1. The Income-tax Appellate Tribunal, Delhi Bench '4', has referred thefollowing three questions of law for our opinion under Section 66(1) of theIndian Income-tax Act, 1922:
'(1) Whether, on the facts and in the circumstances of the case, and on a true construction of the instrument of partnership dated 1st April, 1960, a valid partnership came into existence ?
(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to registration under Section 26A of the Indian Income-tax Act, 1922, read with Rule 6 of the Income-tax Rules, 1922 ?
(3) Whether, on the facts and in the circumstances of the case and in view of the fact that the parties of the second part have been found to be benamidars of the parties of the first part, the assessee-firm is entitled to the grant of registration ?'
2. The assessee claims to be a partnership firm. The assessment year in question is 1961-62. Pal Singh and Sadhu Singh were carrying on business in radio and radio parts under the name and style of S.P. Gramophone Company in partnership prior to April 1, 1960. In this partnership their shares were equal. On April 1, 1960, there was a change in the constitution of the partnership. A fresh deed was executed and besides the original two partners, four other persons, namely, Gulzar Singh, Surjit Singh, Hari Singh and Harbans Singh, were taken in as partners. The shares of Pal Singh and Sadhu Singh were equal, being 25 per cent. each. Those of the remaining four were also equal, being 12 1/2 per cent. each. The new partners were not to make any capital contribution but were to share the profits and losses according to their respective shares. In the account books, there were only accounts of three of the partners. There is no material from which it can be concluded that the profits and losses of the partners were divided or separately shown in the account books. However, a profit and loss account was drawn up on a loose sheet of paper and filed before the Income-tax Officer during the course of the assessment proceedings. It clearly indicated that the net profit was Rs. 2,26,167.24. This showed entries to the credit of all the partners but while the credits in the case of three of the partners -- Sadhu Singh, Pal Singh and Hari Singh -- were indicated as representing the respective shares of the profits of the year, there was no indication as to the nature of the credit in the cases of Harbans Singh, Surjit Singh and Gulzar Singh. Even this loose paper was not signed by any of the partners, but in the following accounting year ending on March 31, 1962, individual accounts in the names of all the six partners had been opened in the books of account. Therein each of the partners is credited with his individual balance. The balances have been carried forward from the accounts of the year ending on March 31, 1961, but these account books have not been made part of the case,
3. The said firm applied for registration for the assessment year 1961-62 under Section 26A of the Act. The application is dated 15th of September, 1960. The application was accompanied by the deed of partnership. The Income-tax Officer, however, rejected the assessee's application for registration because he was of the opinion that there was no valid firm in existence, and its constitution was not genuine. He was also of the view that the terms of the partnership deed had not been complied with and the rules relating to the application for registration were breached. Dissatisfied with this order, the assessee moved the Appellate Assistant Commissioner in appeal and the Appellate Assistant Commissioner affirmed the decision of the Income-tax Officer. While dealing with the contention of the assessee that the firm was a genuine partnership firm, the Appellate Assistant Commissioner observed as follows :
'Considering the circumstances, the provisions of the deed, the close relationship of the alleged partners, pre-existing relationship of master and servant and total ignorance of the alleged partners of the affairs of the firm, the Income-tax Officer has rightly held that the partners of the second part are only dummies. They are mere benamidars for the parties of the first part. The parties of the first part have retained their respective shares, 50% by introducing two dummies each and allocating to them 12 1/2% profit each erased nut of their own original 50% share. The share retained by Sarvshri Sadhu Singh and Pal Singh together with their benamidars is the same as before the change. The various clauses of the deed have been discussed earlier which lead to the inescapable inference that in the eye of law no valid and genuine partnership has been created by the deed dated 1st April, 1960. Shri Had Singh in his statement recorded by the Income-tax Officer on November 20, 1965, stated that he was not aware of the profit of the firm in 1960-61, 1961-62 and 1962-63 accounting years. He categorically stated that profit and loss account was prepared in the books of account for 1960-61 accounting year and added that he inspected the profit and loss account and balance-sheet in the books. He even stated that they used to get the signatures on the balance-sheets in the ledger books. The statement is obviously false because, admittedly, there is no such profit and loss account and balance-sheet. The following question is indeed revealing :
'Question : Were they (Pal Singh and Sadhu Singh) consulted by all the partners before writing the deed that they intend to make all other four as partners ?
