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Lakhpat Rai Des Raj Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 5 of 1973
Judge
Reported in[1977]107ITR440(P& H)
ActsIncome Tax Act, 1961 - Sections 184 and 185(1); Partnership Act - Sections 37
AppellantLakhpat Rai Des Raj
RespondentCommissioner of Income-tax
Appellant Advocate S.P. Goyal, Adv.
Respondent Advocate D.N. Awasthy and; S.S. Mahajan, Advs.
Cases ReferredCochin Company v. Commissioner of Income
Excerpt:
.....under article 227 of the constitution. - from the order of the tribunal it appears that it was not satisfied with the correctness of the finding of the appellate assistant commissioner or the income-tax officer as to the non-genuineness of the firm. awasthy, learned counsel for the department, with regard to (a) to tell us how the division of profits in accordance with the deed of partnership would be bad if one of the partners suffers his share of profits being shared with others. gurbux rai harbux rai [1971]81itr476(sc) .we, therefore, ask the tribunal to decide the question whether the division of profits, so far as the trust is concerned, was in accordance with the partnership deed and thereafter submit a better statement of the case to this court so that the question of law..........on the facts and in the circumstances of the case, the assessee-firm constituted under the deed of partnership dated 1st december, 1966, has been rightly refused registration under section 185(1)(b) of the income-tax act 2. whether, on the facts and in the circumstances of the case, the status of an association of persons has been rightly assigned to the assessee ?' 2. these questions have arisen in the following circumstances : sh. des raj was carrying on business in kirana as an individual. a deed of partnership was executed on december 1, 1964, to take over this business. the partners were as follows :(i)sh. des raj50 per cent(ii)sh. yog raj25 per cent.(iii)sh. rajinder kumar25 per cent.3. the latter two are the sons of des raj. on december 1, 1966, another deed of.....
Judgment:

1. The Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following two questions of law for our opinion :

'1. Whether, on the facts and in the circumstances of the case, the assessee-firm constituted under the deed of partnership dated 1st December, 1966, has been rightly refused registration under Section 185(1)(b) of the Income-tax Act

2. Whether, on the facts and in the circumstances of the case, the status of an association of persons has been rightly assigned to the assessee ?'

2. These questions have arisen in the following circumstances : Sh. Des Raj was carrying on business in kirana as an individual. A deed of partnership was executed on December 1, 1964, to take over this business. The partners were as follows :

(i)

Sh. Des Raj

50 per cent

(ii)

Sh. Yog Raj

25 per cent.

(iii)

Sh. Rajinder Kumar

25 per cent.

3. The latter two are the sons of Des Raj. On December 1, 1966, another deed of partnership was executed which was made operative with effect from September 1, 1966. This deed was executed because Sh. Rajinder Kumar retired from the partnership and his place was taken by his brother, Subhash Chander. The shares of the partners under this agreement were :

(a)

Sh. Des Raj

40 paise in a rupee.

(b)

Sh. Yog Raj

35 paise in a rupee.

(c)

Sh. Subhash Chander

25 paise in a rupee.

4. In the deed of partnership dated December 1, 1966, Clause 4 is the only relevant Clause on which most of the controversy hinges, This clause is reproduced below:

'That the partners shall neither be entitled to any interest on their capital nor to any salaries for the services rendered to the firm, but shall be entitled to profits and be liable for losses in the following proportions:

1.

Sh. Des Raj

40 paise in a rupee

2.

Sh. Yog Raj

35 paise in a rupee

3.

Subhash Chander

25 paise in a rupee :

Provided that for the year ending on March 31, 1967, Subhash Chander shall be entitled to profits only out of 7/12ths profits of the year ; to the other 5/12ths the old partners shall be entitled in their specified shares in the old deed dated December 1, 1964.'

5. Before this deed of partnership was executed, Rajinder Kumar had executed the following receipt on September 18, 1966, which was given effect to in the books on April 19, 1968. This receipt is in the following terms :

'I, Sh. Rajinder Kumar, son of Sh. Des Raj, son of Lakhpat Rai, Caste Arora Chawala, am resident of Ferozepur City. Whereas I am a member of the Hindu undivided family of Des Raj, son of Lakhpat Rai, resident of Ferozepur. I am a partner with my father, Sh. Des Raj, under the deed of partnership dated 1-12-1964. I have, this day, with my own consent, severed my connections with my father, Sh. Des Raj, .concerning my share in the shop. I have on this date received a sum of Rs. 2,500, half of which is Rs. 1,250 of my share from my father, Sh. Des Raj. Now, I have no concern with my share in the shop named as Lakhpat Rai Des Raj. Hereafter, I shall have no connection with the movable and immovable property of my father, Sh. Des Raj. I have also received share of ornaments. Hereafter, I have no concern with the property of L. Des Raj. From today the Hindu undivided family of myself and L. Des Raj has ceased to exist. Accordingly, I am writing this as a memoranda.'

