WAZIR, C.J. - In compliance with the requisition of the High Court made by order dated the 16th of December, 1953, under section 66(3) of the Income-tax Act the Minister-in-charge of the Income-tax Department has stated the case as under.
The assessee, Messrs. Uttam Singh Khorana and Sons, Jammu, constituted a Hindu undivided family and was assessed as such up to assessment year 2006. During the assessment year 2007 the assessee claimed on 24th Maghar, 2007 that the Hindu undivided family had disrupted and that a partition had taken place amongst the members of the family on the basis of the deed dated the 15th Chet, 2005, and partition deed dated the 6th Maghar, 2007. As the result of the proceedings taken under section 25A of the Income-tax Act the Income-tax Officer, Central Circle, passed an order on the 2nd Poh, 2007, holding that partition amongst the members of the Hindu undivided family had taken place on the 1st Baisakh, 2006. With effect from the same date the members of the Hindu undivided family alleged that they had formed a contractual partnership deed dated 26th Chet, 2006. They further made an application to the Income-tax Officer on the 2nd Poh, 2007, for the registration of the firm under section 26A of the Income-tax Act. On the 6th of Poh, 2007, the Income-tax Officer allowed the registration and assessed the Income of the firm for the year 2007 in the hands of S. Uttam Singh and his three sons, Joginder Singh, Rominder Singh and Devinder Singh (minor) according to their individual shares. The Chief Income-tax Officer, examined the assessment order passed by the Income tax Officer, Central Circle, and finding the order to be erroneous and prejudicial to the interest of the Revenue, issued a notice under section 33B of the Income-tax Act to the assessee to show cause why the assessment made for 2007 be not enhanced. As the result of the proceeding under section 33B the Chief Income-tax Officer found that during the year 2006 the assets of the Hindu undivided family had not passed out of the hands of the family and not been taken over by a valid firm constituted by the members thereof. The main grounds on which he based his finding were :
(i) that the assets of the business owned by the Hindu undivided family had not been ascertained for division amongst the members at the time of the alleged partition.
(ii) that the partition deed dated the 6th Maghar, 2007, having not been executed and registered before the 1st Baisakh, 2006, was void and ineffective as it was inconceivable how the Hindu undivided family could itself into a partnership prior to its disruption;
(iii) that a minor son, S. Devinder Singh, had been admitted a partner in the firm which made the deed of partnership invalid.
In consequence of the above findings the Chief Income-tax Officer overset the assessment made by the Income-tax Officer and directed that the income for the assessment year 2007 be assessed as Hindu undivided family as done in the preceding years. The assessee appealed against that order and the Minister-in-charge rejected that appeal upholding the findings of the Chief Income-tax Officer. The Minister-in-charge took the following facts into consideration.
(i) that some buildings had only been partitioned in shares and not in definite portions :
(ii) that the entries made in the account books to show the division of various business did not effectively evidence that the joint business had passed out of the hands of the family and taken over by the firm;
(iii) that the rent received on account of immovable property had not been credited to the accounts of the various members at the time of receipt of rent;
(iv) that each member of the firm had been debited with one fourth of the amount of the income-tax levied in 2006 on the income of the Hindu undivided family for 2005 while the entire profits and gains for the year 2005 had been appropriated by S. Uttam Singh;
(v) that all the properties allocated to different members had not been shown in their individual returns of income for 2006 filed with the Income-tax Officer, Central Circle, and the assessee was not able to show as to how such omissions had occurred;
(vi) that the deed dated 15th Chet, 2005 was silent with regard to Mrs. Uttamsinghs position in the joint family whereas she has been mentioned as on of the members of the family in the partition deed dated the 6th Maghar, 2007.
To prove the genuineness of the deed dated the 15th Chet, 2005, some copies of letters passed between the properties S. Uttam Singh and the Controller of Supplies, Jammu, were produced before the Minister-in-charge. As for the purpose of section 25A something more than mere intention to divide was necessary. The Minister-in-charge held that these letters could only at best testify to the intention to divide the family and not establish disruption of the family within the meaning of the section in the face of the facts enumerated above.
In holding that the partnership deed dated the 26th Chet, 2006, was void in law, the Minister-in-charge has referred to the following facts;
(i) that the above partnership deed was invalid as it could not have retrospective effect in establishing the existence of partnership during the year 2006;
(ii) that the partnership deed did not provide as to how and in what proportion the minors losses; if any had to be borne by other partners.