Answer: No; they simply called all of us (four new partners, Hari Singh, Surjit Singh, Harbans Singh, Gulzar Singh), and asked us to sign the deed. We signed it and then they told us that they have been made as partners.'
4. Shri Harbans Singh in his statement recorded on December 6, 1965, stated that he used to do the works of paint. He could not tell how many factories the firm was running. He even did not remember the factory in which he used to work though he stated that no witnesses were called when the deed was signed which obviously is a false statement.
5. Shri Surjit Singh's statement was also recorded by the Income-tax Officer on November 18, 1965. He did not know even approximately the profit received by him in the first year of the existence of the firm. He did not even know whether the profit had been withdrawn by him. He stated that his share in the firm was 0-2-0 annas in the case of profit and no share of loss in his case. He stated that he was a working partner and that was the reason for not sharing the losses. Ignorance of even the share profit or loss ratio speaks volumes against the appellant's contention that the firm was genuinely constituted of six partners. He did not know how much profit was actually divided amongst the partners in 1960-61. It is significant that he did not know where the branches of the firm were functioning. He did not know the total production during 1960-61. He did not even know the number of factories run by the firm at Jullundur though he stated that he was in charge of factory No. 1. He did not know which of the partners were drawing salary or interest though he added 'probably Hari Singh was drawing the salary'. It is pertinent to note that Shri Surjit Singh passed Intermediate in September, . 1960, B. A. in September, 1963, and LL.B. in 1965. He joined law college in September, 1963. He was a student of Intermediate class when the alleged partnership was constituted on April 1, 1960. The following question and answer clearly show that he signed the deed mechanically without knowing, reading and much less understanding the implications thereto :
How do you know that losses are not to be shared Answer :
When I was student of law, we were taught that the losses should never be shared and I took that notion. I never read the deed.'
6. Shri Gulzar Singh has also a similar story to tell when his statement was recorded by the Income-tax Officer on November 24, 1965. He stated firmly that he did not know when the deed was executed. He was in the village and he was called from the village. He came to Jullundur and went to the office of Messrs. S. P. Gramophone Company on April 1, 1960, (added by way of afterthought that he came of his own accord). He did not know who read the deed. He was not aware of the deed. He did not know as to who were the witnesses. In fact he frankly admitted ' I do not know anything'. When asked what was his share in profit and loss he stated '2 annas in the case of profit and in case of loss, I do not know and also do not remember'. He did not know the profits of the firm in 1960-61 and his own share therein. Similarly, he had no knowledge of the extent of profit and his share in 1961-62 and 1962-63. He stated that he was in charge of a factory but did not know the amount of sales effected by the firm. He could not even tell the production of the spare parts in the factory of which he was in charge.
7. It is also important to note that the alleged partners of the second part have not withdrawn any sum from the account books except the salary by Sarvshri Hari Singh and Harbans Singh. Equally significant is the circumstance that the banks from whom overdraft has been taken have not been informed of the reconstitution of the partnership on April 1, 1960. Taking all these facts together and the peculiar terms and conditions contained in the deed unmistakably show that the partners of the second part are not real partners but were dummies and the deed is only a cloak to secure registration and thereby reducing the incidence of taxation suffered by the appellant and Sarvshri Pal Singh and Sadhu Singh. No genuine firm as specified in the instrument of partnership, therefore, came into existence.
