1. Both the above cases are disposed of by one single order as they arise out of the same order of the Income-tax Appellate Tribunal dated September 22,1973.
2. Brief facts as set out in the statement of the case are that M/s. Narnauli Jewel Corporation, Jaipur (hereinafter referred to as 'the assessee'), filed its return of income in respect of the assessment year 1968-69 declaring its status as a firm on July 2, 1968. According to the partnership deed which was filed along with the application for registration under section 185 of the Income-tax Act, 1961, the firm was constituted on November 14, 1967. The following persons were declared in the said deed as partners :
(i) Smt Gyan Devi--Mother--share 30%
(ii) BalKrishanAgrawal--Son--share 35%
(iii) Chandra Mohan--Son--share 35%
3. The aforesaid partnership deed was registered with the Registrar of Firms on December 2, 1967, and an account of the firm was opened with the Bank of Baroda, M.I. Road, Jaipur, on November 23, 1967. All the three partners were authorised to operate the said bank account. Smt. Gyan Devi, mother of the other two partners, had brought in as per the books of the firm, a capital ofRs. 22,631. She remained a partner in the firm up to March 31, 1970. Capital in her account in the books of the firm in respect of previous years ended on March 31, 1968, March 31, 1969, and on March 31, 1970, showed no withdrawals meant to cover her household expenses. Withdrawals were, however, made to make a gift of Rs. 9,950 to her son, Shri Kaushal Kishore, and another sum of Rs. 10,000 was similarly gifted. The income-tax payable on her share was also debited to her capital account. The credit balance in the capital account of Smt. Gyan Devi when she left the assessee firm on March 31, 1970, was Rs. 33,425. This credit balance in her account continued in the books of the firm for some time and interest was credited thereon. Ultimately, the entire credit balance was withdrawn and such withdrawals were invested in the purchase of a plot of land.
4. The assessee-firm submitted on application to the Income-tax Officer in Form No. 11 on December 26, 1967, for granting registration under Section 184 of the Act. The application was accompanied by the original partnership deed and was found technically complete in all respects.
5. During the course of assessment proceedings, the Income-tax Officer wanted to ascertain the genuineness of the firm. In the course of his inquiry in this regard, he directed an Inspector to contact Smt Gyan Devi and to elicit from her the information with regard to her being a partner in the said firm. The Inspector contacted Smt. Gyan Devi and recorded her statement on August 24, 1971.
6. The Income-tax Officer found the aforesaid statement of Gyan Devi as unsatisfactory. As such, he wrote a letter to the assessee on October 27, 1971, wherein he indicated that the personal attendance of Smt. Gyan Devi, partner, was very necessary for verification of the genuineness of the firm. The Income-tax Officer pointed out in the letter that 'Inspector, who was sent to contact the above lady has reported that the lady had not replied to his queries properly'. The Income-tax Officer, therefore, required the firm to produce Smt. Gyan Devi in his office on November 17, 1971. It was also mentioned at the end of the letter that if the lady was not produced on the date, it would be presumed that she was not a genuine partner and the claim for registration will be liable to be refused. In response to the aforesaid letter, an application for adjournment was moved on the ground that all the partners were busy with the marriage of one of their partners which was to be held on November 21, 1971. The Income-tax Officer acceded to the request of the assessee and fixed December 6, 1971, for examination of Smt. Gyan Devi. On this date, the representative of the assessee appeared before the Income-tax Officer and informed that it was not possible to produce the lady in the office. No reasons for the aforesaid stand was given to the Income-tax Officer. The Income-tax Officer in these circumstances came to the conclusion that the assessee has deliberately withheld the production ofSmt. Gyan Devi, partner, before him. He, therefore, drew an adverse inference and refused registration to the firm treating it as not genuine because, in his opinion, Smt Gyan Devi did not appear to be a genuine partner. After refusing registration to the firm, he accorded the assessee the status of association of persons and completed the assessment in that status.
7. The assessee, aggrieved against the order of the Income-tax Officer, filed an appeal before the Appellate Assistant Commissioner. The assessee took the plea before Appellate Assistant Commissioner that Smt. Gyan Devi, whose statement was recorded on oath on August 24, 1971, was mentally ill and as such could not give proper answer to the Inspector and such fact was also made known to the Inspector at the time of recording the statement of Smt. Gyan Devi, It was further pleaded that Smt, Gyan Devi could not be produced before the Income-tax Officer as she was mentally ill. The assessee also filed a certificate of a vaidya and an affidavit of the husband of Smt. Gyan Devi before the Appellate Assistant Commissioner on April 7, 1972. The Appellate Assistant Commissioner discarded the above submissions of the assessee and also placed no reliance on the certificate of the vaidya as he found discrepancy in the dates in the certificate. It was pointed out that this certificate was dated August 20, 1971, and yet it was certified that the lady was under the treatment of the vaidya with effect from August 10, 1972. The Appellate Assistant Commissioner thus dismissed the appeal by his order dated April 14, 1972.
