B. S. Dhillon, J. - Two persons, i.e. Shri Om Parkash and Shri Bidhi Chand, entered into an agreement dt. 1-4-1970, purported to create a partnership. The said partnership firm applied to the ITO for its registration for the assessment year commencing on 1-4-1971. The registration was refused by the ITO on the ground that in his opinion no genuine sub-partnership came into existence. The firms appeal before the AAC failed. In second appeal, the Tribunal held that the loss purported to be set off by the firm against its profits from business had been incurred by Om Prakash only in a sole proprietary business but that should only result in not allowing the set off in the firms assessment. The Tribunal also held that the finding of the AAC that subpartnership was not created out of commercial expediency, is also not relevant. The Tribunal observed that in the deed of sub-partnership, the element of agency, a necessary ingredient of partnership was found to be missing. But as the lower authorities had not doubted that the sub-partnership in question constituted a firm as such, the Tribunal held that sub-partnership was a genuine one, therefore, the firm was entitled to get registration.
2. Following question of law has been referred to this Court at the instance of the Revenue for its opinion :
'Whether on the facts and in the circumstances of the case, the IT Appl. Tribunal was right in law in holding that the assessee was entitled to registration for the asst. yr. 1971-72 ?'
3. The sole contention raised by Shri Awasthy, the learned counsel for the Revenue, is based on the observation made by the Tribunal in para 7 of the order. It has been contended that when the Tribunal came to the conclusion that in the sub-partnership in question, there was no element of agency and that the same was not better than the association of persons, the Tribunal should have refused registration on this finding. It has been contended that the Tribunal erred in observing that since this fact was not found by the ITO, therefore, it was not open at that stage to the Tribunal to hold that sub-partnership under consideration was not a firm but merely an association of persons.
4. After hearing the ld. counsel for the parties, we are of the opinion that there is no merit in the contentions raised by the ld. counsel for the Revenue. If the registration is refused to the firm whether the said firm should be assessed as unregistered firm or an association of persons, is essentially a basic question which had not been gone into either by the ITO or by the AAC. The Tribunal at that stage, without there being proper material or an opportunity to the parties to represent their view point in this regard, held that the sub-partnership in question was not a firm but an association of persons. There is merit in the contention of the ld. counsel for the assessee that this argument was never raised by the Revenue before the Tribunal and the assessee was not given any opportunity to meet this aspect of the case. It is clear from the order itself that the Tribunal suo motu went into this question and made the above mentioned observations. The question that if the firm is not registered, whether the firm be assessed as unregistered firm or an association of persons, was never before the ITO or before the AAC and this question could not be finally determined by the Tribunal at that stage of the appeal. Therefore, the observations made by the Tribunal in this regard cannot be successfully assailed.
5. The ld. counsel for the Revenue next contended relying on a decision of their Lordships of the Supreme Court in Addl. CIT, Gujarat v. Gurjargravures P. Ltd. (1978) 11 ITR 1 that the assessee should have got a cross-question referred to this Court challenging the finding of the Tribunal that there was no element of agency in the sub-partnership. This contention is again without any merit. The Tribunal after making the observations referred to above, itself recorded a finding that it was not open to the Tribunal at that stage to hold that sub-partnership under consideration was not a firm but merely an association of persons. The assessee can legitimately contend before us that the question of law referred to this Court be answered in the affirmative, i.e., in favour of the assessee and against the Revenue. It is in this context that the argument of the assessee becomes relevant. The authority relied upon by the ld. counsel for the Revenue in Gurjargravuress case (supra), is not of much held to him.
6. No other argument has been raised.
7. For the reasons recorded above, the question of law referred to this Court for our opinion is answered in the affirmative, i.e. in favour of the assessee and against the Revenue with costs.