6. An application in Form No. 11A, dated March 28, 1967, for registration of the firm was moved on March 29, 1967, under Section 184 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). After the application had been made, the Income-tax Officer drew the attention of the assessee to the unequal division of the profits. This led to the filing of a revised return by the assessee for the assessment year 1967-68. This return was filed on February 26, 1969. The assessee also produced his books of account to prove that the mistake in the apportionment of profits had been rectified on February 21, 1969. In spite of this, the Income-tax Officer took the view that the profits had not been allocated amongst the partners in accordance with the partnership deed. He further held that Clause 4 of the deed of partnership dated December 1, 1966, was vague and, therefore, the firm was not entitled to registration. As a corollary, a further finding was recorded that the firm was not genuine vis-a-vis the year under consideration. The assessee was, therefore, assigned the status of an association of persons.

7. The assessee was aggrieved by the order of the Income-tax Officer and preferred an appeal to the Appellate Assistant Commissioner and the Appellate Assistant Commissioner, after summing up his finding, held that no genuine partnership existed during the previous year. The result was that the order of the Income-tax Officer, refusing registration, was upheld. The assessee then filed a second appeal to the Income-tax Appellate Tribunal. The Tribunal in its judgment, remarkable for its rambling, came to the conclusion that the distribution of profits was not in accordance with the deed of partnership and, on that ground alone, refused registration. From the order of the Tribunal it appears that it was not satisfied with the correctness of the finding of the Appellate Assistant Commissioner or the Income-tax Officer as to the non-genuineness of the firm. However, it expressed no firm opinion thereon and left the question open. Therefore, if the revenue can justify that in law, the conclusion arrived at by the Tribunal that the profits were unequally distributed is correct, the order of the Tribunal dismissing the appeal would be in order. However, we find that that it is not so. In our opinion, the legal import of Clause 4 was not in any way vague. We find no vagueness in it. If properly read and understood, the charge that it is vague appears to be too far-fetched. The only substantial objections that were raised to it by the Tribunal were that:

(a) the profits which fell to the share of one of the partners, namely, Shri Subhash Chander, were not to be utilised by him solely as part of those profits was to go to the partners of the firm under the first partnership deed; and

(b) that the rectification by the assessee, before the registration was refused, cannot be taken notice of in view of the decision of this court in Commissioner of Income-tax v. Ram Saran Inder Singh (Income Tax Reference No. 4 of 1971, decided on July 22, 1971) . To say the least, this decision has no application to the facts of the present case. The Tribunal was in error in thinking that this decision even remotely touched the controversy before it. We have been at pains to ask Mr. Awasthy, learned counsel for the department, with regard to (a) to tell us how the division of profits in accordance with the deed of partnership would be bad if one of the partners suffers his share of profits being shared with others. The fact still remains that the profits are distributed strictly in accordance with the deed of partnership. It is the share of one of them that is further distributed. That does not mean that within the partners the distribution of profits is unequal. The only provision to which Mr, Awasthy, learned counsel for the department, drew our attention is Section 37 of the Partnership Act. This provision visualises a totally different contingency and has no bearing on the question before us. Therefore, the Tribunal was in error in holding that the division of profits was not in accordance with the partnership deed. But that does not solve the problem. The matter as to the genuineness of the firm was to be considered keeping in view the overall picture of the dealings between the partners. That matter the Tribunal left open and it is not possible for us to finally give any answer to the questions referred to us without proper decision of that matter. In this behalf we may draw the attention of the Tribunal to our observations in Commissioner of Income-tax v. Hindustan Milk Food . (Income-tax Reference No. 21 of 1966 decided on May 3, 1971) , wherein it was observed as follows: 'In the present case, material facts have not been determined and noticed in the statement of the case so as to enable us to determine the question satisfactorily. We, therefore, remit this part of the case to the Tribunal to find proper facts in the light of the Supreme Court decision in Cochin Company v. Commissioner of Income-tax [1968] 68 ITR 199 and submit a supplementary statement of facts to us.'

8. We may also draw the attention of the Tribunal to our decision in Commissioner of Income-tax v. Shahzada Nand and Sons (Income-tax Reference No. 33 of 1971, decided on January 18, 1972) , wherein it was observed :

'When the matter was posted before us for decision, it transpired from the statement of the case that the Tribunal while dealing with the appeal of the assessee did not decide the question, though raised before it, that the share of profits of the trust had been paid to it in accordance with the partnership deed. Without a decision on this question by the Tribunal, it is not possible for us to answer the question referred. The only course, therefore, open to us is to send back the case to the Tribunal for a finding on this question. The course we have adopted is justified by the decision of the Supreme Court in Commissioner of Income-tax v. Gurbux Rai Harbux Rai : [1971]81ITR476(SC) . We, therefore, ask the Tribunal to decide the question whether the division of profits, so far as the trust is concerned, was in accordance with the partnership deed and thereafter submit a better statement of the case to this court so that the question of law that has been referred to us can be properly answered.'

9. These observations fully apply to the facts of the present case. We accordingly direct the Tribunal to submit a supplementary statement of the case in view of the above observations. However, nothing in this order will affect the revenue's right to make submissions on the question of genuineness or otherwise of the partnership.


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