Yahya Ali, J.
1. The question referred to this Court by the Income-tax Appellate Tribunal under Section 66 of the Income-tax Act for decision is--
Whether the firm purported to have been brought into existence by the deed of partnership, dated 14th August, 1941, can in law be registered under Section 26-A of the Indian Income-tax Act.
The proved facts are these. Raju Chettiar and Ramaswami Chettiar who were brothers constituted a joint Hindu family and carried on business as jewellers. Ramaswami died in 1934 (that date is now mentioned by the applicant's advocate while the Tribunal said that the date was not ascertainable). The widow Ranganayaki Ammal and two minor sons Viswanathan and Ranganathan survived Ramaswami. The family was being assessed in the status of a Hindu undivided family upto the assessment year 1940-41. On 19th August, 1940, there was a partition of the undivided family and that partition was recognised by the Income-tax department under Section 25-A. On the same date a deed of partnership was entered into between Raju Chettiar and the two minor sons of Ramaswami Ghettiar constituting themselves into a partnership; the minors being represented by their mother Ranganayaki Ammal and the partnership was to come into effect from the 14th. April; 1939. In 1940-41 assessment a claim was made on the strength of this deed of partnership, dated 19th August, 1940, that, as the separated members were carrying on the business, the firm should be registered under Section 26-A as from 14th April, 1939. This contention was repelled on the ground that the partition took place only on 19th August, 1940 and consequently the question of registering the firm for the assessment for 1940-41 did not arise. Subsequently it appears to have been realised that there could be no valid partnership between an adult and two minors and by way of legalising the transaction a fresh deed of partnership was executed on 14th August, 1941. The members of that partnership according to the new deed were Raju Chettiar and Ranganayaki Ammal. In the course of the assessment for 1941-42 which is the subject-matter of the present reference, an application was made under Section 26-A for the registration of the firm brought into existence under the partnership deed, dated 14th August, 1941. The Income tax Officer held an enquiry into the petition and came to the conclusion that there was no genuine partnership between Raju Chettiar and Ranganayaki Ammal and the share, shown as belonging to Ranganayaki Ammal did not belong to her and the deed did not specify the real partners and their shares and that therefore there was no real firm in existence which could be registered under the Act. Appeals against the refusal of registration brought before the Appellate Assistant Commissioner and the Tribunal failed. The Tribunal in its order under Section 33 recorded the finding that the deed, dated 14th August, 1941, did not bring into existence any genuine partnership between Raju Chettiar and Ranganayaki Ammal. The facts found by the Tribunal in that order are that at the end of the year of account 1940-41 the capital standing to the credit of the family account was Rs. 1,20,000 and that amount was transferred to the account of Raju Chettiar and the minors, Rs. 60,000 to the credit of Raju Chettiar, and Rs. 30,000 to the credit of each of the minors. Those credit entries were on the same day reversed and the sum of Rs. 60,000 which stood to the credit of the two minors was transferred to the account of Ranganayaki Ammal, and in that way it was exhibited in the accounts of the new firm that Ranganayaki Amma contributed to the new partnership a capital of her own Rs. 60,000. The Tribunal found that the capital alleged to have been contributed by her was not her own capital but that of the two minors. It was further found that the deed made express provision that the profits were to be credited to the minors in equal shares as per the desire of their mother and on these facts the conclusion was reached that Ranganayaki Ammal was not a partner in her own right, but was only a nominee on behalf of her two minor sons.
2. Appearing for the assessee at whose instance this reference was made by the Tribunal the learned Advocate-General advanced the following propositions:
(1) It is open to the guardian of a minor whose father was a member of the partnership to continue an ancestral business after the father's death if the continuance of the same is for the benefit of the minor.
(2) When in such circumstances the business is continued, the guardian alone can be a partner and not the minor, the only manner in which the business can be lawfully carried on by the guardian being by the guardian becoming a partner in his or her own name and utilising the minor's assets, if necessary, for furnishing the required capital for the continuance of the business. In such a case if profits are received, the guardian will duly transfer them to the minor. This is the only lawful method by which the guardian can discharge the duty of conserving and protecting the interests of the minor in the business left by the minor's father. It is argued in this connection that there is nothing in Section 26-A of the Income-tax Act to militate against the right of the guardian either to enter into a partnership on behalf of the minors in his or her own name, or to utilise the minors' moneys towards capital for that business or to make over the profits to the minors.
(3) There can be no apprehension of any revenue being lost to the Income-tax department as even if the firm is registered with Raju Chettiar and Ranganayaki Ammal as partners, it will be open to the department under Section 40 to assess the share of profits received by the minors in their personal accounts.