8. The assessee then filed an appeal before the Tribunal and raised several contentions regarding the genuineness of the firm as mentioned in para 10 of the statement of the case. Contentions were also raised that there was no legal basis for the examination of Smt. Gyan Devi by the Inspector. Such statement recorded by the Inspector had no evidentiary value. It was also argued on behalf of the assessee that the partners of the firm had already been assessed on their share of income from the firm and as such with regard to firm's income, the appellant, i.e., the assessee-firm, could not have been assessed in the status of an association of persons. The Tribunal did not find favour with the arguments of the assessee and dismissed the appeal by order dated September 22, 1973.
9. The assessee then moved an application to refer the following six questions for the opinion of this court:
'1. Whether, on the facts and in the circumstances of the case, the learned Tribunal was correct in holding that Smt. Gyan Devi was not a partner in the appellant firm and no firm came into being as a result of deed dated 14th November, 1967 ?
2. Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in refusing to grant registration and according status of association of persons to the appellant firm?
3. Whether the learned Tribunal had material and evidence on record to hold that Smt Gyan Devi did not consent under Section 13 of the Contract Act to become a partner and the appellant firm did not exist under Section 6 of the Indian Partnership Act ?
4. Whether in view of the individual assessment of Smt. Gyan Devi, S. V. S. Chandra Mohan and Bal Krishan, the learned Tribunal was correct in holding that the appellant could be subsequently assessed as association of persons ?
5. Whether there was any evidence on the basis of which the learned Tribunal could record the finding that Smt. Gyan Devi was not a partner and the partnership evidenced by the deed dated November 14, 1967, did not exist and was not genuine ?
6. Whether the learned Tribunal was correct in law in considering and basing their decision on the statements recorded by the Inspector ?'
10. The Tribunal declined to refer questions Nos. 1, 2, 3 and 5 as being not questions of law and were pure questions of fact. As regards question No. 6, the Tribunal held that the same was purely academic because it had already been concluded by their Lordships of the Supreme Court in the case of Dhakeshwari Cotton Mills Ltd. v. CIT  26 ITR 775. The Tribunal thus found that only the following question of law arose out of the order of the Tribunal which, in their opinion, was proper to be referred to this court:
'(1) Whether, on the facts and in the circumstances of this case, the Tribunal was right in holding that the appellant could be assessed as an association of persons notwithstanding the assessment of the members of the association of persons earlier than the assessment of association of persons.'
11. The Tribunal, therefore, referred only one question as mentioned above which is the subject-matter of Income-tax Reference No. 26 of 1974. The assessee has filed an application under Section 256(2) of the Income-tax Act for giving a direction to the Tribunal to state the case and refer the remaining five questions also and that is the subject-matter of Income-tax Case No. 172 of 1974.
12. In our view, the Tribunal has already sent the statement of the case in Income-tax Reference Case No. 26 of 1974 and all the relevant annexures A to J have also been annexed with the statement of the case with respect to one question, and learned counsel for the assessee and the Department submitted that no further statement of the case would be needed in deciding other questions also in Case No. 172 of 1974 which, in the opinion of this court, would be questions of law arising out of the order of the Tribunal dated September 22, 1973. In our view, apart from the question of law sent by the Tribunal for our opinion, one more question arises in the following manner :
'Whether, on the facts and in the circumstances of the case, the learnedTribunal was correct in holding that Smt. Gyan Devi was not a partner in theassessee firm and no firm came into being as a result of partnership deed datedNovember 14, 1967 ?' '
13. As there is already the statement of the case available to us for deciding the above question also, we would now decide the above two questions, viz., one referred by the Tribunal and the other as framed by us.