The question whether disruption of the Hindu undivided family of which S. Uttam Singh is the karta had taken place and in its place a valid firm established within the meaning of section 26A were held by the Minister-in-charge to be question of face and the following questions were referred to this Court :
'(i) Whether on the facts and circumstances of the case, the Hindu undivided family trading in the name and style of M/s. Uttam Singh Khorana and Sons had disrupted on the 1st Baisakh, 2006, within the meaning of section 25A of the Income-tax Act, 2007;
(ii) Whether on the facts of the case and true construction of the various terms of the partnership agreement, a partnership in law had been found on the 1st Baisakh, 2006 between S. Uttam Singh and his sons which could be registered under section 26A of the Income-tax Act, 2007.' and along with these the following questions framed by this Court under section 66(3) were also referred :
'(i) Whether the evidence produced in the case warrants the inference that the family of S. Uttam Singh Khorana & Sons still constitutes a Hindu undivided family which could be assessed as such for the assessment year 2007 :
(ii) The disruption under section 25A not being proved, whether the Income-tax Authorities could reject the petitioners claim for registration of their firm under section 26A of the Act;
(iii) Whether in the facts and circumstances of the case, the partnership agreement is void and of no effect in law and therefore registration has been rightly refused ?'
In this case S. Uttam Singh and his sons constituted a Hindu undivided family which carried on various businesses such as Uttam Flour Mills at Jammu; Guru Nanak Cold Storage at Miram Sahib; petrol and kerosene oil agencies; rice and oil mills at Saharanpur and renting out of immovable properties at various places under the name of Messrs. Uttam Singh Khorana and Sons. The Hindu undivided family carried on business till the 30th Chet, 2005 and on that date the books of the business were closed and it is alleged that by virtue of a document dated 15th Chet, 2005, a disruption of the Hindu undivided family was effected and from 1st Baisakh, 2006 a contractual firm came into existence under the name of Uttam Singh Khorana and Sons in which the father and his three sons had one-fourth share each. On 1st of Baisakh, 2006 the firm started its business with father, two major sons and one minor son as partners of the firm. A deed of partnership was executed on 26th Chet, 2006, which was registered on the 14th of Baisakh 2007. The assessee claimed to be assessed as firm for the accounting year 2006 and produced before the Income-tax Officer a deed executed on 15th Chet, 2005 and also the account books in support of the fact that the disruption of the family had taken place and that the family was conducting the business as a firm from the 1st of Baisakh, 2006. A copy of the letter addressed to the Controller of Supplies was also produced before the Minister-in-charge, Income-tax Department, in order to show that the Hindu undivided family had already disrupted prior to 1st Baisakh, 2006.
The first question for consideration is whether the disruption of the family had taken place prior to 1st Baisakh 2006 In our opinion there was sufficient material on the basis of which the Chief Income-tax Officer and the Minister-in-charge came to the conclusion that the disruption of the family had not taken place prior to 1st Baisakh, 2006. The deed dated 15th Chet, 2005, on which great reliance is placed does not prove satisfactorily that the movable and immovable properties had been distributed among the partners. This document is in every respect unsatisfactory. Notwithstanding the fact that the deed affects immovable property, it is not registered and the particulars of the property which fell to the share of each members are not mentioned in this deed. No reference to this deed is made in the subsequent deed of partition which came into existence on the 6th Maghar, 2007 and therefore the Income-tax Authorities have rightly ignored this document dated 15th Chet, 2005. Reliance has been placed on the letter written by that the family had disrupted and the property had been divided among the members of the family. This letter also would not be of much assistance to the assessee inasmuch as it is an admission by the assessee in his own favour and will not have much weight in providing that disruption had taken place prior to S. 2006. We are therefore satisfied that the finding of the Chief Income-tax Officer and the Minister-in-charge that the disruption of the family had not taken place prior to 1st Baisakh, 2006 is quite correct and the first question referred to this Court is answered accordingly.
The next question is whether the claim for registration of the firm under section 26A for the according year 2006 was rightly refused or not.
The contention on behalf of the assessee is that there was no material before the Chief Income-tax Officer or the Minister-in-charge for arriving the three sons and the father which was entitled to registration under section 26A of the Income-tax Act.