3. These propositions were elaborated with considerable citations of authority. In Joykisto Cower v. Niyyanund Nundy I.L.R. (1878) Cal. 738 it was held that the guardian of a Hindu minor was competent to carry on an ancestral trade on behalf of the minor and following that decision Wallis and Munro, JJ., held in Sanka Krishnamurthy v. Bank of Burma : (1911)21MLJ620 that the widow and natural guardian may in India carry on a family business belonging to a minor son by a manager. In such a case such guardian and not the minor is the person personally liable on contracts entered into in the course of the business. Creditors of the business have no right of direct recourse against the minor; but as the guardian will be entitled to indemnity for liabilities properly incurred out of the assets of such business, creditors of the business can proceed directly against such assets for liabilities properly incurred by the guardian. Khorasany v. Acha and four I.L.R. (1928) Rang. 198 was the case of a Mohamedan widow who entered into partnership contract with her deceased husband's partner and continued the business so as to bind her minor children. It was held following the leading case on the subject Imambandi v. Mutsaddi (1917) 35 M.L.J. 422 : 1917 L.R. 45 IndAp 73 : I.L.R. 45 Cal. 878 that a Mohamedan widow is not competent to enter into a contract binding on her minor children. It is argued that the principle on which that authority is based is of general application.
4. Strong exception was taken to the statement which is found in the order of the Tribunal made under Section 33 (but not in the statement of the case) that Ranganayaki Ammal has no beneficial interest in the share that the deed purports to assign to her and this was indicated in that order as one of the reasons supporting the conclusion that she could not be a member of the partnership in her own name. That statement appears to have been adopted from an observation of Beaumont, C.J., in Central Talkies Circuit, Matunga, In re (1941) I.T.R. 44 which is to the following effect:
If the Assistant Commissioner had any evidence before him to lead to the conclusion that the mother in this case was not really entitled to a beneficial interest of 4 annas share, I think he was justified in refusing to register the deed.
With great respect we are of opinion that the correct legal position has been stated rather widely in that passage. There can conceivably be cases where a person who has no beneficial interest, such as a trustee appointed under a testament, will have to continue a partnership in which the deceased was a partner and being a legal owner, the trustee despite the fact that he has no beneficial interest will have to join the new partnership as a member in his own name. Such illustrations can be easily multiplied, viz, Fry v. Shiaw trustees (1915) 6 T.C. 583, where Lord Skerrington held that where a business is carried on by testamentary trustees on behalf of the minors who are beneficiaries under a will the business is not the property of the beneficiaries but of the trustees. The present case, however, as we shall show presently, stands on an entirely different footing, having regard in particular to the language of Section 26-A and of the various rules bearing on the question. We shall deal further with the first two propositions after disposing of the last.
5. With reference to the third proposition reliance was placed on a number of cases: Kirpaldas v. Commissioner of Income-tax (1941) I.T.R. 505 Shapurji Pallonji v. Commissioner of Income-tax, Bombay (1945) I.T.R. 113 Commissioner of Income-tax, Madras v. Mr. Saldanha : (1932)62MLJ600 . The Probynenbad Stud Farm, In re (1936) I.T.R. 114. Hotz Trust v. Commissioner of Income-tax I.L.R. (1930) Lah. 724. Trustees of the Tribune Press v. Commissioner of Income-tax I.L.R. (1935) Lah. 829. In those cases registration of the firm had been made on a particular basis as disclosed in the deed of partnership which was submitted for registration. Subsequently facts came to the notice of the Income-tax authorities which affected the individual assessments of the parties; either the shares were found on enquiry to be different or new partners were found to exist or existing partners were held not to be genuine partners. In such cases when the department sought to make the assessment in accordance with the real facts found by them as to the constitution of the partnership, pleas were put forward based on estoppel on the ground that the partnership in accordance with the deed had been duly registered under Section 26-A. In all these cases that contention was repelled and it was held that the Income-tax Officer could not in any way be estopped from enquiring into the question as to the identity of the persons who actually received the profits. In the case of Shapurji Pallonji v. Commissioner of Income-tax, Bombay (1945) I.T.R. 117. Kania, J. (as he then was), said:
That only means that in making the firm's assessment, and showing the distributive share of each partner, the Income-tax Officer should show the amount according to the instrument registered. That, however, is not in respect of the assessment of the individual partner, and does not preclude the officer from inquiring whether the income shown against the individual partner's name is the true income of this partner, or stands in his name as a nominee of another partner or another person.
