Dipak Kumar Sen, J.
1. M/s. Dhaniram Gupta & Co., the assessee, was incorporated as a partnership by an indenture dated November 20, 1956. The assessee was granted registration under the Income-tax Act, 1961, for the assessment years 1961-62, 1962-63 and 1963-64. On January 12, 1970, the Income-tax Officer issued three notices to the assessee under Section 186(1) of the Act stating that, he was of the opinion that during the said three assessment years, no genuine partnership firm as registered was in existence and called upon the assessee to make its representations in respect thereof on January 20, 1970.
2. At the request of the assessee, the proceedings were adjourned till February 11, 1970, on which date the assessee asked the Income-tax Officer in writing for information about the material on which he had formed an opinion stating further that on receipt of such information further explanation would be submitted. It was contended that the assessee was a genuine firm in existence during the relevant years and registration has been duly granted to the assessee. There was no reason for the Income-tax Officer to change his opinion.
3. The Income-tax Officer without any further reference to the assessee proceeded on the basis of the material on record and noted as follows :
(a) On January 20, 1956, when the assessee was incorporated with two partners, namely, K.T. Tan and Dhaniram Gupta, another deed was executed between Dhaniram Gupta, K.T. Tan and M/s. Kian Gwan Company Pvt. Ltd. (hereinafter referred to ' as the company ') recording, inter alia, that K.T. Tan would be the nominee of the company in the partnership ;
(b) the deed of partnership was registered under the Partnership Act, but the second deed was not so registered;
(c) the assessee from time to time permitted the brother and the father of Dhaniram Gupta, a partner, to operate the bank account of the assessee contrary to trade practice ;
(d) K.T. Tan, one of the partners, was out of India for two years;
(e) Dhaniram Gupta held 539 shares out of a total 573 shares of the company;
(f) the auditor of the company had reported that as the audited balance-sheet of the assessee was not available, no entries could be made in the investment account of the company.
4. From the aforesaid, the Income-tax Officer came to the conclusion that Dhaniram Gupta was in complete control of the company and the partnership, that there had been no allocation of profits between the partners and that the partnership deed had not been acted upon. The registration of the assessee for the said assessment years was cancelled by three separate orders passed under Section 186(1) of the Income-tax Act, 1961.
5. The assessee preferred an appeal against the said orders to the Appellate Assistant Commissioner, who found that the brother and the father of Dhaniram Gupta had been given authority to operate the bank account of the assessee to avoid difficulties when the partners were absent and held that this was not a valid ground for holding that the assessee was not a genuine firm. He also found that during the relevant assessment years, Dhaniram Gupta held no share in the company and there was no basis to hold that Dhaniram Gupta controlled the affairs of the company and the assessee.
6. He held that there was no material before the Income-tax Officer to come to the conclusion that the assessee was not a genuine firm. He allowed the appeals and cancelled the orders of the Income-tax Officer.
7. The Revenue preferred a further appeal before the Income-tax Appellate Tribunal against the order of the Appellate Assistant Commissioner. On behalf of the Revenue, it was reiterated before the Tribunal that the authority for operating the bank account of the assessee granted to the relations of one of the partners indicated that the partnership deed was not acted upon. It was urged that K.T. Tan, one of the partners, had left India leaving the exclusive control of the assessee and the company to the other partner, Dhaniram Gupta.
8. The assessee contended that no opportunity had been given to it to make representations on the materials collected and relied upon by the Income-tax Officer, It was submitted that the second deed executed on November 20, 1956, was a clarificatory one and that authorisation had been given to the relations of Dhaniram Gupta to operate the bank account of the assessee during the periods when both the partners would be absent from Calcutta. At the relevant time, Dhaniram Gupta did not hold any share in the company.
9. The Tribunal found that the Income-tax Officer had failed to give reasonable opportunity to the assessee of being heard and held that the material collected could not be used against the assessee. The Tribunal also found that authority to operate the bank account of the assessee had been given to persons other than the partners to overcome difficulties during the absence of the partners from Calcutta and that K. T. Tan, one of the partners, was in India during the relevant assessment years and that Dhaniram Gupta did not control the company exclusively during the said years.
10. The Tribunal held that no adverse inference should be drawn from the fact that the balance-sheet of the assessee had not been prepared even after the audit of the company was completed and that the profits of the assessee were not apportioned between the partners. The Tribunal agreed with the Appellate Assistant Commissioner that there was no material on record for the Income-tax Officer to come to the conclusion that there was no genuine firm in existence during the relevant years and rejected the appeals.
