Sankar Prasad Mitra, J.
1. This is a reference under Section 66(1) of the Indian Income-tax Act, 1922. Up to the assessment year 1959-60 the respondent had two partners, namely, Golam Hussain Hasanali and Eusufali Hasanali. They were brothers and had equal shares. The firm was carrying on business in hardware and mill stores and was granted registration under Section 26A of the Income-tax Act.
2. For the assessment year 1960-61, the assessee applied for a fresh registration. It was stated that a deed of partnership dated the 16thMarch, 1959, had been executed and a new firm had been constituted consisting of seven partners. These seven partners and their respectiveshares are as follows :
1.Golam Hussain Hasanali0-2-0|
|0-8-0 annas2.Hatimbhoy Molla Golam Ali (son of No.1)0-2-03.Abbashbhoy Molla Golam Ali (ditto)0-2-04.H. M. Golam Hussain (ditto)0-2-05.Eusufali Hasanali0-2-0|
|0-8-0 annas6.Fakruddin Eusufali (son of No.5)0-3-07.Abbashbhoy Eusufali (ditto)0-3-0
3. It was claimed that the sons of the two original partners havecontributed to the firm's capital out of gifts made by their respectivefathers.
4. The Income-tax Officer took the view that there was no valid gift because the firm did not have sufficient cash to make the gifts. He pointed out that the gifts were also claimed to have been made only subsequent to the coming into existence of the new firm. The new partners were said to have been employees of the old firm and were taken in as partners because they were unwilling to work only as employees. The Income-tax Officer further pointed out that in the new partnership deed there was no provision for payment of salaries to these new partners, but the accounts of the new firm showed that these new partners were being paid salaries as before. The Income-tax Officer also found that under the partnership deed all the partners were authorised to operate the bank accounts; but it appeared that the account with the Bank of India Ltd., it was arranged, was to be operated by two partners only, while the account with the Union Bank of India was to be operated by four partners. In these circumstances, the Income-tax Officer was of the opinion that there was no change in the status of the new partners and they continued to be employees and further the apparent state of affairs was not the real state of affairs. He rejected the claim for registration.
5. The Appellate Assistant Commissioner agreed with the Income-tax Officer. He expressed the view that a genuine firm had not come into existence for various reasons. Firstly, the new partners continued to draw the amount of salaries formerly drawn by them qua employees. Secondly, the group constituted by Golam Hussain Hasanali and his three sons were still receiving eight annas share in the firm and the group constituted by Eusufali Hasanali and his sons still had eight annas share in the firm. Thirdly, the new partners continued to appear in the pay register maintained for employees. And, fourthly, the statement filed before theIncome-tax Officer in respect of salaries 'paid to office staff' included also the new partners.
6. The Tribunal has held that the department has not been able to substantiate its charges that there was no genuine firm in existence and that the apparent state of affairs was not real. The Tribunal has directed registration under Section 26A.
7. The department suggested to the Tribunal that the following question of law be referred to this court :
'Whether, on a proper construction of the terms of the deed of partnership executed on the 16th March, 1959, and taking into consideration all the relevant facts of the case showing the conduct of the parties and particularly the fact that the alleged object of admitting the sons of the erstwhile partners to the partnership to avoid payment of adequate salary to them has not been achieved, the Tribunal was right in holding that the said document brought into existence a genuine firm and registration was therefore allowable to the assessee under Section 26A of the Indian Income-tax Act, 1922?'
8. The Tribunal, however, has referred to this court the following questions:
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a genuine firm as evidenced by the deed dated the 16th March, 1959, came into existence and that the firm was entitled to registration under Section 26A of the Indian Income-tax Act, 1922, for the assessment year 1960-61 ?
(2) If question No. 1 is answered in the negative, whether the Tribunal was right in setting aside the assessment in the status of unregistered firm and directing the Income-tax Officer to make fresh assessment in the status of registered firm ?'
9. The second question, we should point out, is referable to the appeal against the quantum of assessment and the present reference is a combined reference covering both the aspects of the matter.
