Satyanarayana Rao, J.
1. The following question has been referred to us by the Income-tax Appellate Tribunal under Section 66(1), Indian Income-tax Act:
'Whether there was evidence to hold that the partnership constituted by the deed dated 13-1-1944 was not genuine.'
One S. S. K. Haja Allauddin Maracair carried on business in piece goods at Colombo from the year 1935 under the name and style of S. S. K. Haja Allauddin and Sons. Upto the accounting year ending 31-12-1943 his income was assessed in the status of an individual. During the assessment year 1945-46, however, it was claimed by the assessee that the business ceased to be owned by the individual Haja Allauddin Maracair and that it had become the business of a partnership which came into existence on 1-1-1944 evidenced by a deed of partnership of 13-1-1944. The accounting year of the assessee is the calendar year 1944, the assessment year being 1945-46. Under the Business Names Ordinance obtaining in Ceylon this partnership was registered on Haja Allauddin swearing to an affidavit dated 11-2-1944 in which he pleaded that the partnership was real and genuine.
The partners in this partnership were the three major sons of the first wife of Haja Allauddin. He has also minor sons by the second wife but they are not made parties. On an examination of the various clauses of the deed of partnership the revenue authorities and the Appellate Tribunal found that the partnership was not real and therefore assessed Haja Allauddin as an individual during the assessment year. It has been represented to us on behalf of the assessee by Mr. Viswanatha Iyer that there was also an application to register the partnership under Section 26A of the Act and that application is kept pending till this reference has been answered by us.
2. The point for consideration therefore is whether the view taken by the Appellate Tribunal that this partnership was not real is supported by any evidence in the case. Apart from the circumstance that this firm was registered under the Cevlon Business Names Ordinance, the only other material on which the conclusion of the authorities was based was the deed of partnership. Though the partnership commenced on 1-1-1944, the deed was entered into on 13-1-1944 and was attested by a Notary Public in Ceylon. The father and the three adult sons by the first wife became partners under this deed, their shares being 30 shares in 100 to Haja Allauddin, 25 shares to Mahomed Owdhu, 25 shares to Mohamed Lebbe and 20 shares to Shaik Mohammad Bhukari. The style of the firm remained the same, viz., S. S. K. Haja Allauddin and Sons.
Clause 5 provides that the capital of the partnership shall consist of the net value of the stock in trade, book debts and other assets of the said business carried on till then solely by the father less the outstanding liabilities of that business which were estimated to be about Rs. 40,000. In substance and in effect the father during his lifetime was admitting these three major sons as sharers in the business and but for this partnership deed the sons would not have any interest in the business. Prom the point of view of the father, therefore, the recitals in the document are undoubtedly against his pecuniary interest. The net capital, it was perhaps contemplated, could be known only after the Income-tax upto the end of 1943 was paid by all the partners in equal shares out of the said capital as provided by Clause 6 of the deed of the partnership. Under Clause 7, provision was made for raising additional capital if it was found necessary or expedient for the efficient carrying on of the business and that it should be contributed by the partners in the shares in which they held the interest in the partnership, is also provided by the said clause.
No term was fixed for the duration of the partnership but it would be terminated by three months' notice by a partner. Death, retirement or expulsion of any partner would not have the effect of terminating or dissolving the partnership. The partners were permitted to draw during the continuance of partnership every month Rs. 50 by the father, Rs. 40 each by his first and second sons and Rs. 25 by the third son. The importance of this provision is that the father is not treated as the sole owner of the capital and the profits and was not given absolute discretion to draw any amounts he liked from the funds of the partnership, but his right was restricted along with the sons to a particular amount per month. This is undoubtedly a curtailment and a restriction on his proprietary rights in the business.
The father being aged was undoubtedly given an important position in the management of the affairs of the business but as rightly pointed out by the Appellate Tribunal such control over the sons by the father is not at all inconsistent with the existence of a real partnership. The sons were required to attend to the business at Colombo and most senior of them in age including the father should be termed the managing partner and in that capacity was entitled to draw every month Rs. 25 in addition to the drawings permitted under the previous clause. The father however was at liberty to stay outside Ceylon for a longer period than the sons in whose case the period was only three months per year. There are also the other usual clauses found in any deed of partnership specifying the duties and the rights of the partners 'inter se' which it is unnecessary to refer or enumerate in the course of this judgment.
