(1) Abdul Rahman Rowther was the proprietary owner of a tobacco business. He entered into a partnership with his two married daughters and on that basis sought registration of the firm under S. 26-A of the Income-tax Act. The Income-tax Officer rejected the application holding that the 'partnership deed was a sham document', that there was no genuine firm and that the business continued to be that of Abdul Rahman Rowther alone. On appeal, the Appellate Assistant Commissioner concurred in these findings. He also thoughts that that interest of the two daughters in the firm was created by alleged gifts of Rs. 25,000 to each of them by the father, and that the gifts were not valid as there was no handing over of the cash to the daughters. He was also inclined to hold that the making of a gift of a large part of the assets to only two of his daughters in preference to his several other children was unnatural. He further relied on the fact that on an earlier occasion Abdul Rahman Rowther had also purported to form a partnership, the registration of which had also been rejected. There was a further appeal to the Tribunal, before whom it was contended that the gifts were valid, that the propriety of the gifts by a father to his daughters could not be questioned by the Department, that besides being supported by entries in the books of account, a deed of partnership had also been executed by the parties. The Tribunal however was not prepared to accept these contentions. It held that no fresh capital had been brought into the business, that there was only an artificial division of the capital and that some book entries without anything more by way of collateral evidence were not sufficient to complete the gifts; and the appeal was accordingly rejected.
(2) The assessee applied under S. 66(1) of the Act for a reference to the High Court. His application was dismissed. On his further application under S. 66(2) of the Act, this Court directed the following question to be referred for determination:
'Whether on the facts and in the circumstances of the case, the assessee firm was not entitled to registration under S. 26-A of the Act for the assessment year 1056-57?'
(3) At the outset, we may mention that the refusal to register this same partnership for the earlier year 1955-56, or the fact hat Abdul Rahman Rowther had on a still more previous occasion purported to form a partnership which also was not recognised by the Department are really not matters germane to the question which the Department and the Tribunal had to consider. Indeed, the reference by the Appellate Assistant Commissioner to the last mentioned feature is wholly out of place and suggests some sort of prejudice against the assessee. The questions which had to be considered in the disposal of the application by the assessee are, firstly, whether a genuine partnership did come to exist, and secondly, if the formation of the partnership was preceded by certain other transactions, which were necessary for the formation of the partnership, whether those transactions were true and valid.
Undoubtedly, upon the claim that the petitioner had made gifts to his daughters, which gifts went to form their capital in the partnership, the department was entitled to examine whether the making of the gifts conforms to the law and valid gifts had in fact been made. That is certainly different form questioning the propriety of a father preferring some of his children to the rest. We may mention, for instance, that cases have held that where a joint Hindu family enters into a partition arrangement and pleads for a recognition of the partition under S. 25-A, it has been held that is not open to the Department to question whether the properties have been properly divided among the members. Equally, whether the assessee, a Mohammadan father was justified in giving over a half share in the firm's assets to two of his daughters, though he has other issues, is not a question that should agitate the minds of the Income-tax Authorities, except from the aspect of whether the transaction could be a true one or not. The validity of the transaction as such cannot depend upon that factor but must depend upon the law relating to gifts.
(4) We may also mention that nowhere in the records is there any suggestion that the assessee was possessed of no other properties except the assets of the firm. If the Department chose to attack the genuineness of the transaction on such grounds as the above, the Department should have ascertained whether the assessee was not possessed of other assets. There was no investigation of that kind. It cannot therefore be asserted by the Department that the making of the gifts to two of the married daughters in the instant case was really at the expense of the other members of the family, so that an air of unreality was cast over the whole transaction. We may also observe that it does not appear to have been questioned that the assessee had the legal authority to make the gifts of any description and of any amount to any person as he desired.
(5) According to the assessee, the gifts were occasioned by the fact that he had made a promise to his daughters at the time of their marriage that he would make such gifts. It is true that we have only his statement in that regard. We shall content ourselves with remarking that that is not unusual in Mohammadan families.
(6) On 8-6-1954, the assessee purported to make the gifts by incorporating certain entries in his accounts. On that day, he debited himself to the extent of Rs. 50,000 and credited his two daughters with Rs. 25,000 each. On the following day, that is, 9-6-1954, a partnership deed was executed. It does not also appear to be in dispute that there was in fact a division of the profits of the business in accordance with the terms of the partnership. The question is whether in these circumstances the genuineness of the partnership can be brought into question and the validity of the gifts attacked.
