1961 (12) TMI 107 - HC - Income Tax

Summary

Issues Involved:
1. Refusal of firm registration under Section 27 of the Madras Agricultural Income-tax Act.
2. Validity of the partition and division of shares among partners.
3. Bona fides of the partnership and the division of shares.
4. Substitution and retirement of partners.
5. Retrospective operation of the partnership deed.

Issue-wise Analysis:

1. Refusal of firm registration under Section 27 of the Madras Agricultural Income-tax Act:
The Agricultural Income-tax Officer refused registration of a firm for the agricultural income-tax year 1957-58, a decision upheld by the Assistant Commissioner and the Agricultural Income-tax Appellate Tribunal. The firm consisted of 15 partners, including a minor entitled only to the benefits of the partnership. The refusal was challenged in this tax revision case.

2. Validity of the partition and division of shares among partners:
The original partnership was constituted with five partners and was accepted by the agricultural income-tax department for the assessment years 1955-56 and 1956-57. A fresh partnership was entered into on 23rd November 1955, with the original share of A.S. Subbaraj being divided among his sons. The Tribunal accepted the partition arrangement in Mallayyan Chettiar's family as true and valid. However, it questioned the division between Subbaraj and his sons, citing the partition deed dated 14th January 1955, which kept the 7/12th share undivided.

3. Bona fides of the partnership and the division of shares:
The Tribunal doubted the genuineness of the partnership constituted by the deed dated 23rd November 1955, viewing the division of shares as a device to secure a lower rate of income-tax or avoid assessment. It held that the recital in the partnership deed about the shares was not bona fide. However, the court opined that a partition cannot be vitiated by a bad motive or mala fide object, and the declaration in the partnership deed should be regarded as having brought about a division among Subbaraj and his sons.

4. Substitution and retirement of partners:
Suppan Chettiar retired from the partnership, and his share was taken by his four sons. The Tribunal viewed the transfer as lacking bona fides. The court noted that it is always open to any partner to retire from the firm, yielding his place to his nominee or nominees, with the agreement of the other partners. The absence of a valid document of transfer from Suppan Chettiar to his sons did not affect their status as partners.

5. Retrospective operation of the partnership deed:
The Tribunal observed that there was no evidence of the partnership having come into existence on 1st July 1955. The court accepted this finding, stating that the partnership began to function from the date of the written instrument, 23rd November 1955, and could not be given retrospective operation from 1st July 1955.

Conclusion:
The revision petition was allowed, and the order of the subordinate tribunals was set aside. The Agricultural Income-tax Officer was directed to restore the application for registration and dispose of it in accordance with law and the observations contained in the judgment. No order as to costs was made.