8. On the question of the breach of rules, the Appellate Assistant Commissioner observed as follows ;
'The profits of the business relating to the accounting year ended 31st March, 1961, had not been divided or credited in the individual personal accounts of the alleged partners in their profit sharing ratio as specified in the instrument of partnership. No profit or loss account or balance-sheet has been drawn up in the books of accounts. Even the personal accounts of Sarvshri. Harbans Singh, Gulzar Singh and Surjit Singh do not appear in the books of account of the appellant during the relevant accounting period. The profit and loss account drawn up on a loose sheet and annexed with the return of income does not show any distribution or allocation of net profit amongst the partners. The closing entry in the profit and loss account reads 'Net profit Rs. 2,26,157'34.' The balance-sheet as on January 31, 1961, drawn up oh a loose sheet and enclosed with the return of income, inter alia, shows the following entries on the liabilities side:
'S. SadhuSingh capital
2. S. Pal Singhcapital
3. S. Hari Singh
4. S. Harbaris Singh
5. S. Surjeet Singh
6. S. Gulzar Singh
Neither the profit and loss account nor the balance-sheet annexed with the return is signed by any of the partners. Nor has any such profit and loss account and balance-sheet duly approved and signed by all the alleged partners been produced at any stage of the proceedings .... There is no other evidence of actual division of profits amongst the alleged partners. There is no evidence even of the profit being credited to a reserve account showing the allocation thereof, in accordance with the shares specified in the instrument of partnership.
On these facts the Income-tax Officer has rightly held that the requirements of Rule 8 of the Income-tax Rules, 1922, regarding the certificate that the profits or losses were/will be divided or credited has not been satisfied in this case.'
9. It is significant that the Appellate Assistant Commissioner did not refuse registration merely on the ground that the partnership consisted of some persons who were merely benamidars for the real partners.
10. The assessee being dissatisfied with the order of the Appellate Assistant Commissioner filed a further appeal to the Income-tax Tribunal. It appears that the Tribunal was side-tracked in many ways and lost sight of the real question that it had to determine, though in a roundabout manner it did to some extent deal with that question. On the other hand, it went on to deal with the question that some of the partners of the firm were benamidars, and, therefore, that was a good ground to refuse registration. The net result, however, in appeal before the Tribunal was that it met with no success and the order of the Appellate Assistant Commissioner was affirmed.
11. The assessee then moved an application under Section 66(1) of the Income-tax Act and wanted the Tribunal to refer as many as nine questions of law for the opinion of this court. The Tribunal, however, only referred three questions of law which we have set out in the earlier part of this order.
12. It may be mentioned at the very outset that the first question has not been correctly framed. It pre-supposes existence of a partnership, the validity of which has to be determined. The Income-tax Officer and, in appeal, the Appellate Assistant Commissioner held that in fact there was no genuine partnership. In other words, the deed of partnership was a mere paper transaction and did not bring into being a genuine partnership. The old state of affairs prevailing before the partnership deed dated 1st April, 1960, continued and in substance only Pal Singh and Sadhu Singh continued to be partners. We have, therefore, recast the first question. It should be in the following terms :
'Whether, on the facts and in the circumstances of the case and on a true construction of the instrument of partnership dated 1st April, 1960, there is a genuine partnership, and whether the finding that there is no genuine partnership is based on evidence ?'
13. So far as the first question, as reframed is concerned, we have been taken into the evidence on the record and also the terms of the partnership deed, on the basis of which the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal in a circuitous manner came to the conclusion that there was no genuine partnership. There is ample material on the record to justify this finding. It cannot be said that this conclusion is based on no evidence. Mr. Bhandare made an attempt to argue that there was no evidence on which this conclusion is based. We are unable to agree with this contention. In fact, the statements of the so-called partners clinch the matter. In fact, their statements disclose that they were totally oblivious to the fact that they were in fact partners under the partnership deed dated April 1, 1960. This deed has been brought into existence merely to get over the tax burden. The construction of the partnership deed also points towards that conclusion. Mr. Bhandare, while dealing with the partnership deed, dealt with each clause of it as if it was in a water-tight compartment. The partnership deed has to be read as a whole to see whether it in any way militates against the finding at which the departmental authorities and the Tribunal arrived. The best that can be said in favour of Mr. Bhandare was that the document was capable of interpretation which could be consistent with a finding, if it was recorded, that the instrument of partnership brought about a genuine partnership. As already observed, the facts and circumstances of this case and the evidence which was led and has been appraised, leads to the only conclusion that there was no genuine partnership and the various clauses in the partnership deed lend support to that conclusion and do not militate against it.. Thus, there is no escape from the conclusion that the decision that the partnership is not genuine is not open to attack. This is a decision on a question of fact and is binding on us in our advisory jurisdiction. In this view of the matter, the first question, as reframed, has to be answered in favour of the department and against the assessee, i.e., it is to be answered in the negative. There is ample material on the record to justify this finding.