11. On an application of the Revenue under Section 256(1) of the Act, the following question has been referred by the Tribunal, as a question of law arising out of its order, to this court for its opinion :
' Whether, on the facts and in the circumstances of the case and on a correct interpretation of the partnership deed dated November 20, 1956, the Tribunal was right in holding that the registration of the firm could not be cancelled '
12. At the hearing, the learned advocates for the parties reiterated their contentions raised in the proceedings below. It was submitted on behalf of the Revenue, in particular, that the assessee should not be held to be a genuine partnership as two deeds were executed on the same day, under one of which K, T. Tan was taken in as a partner for and on behalf of the company.
13. In support of the respective contentions, the following decisions were cited at the Bar :
(a) CIT v. A. Abdul Rahim and Co. : 55ITR651(SC) . Here, the partnership was constituted initially by three persons. A relation of one of the partners was inducted into the partnership later with a share carved out of the share of his relation and a fresh deed was executed. It was found as a fact that the new partner was a ' benamidar ' of his relation. It was held by the Supreme Court that the registration to the partnership could not be refused on the ground that one of the partners was a ' benamidar ' of another. The Supreme Court observed as follows (p. 659) :
' When a firm makes an application under Section 26A of the Act for registration, the Income-tax Officer can reject the same if he comes to the conclusion that the partnership is not genuine or the instrument of partnership does not specify correctly the individual shares of the partners. But once he comes to the conclusion that the partnership is genuine and a valid one, he cannot refuse registration on the ground that one of the partners is a benamidar of another. If the partnership is genuine and legal, the share given to the benamidar will be the correct specification of his individual share in the partnership. The beneficial interest in the income pertaining to the share of the said benamidar may have relevance to the matter of assessment, but none in regard to the question of registration. ' (b) CIT v. Hassanally & Sons : 81ITR282(Cal) . In this case, a firm consisting of two partners applied for fresh registration in the relevant assessment years. It was stated that a fresh deed had been executed inducting five other partners. It was claimed that the new partners, the sons of the original partners, had contributed to the initial capital out of the gifts made by their respective fathers. Registration was refused to the firm on the ground that gifts to the new partners were made after the date when the firm came into existence under the deed. The new partners drew salaries, though the deed provided that they would not do so and all the partners were not allowed to operate the bank account of the firm. It was held by a Division Bench of this court that as the business of the firm was not carried on in conformity with the material terms of the partnership deed, the firm was not entitled to registration.
(c) K. D. Kamath and Co. v. CIT : 82ITR680(SC) . In this case, it was laid down by the Supreme Court that the legal requirements necessary to constitute a partnership in law were that there must be an agreement to share the profits or losses of the business and that the business must be carried on by all the partners or any of them acting for the others. It was also laid down by the Supreme Court that control and management of the business of a firm could be left by agreement between the parties in the hands of one partner to be exercised on behalf of all the others.
14. It has been held both by the Appellate Assistant Commissioner and the Tribunal that the assessee was not given adequate opportunity to make representation to justify the continuation of its registration. On this ground alone the assessee is entitled to succeed.
15. On merits, it appears that the main contention of the Revenue before the Tribunal was that the firm had authorised the operation of its bank account by the relations of one of the partners and, as such, the partnership deed was not acted upon. It does not appear from the deed that the partners were precluded from authorising their agents to operate the firm's bank account on their behalf. Even otherwise, in view of the decision of the Supreme Court in K. D. Kamath & Co. : 82ITR680(SC) , this question is no longer open for adjudication.
16. The other contention was that K. T. Tan, one of the partners, had left India leaving Dhaniram Gupta, the other partner, in exclusive control both of the assessee and the company. It has been found by the Tribunal that at the material time, K.T. Tan did not leave India. This fact has not been challenged. No other contention was raised before the Tribunal.
17. It was faintly argued before us on behalf of the Revenue that the deed of nomination entered into by and between K. T. Tan, Dhaniram Gupta and the company on the same day when the deed of partnership was executed shows that the partnership deed was not a genuine one as the real partner, the company, was excluded from the deed. This contention also cannot be accepted in view of the decision of the Supreme Court in A. Abdul Rahim & Co. : 55ITR651(SC) . Law is settled in India that a partnership would not be affected by internal arrangements made by the partners among themselves or with outsiders. Sub-partnership is recognised in Indian law. A Hindu undivided family cannot become a partner in a partnership but can always be represented by its karta who will be treated as a partner in his individual capacity.
18. For the reasons as above, we are unable to accept the contentions of the Revenue. The question referred to us is answered in the affirmative and in favour of the assessee.
19. There will be no order as to costs.
G.N. Ray, J.
20. I agree.