The Order of the Court was pronounced by
RAJAGOPALAN, J. - The question that was referred to this court on an application under section 66(2) of the Act was 'whether on the facts and in the circumstances of the case, there is material on record to justify the finding of the Appellate Tribunal that the joint family was a partner in the Andhra Trading co., and not Naganatha Iyer in his individual capacity.'
The assessee was a Hindu undivided family, which consisted of Narayanaswami Iyer, and his two adult sons, Naganatha and Ganapathy. Among the items of the business of the family carried on were rice and flour mills, firewood, oil cakes and soapnut powder. It was found by the Assistant Commissioner that both Naganatha and Ganapathy were incharge of the family business. The Appellate Tribunal was of the view, that Naganatha was the de facto managing member of the family. Naganatha was the partner eo nomine of the Andhra Trading Co., which traded among other things in firewood and oil cakes. It was virtually common ground that the business of each was independent of the other. The assessee family was one of the customers of the Andhra Trading Co. The Department, and the Tribunal agreeing with them, held that, though Naganatha was shown as the partner, it was really the assessee family that was the partner of the Andhra Trading Co.
It was in February, 1941, that Naganatha entered into partnership with one Manikkam to form the Andhra Trading Co. In November, 1942, Narayanaswami Ayyar informed the Departmental Authorities, that the income from the Andhra Trading Co. belonged exclusively to Naganatha. That position was accepted by the Department in the three assessment years that preceded 1945-46. In that year, however, the Department, and the Tribunal agreeing with them, held that it was not Naganatha but the joint family that was the real partner of the Andhra Trading Co. There was no specific finding that all along from the inception of the company, it was the joint family that was the partner.
Learned counsel for the petitioner contended that the appreciation of the evidence on record by the Tribunal was vitiated as the Tribunal had misdirected itself even on questions of fact. In paragraph 6 of its appellate order the Tribunal recorded : '(i) In the accounts of the Andhra Trading Co., there are no transactions in the name of K. S. Narayanaswami Iyer and they are all entered in the name of Naganatha Iyer; (ii) again Naganatha Iyers drawings during his partnership in this firm were insignificant and his only substantial drawings were to liquidate the debts due by the family for the fuel taken.' Neither of these statements was factually correct. Annexure B to the statement of the case was the ledger folio of the family in the accounts of the company for the relevant accounting year 1944-45. Annexure B-1 was the ledger folio of Naganatha Iyer in those accounts, and that showed that considerable amounts were drawn from the partnership funds by Naganatha on various dates. Apart from Rs. 9,606 to which we shall presently refer, none of these items was shown to have been included in the accounts of the family. Sub-paragraphs (iii), (v) and (vi) in paragraph 6 of the statement of the case submitted by the Tribunal do not appear to present a correct statement of the facts.
The Tribunal found in sub-paragraph (i) of paragraph 6 of the statement of the case, that neither of the partners of the company, Manikkam and Naganatha, contributed any capital. The funds of the family were not drawn upon by Naganatha to commence the business of the company. Nor was there anything to show that at any time thereafter the funds of the family were utilised, either to its detriment or to its advantage to carry on the business of the company. The Assistant Commissioner found it was not a case of blending Naganatha Iyers income with the income of the joint family, that is the income that accrued to Naganatha Iyer in the year of accounting or any other period. The Tribunal apparently agreed with that view, but it did not discuss it.
Virtually the sole basis on which the tribunal could have come to the conclusion, that the share income of Naganatha from the company in the year in question accrued to the joint family, was what was recorded in paragraph 6(v), that a sum of Rs. 9,606 due from the family on its dealings with the company was paid by adjustment. The books of the company showed that the family was credited with this sum and Naganatha was debited with it. In paragraph 6(vi) the Tribunal observed that the explanation furnished by the assessee was unacceptable.
Even had the whole sum of Rs. 9.606 been utilised by Naganatha to pay off a debt due by the family to the company, such a transaction would not prove that the money all along belonged to the family and not to Naganatha in his individual capacity. Even that assumption, that the entire amount was paid by Naganatha may not be correct. An examination of the books would have shown that a sum of Rs. 6,000 paid by the family on March 27, 1945, was wrongly placed to credit of Naganatha in the books of the company AHFH : Annexure B-1. It is not for us to consider now why the family carried out its final adjustments in its accounts by showing the entire amount of Rs. 9,606 as a receipt from Naganatha in the capital account : Annexure B-2. Bad accounting is not necessarily proof of concealment of the real nature of the transactions between the family and the company. A settlement of a portion of the liability of the family to the company by adjustment from what was due by the company to Naganatha cannot obviously act retrospectively and make the family a partner in the company from its very inception. The family was not a partner but a customer of the company even in the year of account.
In our opinion there was no evidence on record to sustain the conclusion of the Tribunal that it was not Naganatha in his individual capacity but it was the family, of which he was the de facto manager, though a junior coparcener, that was the real partner in the company.
The question referred to us is answered in the negative, and in favour of the assessee. The petitioner will be entitled to his costs. Counsels fee Rs. 250.
Reference answered in the negative.