JAGADISAN J. - P.A.C. Ratnaswamy Nadar carried on business in the manufacture and sale of safety matches as sole proprietor in the trade name 'Siriyapushpam Match Factory'. On 31st March, 1955, he debited his personal account in the business with a sum of Rs. 27,000 and credited each one of his six sons with Rs. 4,500. On 1st April, 1955, a partnership deed between Ratnaswamy Nadar and his sons was executed. Four of his sons were adults and majors and two of them were minors. The minor sons were admitted to the benefits of the partnership. The firm so constituted was registered with the Registrar of Firms on 23rd January, 1956. The excise licence which stood in the name of Ratnaswamy Nadar, the father, was transferred to the name of the partnership by the Assistant Collector of Central Excise on application made in December, 1955. The firm closed it accounts on 18th April, 1956, in respect of the year of account, 13th April, 1955, to 13th April, 1956, and submitted a return of income to the Income-tax Officer. Along with the return the firm also filed an application for registration of the firm under section 26A of the Indian Income-tax Act.
The Income-tax Officer refused to register the firm. He observed that there was no document of gift by Ratnaswamy Nadar in favour of his six sons and that mere entries of credit in favour of the sons in the books of account of the business could not constitute gifts. He also observed that of the four major sons only one had business experience and the control and management of the business remained only with father, who was originally the sole proprietor. There was an appeal before the Appellate Assistant Commissioner, who affirmed the decision of the Income-tax Officer, taking the view that no genuine partnership was constituted under the deed dated 1st April, 1955. A further appeal was taken to the Income-tax Appellate Tribunal, and the Tribunal also held concurring with the decision of the taxing authorities that there was no gift by the father in favour of his sons, and that there was no genuine partnership constituted to enable registration being granted under the Act. On application made by the Tribunal for reference to this court under section 66 of the Act the following question of law has been referred :
'Whether, on the facts and in the circumstances of the case, there was material to find that there was no genuine firm which could be registered under section 26A of the Indian Income-tax Act ?'
In the year ending 31st March, 1955, the sum of Rs. 17,519-8-6 was earned a profit by Ratnaswamy Nadar. The entries in the account books of the business dated 31st March, 1955, show the each one of the sons was gifted with the sum of Rs. 4,500. It cannot be seriously disputed that the father was in a position to make the gift to his sons and that there were sufficient assets of the business from which a valid gift could have been made. The question, however, is whether in fact and in truth the father intended to make gift of Rs. 4,500 to each of his sons with a view to enable the formation of a firm consisting of himself, his adult sons and the minor sons, who of course can only be admitted to the benefits of the partnership as the law disentitled minors to be partners. The view of the Tribunal is that the credit entries in favour of the sons are merely book entries, and that such entries by themselves would not establish a gift, as the law requires the donor to deliver the subject-matter of the gift, where it is moveable, to the donee. It must be remembered that having regard to the close relationship between the donor and the donee and to the fact that the subject-matter of the gift, namely, cash of Rs. 4,500 got from the father by each one of the sons, was the very capital of the intended partnership, it would be an idle formality for the father to hand over cash in specie to the sons and the sons handing them back to the father. It must not be forgotten that two of the sons who were admitted to the benefits of the partnership were minors under the protection and guardianship of the father. We are unable to see as to why the entries in the books of account of the business should not be relied upon as affording cogent evidence of the gift.
'Gift' is defined in section 122 of the Transfer of Property Act as the transfer of existing moveable or immoveable property made voluntarily and without consideration by one person called the donor to another called the donee and accepted by or on behalf of the donee. The transfer for the purpose of making a gift of moveable property may be effected either by registered instrument signed by the donor and attested by at least two witnesses or by delivery. In the absence of a written instrument, a gift of chattels or moveables is incomplete without delivery. An oral gift of movables unaccompanied by delivery passes no property to the donee and such a gift is not a gift at all.
'Actual delivery is not mere evidence of the gift but is part of the gift itself. In ordinary English language and in legal effect there cannot be a gift without a giving and taking' (Halsburys Laws of England, Volume 18, page 372). But delivery need not necessarily be actual manual delivery. A constructive delivery by which the donee is effectively put in possession of the subject-matter of the gift is sufficient compliance of the requisite of law. The delivery of the key of the warehouse in which the gifted articles are stored or the delivery of part as representing the whole is as good and valid a delivery as the physical handing over of all the articles. The reason of the insistence in law of there being a delivery from the donor to the donee in cases of gifts of moveables is that a mere declaration by a donor of his having made a gift is not capable of being specifically enforced against him, as it is not a contact enforceable at law. Where the gift consists of cash or money the donor can by merely handing over the subject-matter of the gift to the donee effectively bring about a gift. It is open to the donee to hand back the gift to the donor asking him to keep it with him behalf or treating him as his debtor. It is implicit in a credit entry in favour of the donee in the account books of the donor that the amount standing to such credit has been gifted to the donee and has been invested with the donor. Though the entry as such may not conclusively establish a real and effective gift it is evidence in support of the gift that evidence taken along with the other evidence that may be available can establish a gift if the requirements of law are fully satisfied.
In the present case of the contemporaneous formation of a partnership between the donor and the donees can also be taken into account in determining the question of the validity of the gift as the gift and the partnership must be deemed to be parts of scheme of one transaction. It is true that the question of gift has to be adverted to only in finding out whether the partnership is genuine or not but it will not be proper to sever the gift from the entire transaction and determine its validity disregarding the other aspects of the transaction.