10. Before we make our comments on the facts of this case it would be useful to reiterate the basic principle which must be borne in mind to answer the second part of question No. 1 in this reference. In R. C. Mitter & Sons v. Commissioner of Income-tax,  36 I.T.R. 194the Supreme Court laid down, inter alia, that unless the partnership business was carried on in accordance with the terms of an instrument of partnership which was operative during the accounting year, it could not be registered under Section 26A of the Income-tax Act, 1922, in respect of the following assessment year. In other words, to be entitled to registration under Section 26A the partnership business must be shown to have existed in conformity with the terms and conditions of the instrument of partnership. Their Lordships of the Supreme Court have, time and again, relied on this principle. References,' for instance, may be made to the Supreme Court judgments in Commissioner of Income-tax v. Sivakasi Match Exporting Co. , : 53ITR204(SC) and Agarwal and Co. v. Commisssioner of Income-tax, : 77ITR10(SC) .
11. In this case also we have to consider whether, on the facts found, it can be said that in the relevant accounting year the partnership business was carried on in conformity with the terms and conditions of the deed of partnership. Now, Clause 5 of this deed says :
'That the capital of the present partnership shall consist of the amounts invested by the partners hereof and standing against their respective names in the ledger of the firm. If any additional capital is required hereafter that further capital shall be contributed by the partners hereof rateably to their shares in the firm.'
12. It seems to us that this clause means that on the date the partnership came into existence the partners mentioned in the deed had invested certain amounts and those amounts were standing against their respective names in the ledger of the firm. And the sum total of those amounts constituted the initial capital of the partnership firm. But the taxing authorities found that the investments of the new partners came out of the gifts made by the original partners to their respective sons. And these gifts were made only by making transfer entries in the firm's books of accounts, as, on the date of transfer, the firm did not have sufficient cash in its till. What is more surprising is that the Appellate Assistant Commissioner has stated in paragraph 2 (at page 14) of his order :
'On the 17th February, 1959, it is alleged that a gift was made by Golam Hussam Hasanali to his three sons, each getting Rs. 3,250. This gift was made by debiting the account of Golam Hussain Hasanali with Rs. 9,750 and crediting the accounts of the three sons with Rs. 3,250 each. Similarly, on 10th October, 1959, a gift is alleged to have been made by Eusufali Hasanali to his two sons of Rs. 5,000 each by making similar transfer, entries in the account books. Registration of the firm consisting of the above seven partners was claimed in the assessment for the year under appeal . . ..'
13. The first clause of the deed of partnership is that the partnership shall be deemed to have commenced on and from the 1st January, 1959. It is apparent that both the gifts aforesaid were made after that date. Secondly, the deed of partnership was made on the 16th March, 1959, but the gift of Eusufali was not made till 10th October, 1959. On these facts we cannot hold that in the relevant accounting year this partnership business was carried on in compliance with the terms of Clause 5 of the deed of partnership.
14. Secondly, one of the recitals to the deed of partnership is that the sons had declined to serve the original firm as paid assistants 'without adequate cash remuneration for their whole time services' and since in the then state of business their demands could not be satisfied the new partnership was being brought into existence. The taxing authorities below have found that these new partners even after the execution, of the deed continued to draw the same salary as they were drawing previously and their names continued to appear in the staff register. These facts do not show that the statements made in the recitals aforesaid were being fully implemented.
15. Thirdly, Clause 12 of the instrument of partnership states :
'That the bankers of the partnership firm shall be Lloyds Bank Ltd. or such other bank or banks as the parties hereof may agree upon and each of the partners shall be authorised to draw cheques on the firm's account for payments in the normal course of the business of the firm.'
16. The plain meaning of this clause is that each of the partners shall be armed with the authority to draw cheques on the firm's account with the Lloyds Bank Ltd. or any other bank in which the firm may have an account. But the facts found are that there was an account with the Bank of India Ltd. and only two partners had the authority to operate on that account. There was another account with the Union Bank of India and four of the partners were authorised to operate on that account. These facts clearly indicate that the provisions of Clause 12 of the instrument of partnership were not given effect to.
17. The cumulative effect of the findings aforesaid leads to the conclusion, in our view, that during the relevant year of account the business of the partnership was not carried on in conformity with some of the material terms of the deed which brought the partnership into existence.
18. For these reasons, our answer to the second part of question No. 1 is that the firm was not entitled to registration under Section 26A of the Indian Income-tax Act, 1922, for the assessment year 1960-61.
19. The first part of question No. 1 need not, therefore, be dealt with at all. Our answer to the second question is in the negative.
20. Each party will bear and pay its own costs.
21. K.L. Roy, J.
22. I agree.