In order that a firm should be registered by the Income-tax Authorises under section 26A it is necessary that an application should be made on behalf of the firm constituted under an instrument of partnership specifying the individual shares of the partners for registration for the purpose of the Income-tax Act. It is conceded that the firm, which is alleged to have come into existence on the 1st of Baisakh, 2006 was not constituted under a duly registered instrument of partnership. On behalf of the assessee it is submitted that partnership came into existence on the basis of the deed dated 15th Chet, 2005. That deed is not registered and in the State under section 17(d) of the Registration Act it is necessary that the partnership deed should be registered. In these circumstances there was no registered instrument of partnership under which the firm came into existence on 1st Baisakh, 2006. The Income-tax Authorities could not entertain an application from a firm which was not constituted under an instrument of partnership duly registered under section 17(d) of the Registration Act of the State In this event the Income-tax Authorities were fully justified in refusing the registration of the firm from 1st Baisakh, 2006.
It has been contended that if the deed of partnership came into existence during the accounting year it will have retrospective effect and will be deemed to have constituted a firm from the beginning of the accounting year. We find ourselves unable to agree to this contention of the learned counsel. The partnership deed was executed on the 26th of Chet, 2006, and was registered on the 14th of Baisakh 2007. So the firm which could make an application for being registered under section 26A was the firm which was constituted under a registered instrument of partnership of 26th Chet 2006, and it is this firm which could be registered by the Income-tax Department. Although some defects have been pointed out in regard to this registered deed of partnership we find that none of the reasons given by the counsel appearing for the Department have any proximate bearing on the question that the firm is not genuine. There is ample material on the basis of which it can be held that a genuine partnership was formed by a registered partnership deed which came into existence on the 26th of Chet, 2006. The shares have been specified in the partnership and the account books of the firm fully support the fact that each partner has a specified share of one-fourth in the partnership business.
As regard the retrospective effect of the registered deed to partnership which came into existence at the fag end of the accounting year we are of the opinion that is cannot relate back to the first day of accounting year i.e. the 1st of Baisakh 2006. The very words in section 26A show that the firm for the purpose of registration under the Income-tax Act should have been constituted under an instrument of partnership and duly registered as required in the state. It cannot be said therefore that the firm came into being on a date long before the instrument of partnership was executed. In this view we are supported by a Privy Council authority in Waddington v. OCallaghan in which it was observed : 'when people enter into a deed of partnership and that they are to be partners as from some date which is prior to the date of the deed, that does not have the effect that they were partners from the beginning of the deed. You cannot alter the past in that way. What it means is that they begin to be partners at the date of the deed, but then they are to take the accounts back to the date that they mention as from which the deed provides that they shall be partners.'
So we are of the opinion that S. Uttam Singh Khorana and Sons started their partnership from 26th of Chet, 2006, for the purpose of registration as a firm under the Income-tax Act.
Lastly the Income-tax Authorities pointed out that the fact that a minor was taken as a partner and that the partnership deed was signed by him made the deed void in law. We have examined the partnership deed and we find that on behalf of the minor S. Uttam Singh, his father who is the natural guardian, has signed the partnership deed. The contract of partnership would have become illegal only if the minor had signed it as a party. When it is admitted that it is the guardian Uttam Singh who has entered into the contract of partnership there can be no objection to the minor being admitted to the benefits of partnership and this has been done with the consent of the guardian who has put in his signature on the deed in confirmation thereof. In these circumstances we do not see any reason to hold that the partnership agreement is void and of no effect in law.
In our opinion therefore the Income-tax Authorities were right in holding that no disruption of the Hindu undivided family had taken place in S. 2005 and the registration under section 26A of the firm for the accounting year 2006 has been rightly rejected. In view of the fact that the firm was constituted under a registered instrument of partnership on the 26th Chet, 2006, and that the registered partnership deed of 26th Chet, 2006 had no retrospective effect, the firm should have been registered under section 26A of the Income-tax Act from the 26th of Chet 2006. The minor having been admitted to the benefits of partnership would not in any way invalidate the partnership agreement.
The question referred to us are answered as indicated above and the Income-tax Department should take further action accordingly.
In view of the circumstances of the case we leave the parties to bear their own costs in this Court.
KILAM, J. - I agree.
Reference answered accordingly.