We wish to refer to the decision in South Indian Lucifer Match Works v. Commissioner of Income-tax to which on of us was a party. The facts of that case were as follows : On 24th February, 1952, in the account books of a business carried on by a Hindu undivided family a sum of Rs. 25,000 was debited to the capital account of the family. Out of that amount a sum of Rs. 15,000 was transferred to the capital account of an adult son of the joint family manager and Rs. 5,000 each to the capital account of his two married daughters. A deed of partnership was then entered into between the father, the manager, the son and the daughters to run the business in partnership. The partnership applied for registration under section 26A of the Income-tax Act. But registration was refused by the Tribunal on the ground that the amounts continued to belong to the family and that the gifts were not valid. On a reference to his court it was held that the sum of Rs. 5,000 each credited to the accounts of the daughters were gifts made by the father with the concurrence of the adult sons and the gifts could be completely made by the father having regard to the extent of the assets of the family, that it was not necessary for the validity of the gift to establish actual handing over of the amounts to the daughters. At page 328, Srinivasan J. observed as follows :
'The proposition of law that a gift of moveable property, unless it is effected by registered deed, can only be completed by delivery of the property to the donee, cannot be disputed....... It is true...... that there was no delivery of the gifts to the donees. It does not seem to us in case of this kind that there should be actual handing over of the amounts in question to the daughters and the subsequent credit by them into the accounts of the partnership firm following upon the partnership agreement.'
On the facts the above case is indistinguishable from the instant case and we have no hesitation in following it.
The truth and validity of the gift do not rest on the mere entries in the account books of the business. The account books of the newly constituted firm disclosed that the capital of the sons in respect of the partnership business was furnished only by reason of the gift taking effect. The subsequent acts and conduct of the parties taken along with the entries of credit in the books of account together cumulatively establish a valid gift. We have reached the conclusion that there are enough materials in record to prove that the father made a true and valid gift of Rs. 4,500 to each of his six sons and that the partnership cannot be held to be sham or untrue on the ground that there was no antecedent gift prior to its formation.
It is next contended by Mr. S. Ranganathan, learned counsel for the department, that the entire administration of the alleged partnership business remained in the hands of the father under the terms of the partnership, and that therefore it was mere fiction. The following clauses in the partnership deed are referred to :
'4. All matters connected with the administration of the partnership business shall be carried on after consulting the party of the first part and with his consent. The capital of the partnership shall consist of the amounts standing to the credit of each of the partners.
6. The bank account as well as the receipts and expenses shall be looked after only by the first partner, P.A.C. Ratnaswamy Nadar. Whenever the party of the first part feels necessary he can authorise the partners to act.
8. No other partner excepting partner No. 1 shall have powers to borrow for the partnership business. Any amount so borrowed shall be liability on its own account and it shall not bind the partnership.'
It is nothing artificial on the part of the father retaining a dominant position in the affairs of the partnership especially when his major sons are quite young and inexperienced in business. The managing partner of every business generally has all the powers of management concentrated in his hands. It has never been contended that a partnership wherein one of the partners is conferred practically all the powers of carrying on the firm is not genuine partnership. We do not see any reason to condemn the partnership between the father and sons as being a fictitious one merely on the ground that the father has, under the terms of the partnership, the main control over the business.
The application for transfer of the licence to the Assistant Collector of Excise was made only several months after the formation of the partnership. It cannot be said that the partnership is not genuine, because of the belated application for transfer of the licence. Learned counsel for the department has not contended that the partnership is illegal without the transfer of the licence. Rule 177 of the Central Excise Rules as found at page 99 of the Central Excise Manual, clause 4, is in these terms :
'If the holder of a licence enters into partnership in regard to the business covered by the licence he shall report the fact to the licensing authority within 30 days of his entering into such partnership and shall get his licence suitably amended. Where a partnership is entered into, the partners as well as the original holder of the licence shall be bound by the conditions of that licence.'
It seems to be clear from the provisions of the Central Excise Act and the rules that a licensee is not prohibited from entering into a partnership; but the licensee after entering into the partnership must get the licence suitably amended. This has been done in this case during the year of account of the business of the firm. We are of opinion that the genuineness of the partnership is in no way affected by reason of the application for transfer of licence having been made not immediately after the constitution of the firm but some time later.
Section 26A of the Indian Income-tax Act is an enabling provision conferring the privilege of registration of firms to lighten the tax burden. Recourse to obtain the benefit of registration has nothing sinister about it. Cases arising out of refusal by the department to register firms under section 26A which have reached this court have left the impression in us that the taxing authorities do not favour applications for registration and are prone to dismiss such applications on inadequate grounds. The department no doubt owes a duty under the statute to scrutinise every application for registration and to satisfy itself that the firm has been genuinely constituted as otherwise the flood gates will be opened for escapement of tax. It is quite true that the mere existence of a deed of partnership is not passport for obtaining registration. But an undue scepticism in the matter and suspicion that every partnership put forward is only a device to escape tax cannot be the basis for the disposal of the applications. In our opinion, the application of registration was improperly refused in this case.
The question is answered in favour of the assessee, who will get his costs from the department. Counsels fee Rs. 250.
Reference answered accordingly.