To the same effect are observations in Hotz Trust case I.L.R. (1930) Lah. 724 which was followed by this Court in the Commissioner of Income-tax, Madras v. Mr. Saldanha : (1932)62MLJ600 . That was the case of a mother acting on behalf of her minor children and it was held that Section 40 and the following sections of the Income-tax Act are enabling sections under which the Income-tax Officer can take steps to assess the trustees or guardians as representing their separate beneficiaries or wards, as the case may be, if he so chooses. But the sections do not compel the Crown to resort to them. All the cases cited in support of the third proposition can, in our view, be distinguished on a short ground. Those are cases where registration had been, under a wrong or a different impression, granted of a partnership constituted in a particular manner, but in the course of the individual assessment made on the partners it was found that different persons have received the profits and the assessment of the income in the hands of those persons at the rates applicable to each of them was necessary in the interests of revenue. In such circumstances option is given to the Income-tax Officer either to act according to the distributive shares recorded in the deed of partnership which has been registered or to make the assessment upon persons who are found upon enquiry to have actually received those profits. Because there are such enabling provisions in existence, it does not seem to us to be a valid argument that knowing even at the time of the application under Section 26-A that the real constitution of the partnership is otherwise, the Income-tax Officer should nevertheless register the firm on the basis of the incorrect particulars and later compute the income at the time of assessment in the hands of the actual recipients of the profits. No case has gone to the length of holding that in view of the existence of Sections 40 to 42 in the statute irrespective of who the real partners and what their shares are, the partnership Should be registered, since the Income-tax Officer has the power under the law to tax whosoever is in actual receipt of the income.
6. We may now revert to the first two propositions advanced by the learned Advocate-General. Under the general law a trustee may be entitled in certain circumstances to carry on the testator's business on behalf of the beneficiaries and if he does so he will do it in his own name. A guardian like Ranganayaki Ammal may also be similarly situated but the question that we have to consider under Section 26-A of the Income-tax Act is a strictly limited one There can be no doubt upon the authorities that the Income-tax Officer is entitled to examine when an application for registration of a firm is made whether the partnership is genuine, whether each of the partners mentioned therein is a real partner, whether the shares are specified properly, whether the shares specified are real ones and whether the profits which are to be distributed under the deed will truly be the profits of those particular individuals. If he finds that there is no genuineness with regard to any of these things it is open to him to reject the application on the ground that there is no genuine partnership brought into existence by the deed. In the present case it has been found as a fact that Ranganayaki Ammal is not a real partner but that she has given her name as a partner on behalf of her minor sons because that was considered to be the only way in which a lawful partnership could be brought into existence. In view of the transfer of capital belonging to the minors which was effected in her name and the provision in the partnership deed, dated 14th August, 1941, that the amount of profits due to her shall be credited, half in the name of Viswanathan and the other half in the name of Ranganathan, and the circumstance that the entire management was to be in the hands of Raju Chettiar who should have full power to operate on the bank accounts, it was considered that Ranganayaki Ammal was not a real partner and the half share shown in the partnership deed as belonging to her was really not her share but the real shares were one-fourth belonging to each of the minors. On these grounds it was held by both the Appellate Assistant Commissioner and the Tribunal that there was no genuine firm in existence. In coming to this conclusion they were also guided by the previous history of the matter, namely, the first deed of partnership of 19th August, 1940, purporting to be between Raju Chettiar and the two minors.