14. It was contended by Mr. Ranka, learned counsel for the assessee, that the assessee firm had submitted a partnership deed executed in writing and in which the shares of all the three piiiners had been shown separately. The aforesaid partnership deed was duly registered with the Registrar of Firms on December 2, 1967. An account was opened with the Bank of Baroda, M.I. Road, Jaipur, in the name of the firm on November 23, 1967, and all the three partners including Smt. Gyan Devi were authorised to operate the said bank account. Bank's certificate, certifying the above position, has been filed, vide annexure 'C'. Annexure 'D' shows a separate account of Smt. Gyan Devi in the books of the assessee-firm for the assessment years 1968-69 to 1971-72. According to the said account, during the period of assessment year 1968-69, Smt. Gyan Devi had invested Rs. 4,255 on November 3, 1967, Rs. 15,145 on November 21, 1967, and Rs. 5,261 on February 1, 1968, in the partnership firm. Not only that, Rs. 717 were allowed to her by way of interest and Rs. 5,782 by way of profit towards her share in the partnership. Similarly for the assessment year 1969-70, her account was credited with interest amounting to Rs. 1,769 and towards her share of profit also an amount of Rs. 8,085 has been credited. Similarly interest and share of profit have been credited in her account for the assessment year 1970-71 in the books of account of the assessee-firm. It is submitted that there was no reason whatsoever to doubt the genuineness of the partnership deed and the books of account and there was no occasion whatsoever for recording the oral statement of Smt. Gyan Devi on August 24, 1971. It was further submitted that in any case according to the admitted case of the assessee, Smt. Gyan Devi had remained a partner in the firm only up to March 31, 1970. Her statement was recorded by the inspector on August 24, 1971, thus admittedly after she had ceased to remain a partner in the firm. Annexure 'E'--statement of Smt. Gyan Devi dated August 24, 1971, shows that the first question put to her was in the following manner :
Question : 1 In how many firms are you a partner If so, please let me know the names?
To this Smt. Gyan Devi answered as follows :
Answer: 1 I am partner only in one firm but do not know the name.
The second question put to her was :
Question : 2 When you became partner How much amount you haveinvested therein and source of investment
To this Smt. Gyan Devi answered in the following manner :
Answer; 2 A year ago I became partner. I did not know the money invested by me and source thereof.
The third and last question put to Smt. Gyan Devi was in the followingterm :
Question: 3 Do you know the activity of the firm and bank account,etc. ?
To this the answer given by Smt. Gyan Devi was :
Answer: 3 I do not know or remember anything as I am mentally not well.
15. Mr. Ranka thus submitted that, firstly, Smt. Gyan Devi was mentally ill as she had clearly stated that she neither knew nor remembered anything as she was not mentally well and further no question regarding her partnership in the assessee-firm, i.e., M/s. Narnauli Jewel Corporation, was specifically put to Smt. Gyan Devi. She had admittedly ceased to be a partner in the said firm after March 31, 1970, and no adverse inference at all should have been drawn against her if the above kind of statement was given by her on August 24, 1971. It is further submitted that though it was not specifically submitted before the Income-tax Officer that Smt. Gyan Devi could not be produced on account of her mental illness but the representative of the assessee firm had submitted before the Income-tax Officer that Smt. Gyan Devi was unable to be produced before him. Thereafter, a certificate of a vaidya, dated August 20, 1971, was filed before the Appellate Assistant Commissioner and due to clerical mistake only the date of August 10, 1971, had crept in as August 10, 1972, in the certificate. The affidavit of the husband of Smt. Gyan Devi stating that she was suffering from mental disease with effect from first week of August, 1971, was also filed before the Appellate Assistant Commissioner and there was nothing on record to rebut the aforesaid facts and as such there was no valid reason for not accepting the above contentions made on behalf of the assessee.
16. Mr. Ranka further submitted that the Income-tax Officer, Central Circle I, Jaipur, made an order under Section 185 of the Act on November 19, 1975, granting registration to the assessee-firm for the assessment year 1970-71 and the assessment was also made on July 29, 1976, taking the status of the assessee as registered firm. The (renewal of) registration has also been allowed for the succeeding years. The statement of Smt Gyan Devi dated November 13, 1975, recorded by the Income-tax Officer, Central Circle I, Jaipur, has also been placed on record of this court and her statement has been relied upon for thepurpose of granting registration to the firm for the assessment year 1970-71. The Income-tax Officer, 'B' Ward, Jaipur, also granted registration for the assessment year 1971-72 and in his order dated December 24, 1973, placed reliance on the partnership deed and the book profit distributed according to the partnership deed. It was held that the firm appeared to be genuinely constituted. Mr. Ranka placed reliance on Subhash Medical Stores v. CIT . A Bench of this court in the above tase observed as under (p. 497) ;
'In order to claim registration under the Income-tax Act, what is required to be established is that the legal requirements of partnership are fulfilled. From the principles enunciated in the above referred cases, it is clear that the inter se relations of the partners and all of them not being concerned with the control and management of the business, are not the circumstances coming in the way of registration of the partnership under the Income-tax Act.'
17. It was held that there was no satisfactory material before the Tribunal to come to the conclusion that the partnership firm constituted by the deed dated July 1, 1959, was not genuine.
