In this reference by the Income tax Appellate Tribunal pursuant to an order made by this court on 5th August, 1957, on an application filed by the assessee under section 66(2) of the Indian Income-tax Act, the question formulated for our decision is :
'Whether in the circumstances of this case as found, having regard to the personal law of the parties and the law relating to partnership, the document of partnership dated February 3, 1949, represents a genuine or sham transaction ?'
The facts of the reference are as follows :
In the assessment year 1950-51 the assessee, Messrs. Murlidhar Kishangopal of Indore, made an application under section 26A of the Act for registration of their partnership firm as constituted by a deed of partnership dated February 3, 1949. It was stated by the assessee that Murlidhar Jhavar and his six sons were members of a joint Hindu family carrying on business in money lending and speculation; that the family disrupted on October 29, 1948; and that subsequently Murlidhar and his sons formed a partnership and executed a deed of partnership on February 3, 1949. The Income tax Officer rejected this application. In rejecting the claim for registration he gave as his reasons that after partition Murlidhar and his six sons continued to live and mess together, and that Murlidhar continued to have full and exclusive control of business and the bank account, which Murlidhar used to keep in his own name while the joint family was doing business under the name and style of 'Poosaram Murlidhar', continued to be operated by Murlidhar even after the drawing up of a partnership deed and the bank was not informed that the Hindu undivided family had disrupted. The income tax officer treated the assessee as an association of persons for the purpose of assessment. The Appellate Assistant Commissioner endorsed all the above reasons. He, however, added that it was no doubt open to the person entering into a partnership to impose inter se such terms as they thought fit, but the terms must be reasonable and there was no jurisdiction whatsoever for Murlidhar, who was fairly advanced in age, to keep the management and control of business exclusively with him. The Appellate Assistant Commissioner Accordingly upheld the order of the Income tax Officer rejecting the assessees application for registration. The assessee then preferred an appeal before the Tribunal which was rejected. The tribunal while agreeing with the Appellate Assistant Commissioner gave two more reasons for the rejection of the application for registration. They were that the stamps for the deed of partnership were purchased even before the date of disruption of the joint family, and that the firm was not registered under the Indore Partnership Act for nearly a year and a half after the commencement of the alleged partnership.
The facts found in the statement of the case submitted by the Tribunal on June 24, 1960, the supplementary statement dated April, 28, 1962, which the Tribunal was asked to submit by this court on August 17, 1961, are that Murlidhar and his family constituted a joint Hindu family which disrupted on 29th October, 1948; that on November 2, 1948, the members of the erstwhile joint family entered into a partnership and executed a deed of partnership on February 3, 1949; that Murlidhar and his six sons continued to live and mess together even after the disruption of the family; that Murlidhar had full exclusive control of the family business; that the accounts in the bank continued to be operated by Murlidhar even after the commencement of the partnership business; that the stamps for the deed of partnership were purchased before the family disrupted; and that the firm was not registered under the Partnership Act for over a year after its commencement. The Tribunal, the Appellate Assistant Commissioner, and the Income tax Officer did not reject the assessees statement that there was a partition of the joint Hindu family. It has also been found by the taxing authorities that on February 3, 1949, Murlidhar and his six sons executed a deed of partnership. The sole question for determination, therefore, is whether the partnership was a colourable one for the reasons given by the taxing authorities or a genuine partnership.
In our judgement, the reasons advanced by the taxing authorities for holding that the firm was not genuine are altogether untenable and invalid. It is difficult to see what bearing the circumstances of the joint living and messing of Murlidhar and his sons had on the question of the existence and genuineness of the partnership. Notwithstanding the circumstance, the department treated the assessee as an association of persons and accepted the assessees statement that the family had disrupted in 1948. It cannot therefore be held that this circumstance was relied on by the taxing authorities for rejecting the assessees version that the joint family had disrupted. There is nothing to prevent a family from disrupting and forming a partnership and the members of the family living and messing together even after the disruption of the family and formation of the partnership. The retention of control and management of the partnership business by Murlidhar alone was in accordance with the terms of the partnership deed that the partnership business would be managed by Murlidhar and that the other partners would have no power to incur any liability in the firms name. If a partnership deed puts restrictions or limitations on the rights of some partners, that does not necessarily vitiate the partnership : see Steel Brothers and Co. Ltd. v. Commissioner of Income tax. The circumstance that Murlidhar continued to operate the account in the bank as he used to before the formation of the partnership is in no way inconsistent with the terms of the partnership as embodied in the deed dated 3rd February, 1949. The terms of the partnership deed did not require Murlidhar to keep account in the bank in the name of the partnership firm. That being so, the fact that the bank was not informed of the disruption of the family and the formation of the partnership and that the account in the bank was continued to be kept in the name of 'Poosaram Murlidhar' and operated by Murlidhar alone is of no significance. The substance of the matter is that the account in the bank was operated by Murlidhar as an account of the firm. Maintenance of the bank account cannot therefore be treated as indivative of the colourable nature of the partnership. The further two circumstances, that stamps for the deed of partnership were purchased even before the family disrupted and that the firm was not registered under the Partnership Act for over a year and a half after the commencement of the partnership are also of no consequence. The purchase of stamps only shows that when Murlidhar and his sons thought of partition they should carry on business on a partnership basis. In law there is nothing to prohibit a family from disrupting and forming a partnership. That being so the purchase of stamps before the disruption of the family has no relevance at all on the question of the existence or genuineness of the partnership. The partnership Act does not make registration of firms compulsory and does not impose penalties for non-registration, though the consequence of non registration is to impose a disability in the matter of the bringing of certain suits in respect of partnership which have not been registered under the Partnership Act. It is also not a requirement of section 26A of the Income tax Act that the firm should be one registered under the Partnership Act. The Tribunal was therefore not justified in relying on the fact of non registration of the firm for over a year and a half as a circumstances going to show that the partnership agreement was not genuine and was put merely by way of pretence in order to escape the liability to tax. If the circumstances relied on for holding that there was no genuine partnership are ruled out as being altogether untenable, as they must be, then there remains no material on which the tax authorities could come to the conclusion that the firm was not genuine.
The question whether, on the circumstances relied on by the Tribunal, the Appellate Assistant Commissioner and the Income tax Officer, an inference about th existence and genuineness of the partnership can be drawn in this case is not a question of fact. The inference to be drawn is as regards the legal effect of the facts and circumstances found in the light of the provisions of the Partnership Act of the personal law of the parties. This is a mixed question of law and fact. On a consideration of all the circumstances of the case we are of the opinion that there was no material which the finding of the taxing authorities that the firm was not genuine can be rested.
For these reasons our answer to the question propounded is that the partnership deed dated 3rd February, 1949, is a genuine and not a sham transaction. The assessee shall have the costs of this reference. Counsels fee is fixed at Rs. 100.