7. It may in this connection be profitable to make a brief reference to the section, itself and the relevant rules. Section 26-A provides for an application being made to the Income-tax Officer on behalf of any firm constituted under an instrument of partnership specifying the individual shares of the partners. The remaining details as to who should make the application and what particulars they should contain are relegated to rules. Under Rule 2 any firm constituted under an instrument of partnership specifying the individual shares of the partners may register with the Income-tax Officer, the particulars contained in the deed on an application made in that behalf. It is required that such an application should be signed by all the partners not being minors, personally and the rules also mention the time when the application should be made in each case. Rule 3 prescribes the form of the application. In the form it has to be certified in paragraph 3 that the profits or loss, if any, of the relevant period were divided or credited as shown in Section B of the schedule. Section B requires that particulars should be given of the apportionment of the income, profits or gains of the business in the previous year between the partners who in that previous year were entitled to share in such income, profits or gains. Rule 4 says that if on receipt of the application, the Income-tax Officer is satisfied that there is a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made, he shall enter at the foot of the instrument a certificate stating that the instrument has been registered with him and it will have effect for the assessment year in question. If the Income-tax Officer is not so satisfied he shall pass an order in writing refusing to recognise the instrument. All these provisions are made with a view eventually to satisfy Section 23(5) of the Act which lays down the procedure with regard to the assessment of a firm whether registered or unregistered. In the case of a registered firm the sum payable by the firm itself shall not be determined but the total income of each partner of the firm including therein his share of its income, profits and gains of the previous year shall be assessed and the sum payable by him on the basis of such assessment shall be determined. It is manifest therefore that Section 26-A as well as the rules and the particulars required in the form have all been designed to enable the assessment to be done on registered firms in the manner provided under Sub-section (5)(a) of Section 23. It is for this purpose of the utmost importance that the real partner should be disclosed and the precise shares of each of the partners should be mentioned and these particulars should represent the real state of affairs. The purpose of the entire scheme of the assessment of registered firms will be defeated if it is found that either the firm is not genuine or that the shares mentioned therein are not true. A strict and rigid compliance with the requiremerits of Section 26-A and the rules is, in our opinion, essential and there is no scope for any of the equitable considerations put forward by the learned Advocate-General. It may be that in the peculiar circumstances of the case the only manner in which the interests of the minor could be served was by the guardian acting in the partnership deed as the partner while as a matter of fact she was not the partner and a share of eight annas being shown as belonging to her, while as a matter of fact the real shares were of four annas to each of the minors. The profits which were represented to be the property of Ranganayaki Ammal were in fact and in truth the profits belonging to the minors. In view of the consideration that all the facts have been fully set out in the partnership deed and there is no attempt at. Concealment any suggestion of fraud or mala fides may be eliminated. But it has been held by high authority that even a simulate arrangement is one which cannot be recognised. In Ayrshire Pullman Motor Services and D. M. Ritchie v. Commissioner of Inland Revenue (1929) 14 T.C. 754. Lord President (Clyde) said,
The agreement could not have stood for a minute if it had been possible to say of it on the facts that it was either a fraud or a mere simulate arrangement.
This view was again emphasized by Lord Sands in the same case. It must be: remembered that registration of firms under the Income-tax Act is not a general or common law right, but it is a privilege given to the firm in order to enable them to get the benefit of the lower rates of assessment applicable to the individual partners wherever such rates are lower than the rate applicable to the computed income of the firm as a whole. If a firm desires to have this privilege it must conform strictly and rigidly to the requirements provided by the law. We may refer in this connection to an observation made by a Full Bench of this Court in Kannappa Naicker and Co. v. Commissioner of Income-tax : AIR1937Mad316 . In that case an application for registration was refused on the ground that the individual shares of the partners were not specified in the instrument of partnership. The real information was however otherwise within the knowledge of the Income-tax Officer. The learned Judges said,
Notwithstanding this knowledge, the Income-tax Officer--and his action has been upheld by the Commissioner--presumably with the view that he was rigidly bound by the words of the section and that as in the instrument of partnership these individual shares were not given, registration must be refused. The object in requiring this information is in order that the Income-tax authorities may determine what the profits received by each of the partners from the partnership profits is and in order to prevent the profits from being distributed to the partners otherwise than in accordance with the shares of the partners as shown in the instrument of partnership registered under the Act and to prevent any partner returning his income below its real amount. We think that this is a hard case in view of the fact that Income-tax authorities were really aware of the shares of the partners; but the words of the sub-section do not seem to us to permit of any elasticity of construction. Section 28(2) also points to the same conclusion. The individual shares of the partners must be specified in the instrument of partnership. They were not. That being so, the Income-tax Officer could refuse registration on that ground.
The appeal made to us by the Advocate-General on behalf of the assessee that this was the only legal manner in which the guardian could have acted is of no avail. It may be one of those hard cases mentioned by the Full Bench in the case cited above, but a correct legal expedient will have to be devised to surmount the difficulty. One devise was attempted in the partnership deed on the 19th August, 1940, but that was, on the face of it, an admittedly illegal instrument. Whatever the proper solution of the matter may be, if a registration has to be obtained under Section 26-A, it can only be by a genuine firm which specifies the actual shares of each partner and when that is not done, the Income-tax Officer is competent, if not bound, to reject that application.
8. The answer to the question referred by the Tribunal is that the firm purported to have been brought into existence by the deed of partnership dated 14th August, 1941, cannot be registered under Section 26-A of the Income-tax Act. The applicant will pay the respondent's costs, Rs. 250.