14. Mr. Bhandare then argued that the Tribunal did not give a very clear finding on the question of the genuineness of the partnership. Therefore, a case has been made out for remand. It should go back to the Tribunal to decide that matter clearly. It is significant that this matter was not agitated before the Tribunal when an application under Section 66(1) of the Act was made. We, therefore, see no reason to accede to this request. We have already observed that the Tribunal in a way has dealt with the genuineness of the partnership though in a circuitous manner. However, the fact remains that the Tribunal did not interfere with the decision of the Appellate Assistant Commissioner or cast any doubt thereon that the partnership was not genuine. This contention of Mr. Bhandare, therefore, must fail.
15. So far as the second question is concerned, the contention of Mr. Bhandare is that the unsigned 'balance-sheet is enough compliance with the requirements of the rules. For this contention, the learned counsel relies on Commissioner of Income-tax v. Shantilal Vrajlal & Chandulal Dayalal and Co. : 31ITR903(Bom) and P. P. Kuriakose and P. P. Varghese v. Commissioner of Income-tax : 71ITR109(Ker) . We are unable to agree with this contention. Balance-sheet must have relation to the books of account. It cannot exist in the air. The account books on the basis of which the balance-sheet was prepared have not been produced, nor made a part of the case. The Income-tax Officer in his order dated January 31, 1966, observed :
'It is admitted on oath that there was no credit of the shares in the profits of each partner in the respective accounts nor there was proof that the profits were actually distributed amongst the partners. It is further admitted that no reserve fund was created.'
16. When the account books were examined, the Income-tax Officer detected that:
'The profits of the business relating to the accounting year ended March 31, 1961, had not been divided and credited in the individual personal accounts of the alleged partners in their profit sharing ratio as specified in the instrument of partnership in the books made on March 31, 1961, itself.'
17. Mr. Bhandare, however, contends that it was not necessary for thepartners to do so in the books of account. This may or may not be necessary but the fact still remains that the veracity of the balance-sheet cannotbe judged from any material placed on the record and if that is so, theposition remains where it was. The decision of the Appellate AssistantCommissioner on this matter is very elaborate and we see no reason todiffer from it. The Tribunal has also come to the same conclusion andrightly. The decisions cited by Mr. Bhandare do not help him. They relate to the peculiar facts of those cases and have no bearing on the facts of the present case. It may, however, be mentioned that in those cases the actual state of affairs was traceable to the books of account which is not the case so far as the instant case is concerned.
18. For the reasons recorded above, the second question must be answered in the negative, that is, in favour of the department and against the assessee.
19. So far as the third question is concerned, the answer to it must be given in favour of the assessee. Mr. Bhandare is right in his contention that the Tribunal was wrong in its conclusion that even if some of the partners are benamidars for the others, it would not defeat the application for registration under Section 26A of the Act. Mr. Bhandare went further and urged that there were no benami partners. It is not necessary for us to pronounce an opinion whether there were or were not benami partners but certainly Mr. Bhandare is correct in his submission that if one of the partners is a benamidar of the other, it would not warrant the rejection of the application under Section 26A of the Act. See, in this connection, the decision of the Supreme Court in Commissioner of Income-tax v. Abdul Rahim and Co. : 55ITR651(SC)
20. For the reasons recorded above, the answer to this question is rendered in favour of the assessee and against the department. But it should not be taken from this that we have in any manner come to the conclusion that some of the partners were not benamidars for the others or that the registration was refused merely on the ground that some of the partners were benamidars,
21. We answer the questions referred to us as indicated above. We award costs to the department, which are assessed at Rs. 250.
C.G. SURI J.