VEERASWAMI J. - For assessment year 1956-57, the previous year for which ended on September 14, 1955, the assessee-firm applied for registration on May 26, 1956, under section 26A of the Income-tax Act 1922. The Income-tax Officer granted registration to the firm and completed the assessment on that basis. The Commissioner of Income-tax, in exercise of his power under section 33B, however, held that the application for registration which was received by the Income-tax Officer on June 23, 1956, was belated and that, in any case, the real partners were not the persons shown in the deed of partnership, and that one of the partners, S. K. K. Manickam Chettiar, was not a partner in his individual capacity but was only a representative of another firm in which he was a partner, namely, Messrs. S. K. Kasturirangan Chettiar and Brothers. He came to this conclusion in the light of two facts, (1) S. K. Kasturirangan Chettiar and Brothers had provided the share capital appearing in the name of S. K. K. Manickam Chettiar in the Siddhi Vinayagar and Company, which is the assessee, and (2) the share of profits in the assessee-firm allotted to S. K. Kasturirangan Chettiar and Brother. These two facts were of course supported by a statement and a subsequent letter of Manicham Chettiar himself to the department. The assessees appeal to the Tribunal failed, as it found itself in substantial agreement with the conclusion of the Commissioner of Income-tax. It is in these circumstances the following question has been referred to this court under section 66(2) :
'Whether, on the fact and in the circumstances of the case, the Tribunal was justified in refusing registration to the assessee-firm for the assessment year 1956-57 under section 26A of the Income-tax Act ?'
It is argued before us for the assessee that, even granting that the two facts relied on by the Commissioner of Income-tax for his conclusion have a factual basis, inasmuch as the assessee-firm has not been held to be a bogus one or one which has no legal existence, the mere fact that one of the partners brought the share capital from the funds of another firm and took back his profits in the firm to the other firm for division between its partners will not disentitle the assessee to registration under section 26A. Learned counsel for the assessee, in fact, stresses that the source of the share capital contributed by one of the partners and the division of his share of profits in the firm between the partners of another firm in which he happens to be a partner will be a partner will be wholly irrelevant to the question whether a given firm is the real one and has legal existence.
The contention for the assessee does not appear to require any elaborate consideration by this court, because of two decisions of the Supreme Court, Commissioner or Income-tax v. Sivakasi Match Exporting Co. and Commissioner of Income-tax v. A. Abdul Rahim & Co. In the first of these cases the facts there are practically similar to those in the instant one, so far as they are material to the point we are called upon to decide. One of the partners of the firm would appear to have drawn his capital from another firm of which he was a member and took his share of the profits in the assessee-firm for division among the partners of the other firm. The Supreme Court was of the view that these facts were irrelevant to the question whether the assessee-firm had complied with the requirements of section 26A and the rules framed thereunder. Observed the Supreme Court (at page 211) :
'If the assessee-firm has an existence, the two circumstances relied upon by the Tribunal, namely, that Palaniswamy Nadar, one of the partners of the assessee-firm, brought in the capital from his parent firm or that the profits earned by some of the partners were surrendered to the parent firm would be irrelevant. A partner of a firm can certainly secure his capital from any source or surrender his profits to his sub-partner or any other person. These facts cannot conceivably convert a valid partnership into a bogus one.'
The position is exactly similar here. Neither the Commissioner of Income-tax nor the Tribunal has found that the assessee is a bogus firm or has no legal existence as a firm. They relied on these facts and the Commissioner of Income-tax considered that their legal effect was that the partners of S. K. Kasturirangan Chettiar and Brothers were also partners of the assessee-firm.
The deed of partnership is dated September 18, 1947, and has been entered into between three individuals, (1) K. P. Sundararajan Chettiar, (2) S. Arunachalam Chettiar, and (3) S. K. K. Manickam Chettiar. The name of the firm is given as Sri Siddhi Vinayagar and Company. The period for which the firm will in the first instance carry on business is specified; the principal place of business and the items of business that it would carry on are also mentioned. And the deed further shows that S. K. K. Manickam Chettiar, as a partner of the firm, should subscribe Rs. 500 towards the share capital, and that the would be entitled to a 4 annas share in the profits. The rest of the details in the deed need not be noticed. There is nothing to show that the deed of partnership was a bogus or a make-believe one. In fact, that is not even the departments case.
In Commissioner of Income-tax v. A. Abdul Rahim & Co., the Supreme Court again pointed out that if the partnership was genuine and legal, the share given to the benamidar would be the correct specification of his individual share in the partnership. As mentioned by us, the deed of partnership not only specified the amount of share capital contributed by S. K. K. Manickam Chettiar but also the share of profit he was entitled to from the assessee-firm. Once that is specified, it follows that rule 2 of the rules framed under section 26A has been complied with.
The reference is answered in favour of the assessee and against the revenue. Counsels fee Rs. 250.
Reference answered in favour of the assessee.