituting a valid partnership agreement were in existence. Thus, the only reason, according to the Tribunal, for refusing registration was that the assessee did not carry on any business in the previous year and this reason cannot, in our opinion, constitute a valid reason for refusing registration. Therefore, the Tribunal, in our opinion, was not justified in holding, in the circumstances of the case, that the assessee was not entitled to registration.
6. For all these reasons, this reference is answered in the affirmative and in favour of the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.