(7) It is no doubt true that in making gifts of moveable property, the law requires the handing over of the subject-matter of the gift to the donee. It must however necessarily depend upon the circumstances of the case whether the actual subject-matter of the gift should be so handed over or anything equivalent thereto, or whether an acknowledgement by the donee that the gift had been received would not suffice to meet the requirements of the law. We are not very much impressed by the argument that there were only book entries. It is not in all cases that the actual cash is required to be handed over. For instance, if a share in a firm of a specified value is gifted over to another person and that person enters into a partnership, it is not the law that the proportionate share of the assets of the firm should be realised and that liquid assets should be handed over in specie to the donee.
In Ratnaswami Nadar and Son v. Commr. Of Income-tax : 46ITR1148(Mad) to which one of us was a party, a similar question arose. There, the assessee, who was the sole proprietor of a concern, debited his personal account with a certain sum and credited each of his sons with various amounts. This was followed by the execution of a partnership deed between the father and his sons. The Income-tax Officer refused registration holding that there was no need of gift and that the credit entries were not sufficient to constitute gifts, among other reasons. It was observed in that case that though the entry as such might not conclusively establish a real and effective gift, and the subsequent acts and conduct of the parties, taken along with such evidence in the books of account, could establish a valid gift. It was pointed out further that the contemporaneous formation of a partnership between the donor and the donees could also be taken into account in determining the validity of the gift, as the gift and the partnership must be deemed to be parts of a scheme of one transaction.
This Court also expressly observed that while the Department had a duty to scrutinise the matter and to satisfy itself that he firm had been genuinely constituted, it was not proper to display undue scepticism in the matter and suspect every partnership as devised to escape tax. In Hajee Abdul Karim and Sons v. Commr., of Income-tax, : AIR1964Mad239 to which also one of us as a party, a Mohammadan partner of a firm desired to make gifts to his wife and children. There was not sufficient cash balance available so that entries were made in the books of the partnership making appropriate debits and credits. From that day onwards, the wife and the children figured as creditors of the firm and was paid by the firm to those persons. The question arose whether such interest was deductible as interest on borrowed capital. The Department disallowed the claim on the ground that there was no valid gift. This Court referred to Mulla's Mohammadan Law in the context and extracted the following passage; at p. 399 (of ITR): (at p. 241 of AIR):
'If a donor does not transfer to the donee so far as he can of the possession which he can transfer, the gift is not a good one. The donor must so far as is possible for him transfer to the donee that which he gives, namely, such right as he himself has............................... he must evidence the reality of the gift by divesting himself so far as he can of the whole of what he gives'.
Relying upon this passage, it was pointed out that the principle that the possession of the thing gifted must be given physically to the donee must depend on the nature of the subject-matter of the gift, and in such circumstances, where assets of the firm, the entries in the accounts, followed by such acts as would effectuate a divestment on the part of the donor, would be sufficient. In the present case also, we have noticed that after making the necessary entries a partnership document was executed. In that document, the assessee expressly admitted that of the capital of the partnership, the two daughters were entitled to Rs. 25,000 each. Here was accordingly a statement made by the assessee against his own interest, which is entitled, in our opinion, to more weight than what the Department has chosen to give to it. It is further stated that following the formation of this partnership, the partnership was registered with the Registrar of Firms, and the formation of the firm was also notified to the banks. From these incidents we cannot but each the conclusion that the gifts were validly made, and that the partnership, unless anything can be shown to the contrary, was a genuine one.
(8) We are unable to agree that the tests applied by the Tribunal that for lack of evidence that the two lady partners took any part in the direction of the management of the firm or that they were capable of giving any assistance to their father in the business are matters that can really touch the question of the genuineness of the partnership. It is common place that minors are admitted to the benefits of a partnership, and that partnership do also have sleeping partners who do nothing but to provide capital. On such an account, no partnership has been held to be non-genuine.
(9) The Tribunal's attention was drawn to he decision of the Bombay High Court in Chimanbhai Lalbhai v. Commr., of Income-tax : 34ITR259(Bom) The Tribunal apparently distinguished it. We are not satisfied that there are any real points of distinction. It is true that in Muthappa Chettiar v. Commr., of Income-tax. : 13ITR311(Mad) where certain book entries were relied upon, to postulate the formation of a trust and it was admitted that no funds corresponding thereto had been set apart or allocated at any time, it was held that such entries did not operate as valid gifts or trusts. But here again, the position in the present case is certainly different.
(10) If the validity of the gifts cannot be challenged and the subsequent conduct of the parties does support the formation of a genuine partnership, the circumstances that he two partners were the daughters of the assessee, or that they took no active part in the conduct of the business, are irrelevant for the purpose of deciding the question. The Tribunal was not, in our opinion in law justified in refusing registration of the firm.
(11) The question is accordingly answered in favour of the assessee, who will be entitled to his costs. Counsel's fee Rs. 250.
(12) Reference answered.