To ensure due obedience of the sons the father is given the liberty to dissolve the partnership in case of gross ingratitude or misbehaviour or neglect or disobedience on the part of the sons but in such an event the partner who is sent out would be entitled to receive his share of the capital and the profits. The power to dissolve, though specifically mentioned in Clause 22 of the deed, does not take away the right of the sons to dissolve the partnership if they so chose by giving three months' notice as required by Clause 1 of the deed. In the event of the death of the father it was provided that his minor sons by the second wife should be entitled to the share capital and the profits of the father to the exclusion of the major sons, i.e., modifying the law of inheritance applicable to the parties, viz., the Muhammadan law. A perusal of these provisions does not throw any doubt on the fact that this partnership was real and was not merely a make believe affair.
3. It is said by the Appellate Tribunal that the document gave no indication as to why the father preferred the major sons by the first wife to the minor sons of the second wife. It is not usual in a deed of partnership to give reasons for entering into a partnership. It is not as if the father ignored the interests of the minor sons by the second wife as he provided that they should be entitled exclusively to the share capital and the profits of the business belonging to the father in the event of his death. It may be that the father wanted to make a distribution of an available asset belonging to him, viz., the business even during his lifetime so as to avoid future difficulties.
4. Much was made of the fact that no share capital was distributed nor was it contributed by the sons at the time the partnership came into existence. It must be remembered that the sons had no independent property of their own to make the contribution from their own resources to the partnership. They were entirely dependent upon the father and it is the father that admitted each of them to a share in the business. That is the reason why it was provided that the capital of the partnership should consist of the net value of the stock in trade, book debts and other assets of the business less of course of the outstanding liabilities which were estimated to be about Rs. 40,000. This distribution could not be immediately done as income-tax upto the end of the year 1943 was not assessed till October 1945 and it was thereafter that the net capital could be ascertained and could be distributed between the sons in the accounts.
It is not disputed and it has been adverted to by the Appellate Tribunal itself that the profits of each year were distributed to the sons though it was said that the circumstance was not conclusive. Of course the way in which the Appellate Tribunal and the Income-tax authority treated the matter was to take each circumstance by itself and then reject it on the ground that each by itself was not conclusive. This method of approaching the question in our opinion is not proper. The cumulative effect of all the circumstances should have been considered in arriving at the conclusion whether this partnership was real or not. We have the undoubted fact and a strong circumstance in favour of the assesses that the partnership was recognised immediately by the Ceylon Authorities when it was registered under the Ceylon Business Ordinance. It was not as if they did it as a matter of course. They obtained an affidavit from the father himself to support the statements in the deed of partnership. It is on that information that they acted and registered the partnership deed.
The next circumstance is that the deed itself was attested by the Notary Public and therefore no doubt can be cast upon the existence of the deed on the date which it purports to have come into existence. As regards the reality of the partnership as pointed out above, there are very many circumstances pointing to the conclusion that the father intended that this partnership should be real and should benefit his children by the first wife as well as the second wife. It would be open to any of the sons if there were disputes to claim under this document their share of the capital and the profits in the business.
Even if it should happen that the father should die, they would not be entitled to claim any portion of the father's share so that the father bound himself by this document to recognise the interest of his sons in the manner and to the extent indicated in the deed and the sons 'inter se' have agreed to share the profits of this business and its capital in the manner which it has been agreed to under this deed. We think, therefore, that the conclusion of the Appellate Tribunal was not warranted by the evidence on record. The question referred to us therefore must be answered in favour of the assesses and we hold that the partnership is real. As the assessee has succeeded he is entitled to his costs which we fix at Rs. 250.
5. In view of our finding we think that the partnership will be registered as the assessee has already applied for registration of the same under Section 26, Income-tax Act.