18. Mr. Surolia, learned counsel for the Department, on the other hand, submitted that Smt. Gyan Devi was unable to state that she was a partner in the assessee-firm and did not come forward to give her statement before the Income-tax Officer to prove that she was a consenting party in the constitution of the firm on November 14, 1967, and the finding that. Smt. Gyan Devi was not a partner and no genuine partnership came to be constituted on November 14, 1967, was purely a question of fact.
19. We have given our careful consideration to the entire facts and circumstances of the case and the material placed on record. We are clearly of the view that as Smt. Gyan Devi had separated from the partnership on March 31, 1970, and her statement was recorded by the Inspector on August 24, 1971, and in the manner in which the questions were put to her, no adverse inference at all could be drawn from the answers given by her. In all, three questions were put to her and she had clearly answered the third question that she did not remember anything as she was not mentally well. Even if it may be considered that the certificate of a vaidya was obtained subsequently, the fact remains that even before the Inspector, Smt. Gyan Devi had stated that she was not mentally well. That apart, we fail to understand as to why the partnership deed reduced to writing and the firm having been registered before the Registrar of firms as early as on December 2, 1967, and the accounts of the firm clearly showing that the share of profit of Smt. Gyan Devi was credited to her account should be disbelieved. Strangely enough, the same partnership deed and the accounts maintained by the firm have been believed for granting registration underSection 185 of the Act for subsequent years of assessment. We are in agreement with the view taken in Subhash Medical Stores' case wherein it was observed as under (p. 499) :
'The Tribunal attached much importance to the fact that the two ladies had limited education and they had little or no knowledge about the business carried on by the firm. These factors should not come in the way of the partners claiming registration, because there is nothing illegal in getting the business conducted through some person employed by the partners or someone authorised by them. The income-tax authorities should not have misconstrued the provisions of the partnership deed upon irrelevant considerations. Correct it is that mere registration of a firm under the Partnership Act will not entitle the firm, as of right, to be registered under Section 185 of the Income-tax Act, 1961, because the question of tax is involved. The income-tax authorities are of course expected to take into consideration the facts and circumstances of a given case to find out whether in the garb of a sham transaction, the assessee was avoiding liability to tax. However, if from the circumstances taken as a whole, it can be deduced that it is not an unlawful attempt to avoid payment of tax and at the most, it may be a legal device to reduce tax liability, there is no justification for rejecting the request for registration under the Income-tax Act.'
20. Thus, we are clearly of the view that in the facts and circumstances of this case, the learned Tribunal had no material and was not correct in holding that Smt Gyan Devi was not a partner in the appellant firm and no firm came into being as a result of partnership deed dated November 14, 1967. The answer to the above question is thus given in the negative and against the Department.
21. Now taking the question referred to us by the Tribunal, it may be mentioned at the outset that it is an admitted case that all the three partners had already been assessed individually taking into consideration the profits earned by them in the assessee-firm, i.e., M/s. Narnauli Jewel Corporation. The question of assessing the firm arose subsequently and it is contended by the learned counsel for the assessee that once the partners of the firm having already been assessed, the firm's income cannot be assessed treating the assessee-firm as association of persons. Mr. Ranka placed reliance on the basic authority of the Supreme Court- in CIT v. Murlidhar Jhawar and Puma Ginning and Pressing Factory : 60ITR95(SC) . Fie further submitted that after the above decision, almost all the High Courts in India have followed and interpreted the above case of the Supreme Court and have taken the view that once the partners of a firm having been assessed individually, the firm cannot be assessed as association of persons or as unregistered firm. Reliance in this regard was placed on CIT v. Blue Mountain Engineering Corporation : 112ITR839(Mad) CIT v. R. Dhandayutham : 113ITR602(Mad) Ramanlal Madanlal v. CIT  116 ITR 657 Oh. Atchaiah v. 1TO : 116ITR675(AP) Laxmichand Hirjibhai v. CIT  128 ITR 747 Universal Commercial Company v. CIT : 130ITR775(Mad) and CIT v. V. H. Sheth : 148ITR169(Bom) .
22. The above view has been followed by the High Courts of Andhra Pradesh, Bombay, Calcutta, Gujarat and Madras. Mr. Surolia, learned counsel for the Department, in view of the weighty decisions of all the High Courts in India had nothing to say contrary to the above view. In view of these circumstances, we also hold that once the assessment of a partner or a member of an association having been made by taxing directly his proportionate share from the firm or association, the Income-tax Officer is precluded from assessing the firm in the status of an unregistered firm or association of persons.
23. In the result, the question referred to us in Income-tax Reference No. 26 of 1974 is answered in the negative and against the Department. In the facts and circumstances of this case, the parties shall bear their own costs.