1962 (12) TMI 88 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the new partnership firm under section 26A of the Indian Income-tax Act.
2. Legal effect of the unregistered deed of relinquishment.
3. Impact of non-notification to banks about the new partnership.
4. Non-registration of the partnership under the Partnership Act.

Issue-wise Detailed Analysis:

1. Validity of the new partnership firm under section 26A of the Indian Income-tax Act:
The primary issue was whether the partnership as evidenced by the deed of 1st December 1942 legally came into existence and should be registered under section 26A of the Indian Income-tax Act. The Income-tax Officer initially rejected the registration application, considering the trust as a "camouflage" and the partnership as not genuine. The Appellate Assistant Commissioner found the Income-tax Officer's decision unwarranted but concluded that a trust could not enter into a partnership, thus upholding the refusal of registration. The Tribunal, upon remand, did not find conclusive evidence that a new partnership was genuinely intended, primarily due to the lack of notification to banks and the non-registration of the partnership deed until 1946.

2. Legal effect of the unregistered deed of relinquishment:
The Tribunal initially held that the unregistered deed of relinquishment dated 2nd December 1942 could not legally transfer rights and title to the immovables owned by the firm in favor of the Kamla Town Trust. This was one of the grounds for rejecting the registration of the new partnership. However, it was argued that the relinquishment of an interest in a partnership does not necessarily require registration and that the non-transfer of certain immovable properties should not affect the formation of the partnership as a legal entity.

3. Impact of non-notification to banks about the new partnership:
The Tribunal placed significant emphasis on the fact that the new partnership was not notified to any of the banks with which the old firm was dealing. This lack of notification was considered a critical factor in concluding that the new partnership did not genuinely exist. However, it was argued that the omission to notify the banks was not a legal bar to the constitution of a new firm, especially since the name of the partnership firm remained the same and the banks were informed that the Singhania brothers had become trustees.

4. Non-registration of the partnership under the Partnership Act:
The Tribunal also noted that the new partnership was not registered under the Partnership Act until May 1946. While this non-registration precluded the firm from bringing a legal action in certain cases, it did not affect the constitution of the firm as a legal entity. The court acknowledged that non-registration under the Partnership Act did not invalidate the formation of the partnership.

Conclusion:
The High Court concluded that the Tribunal's finding that the new partnership was a sham transaction was not based on sufficient evidence. The court found that several materials on record, such as the introduction of capital by the trust, the existence of the trust deed, and the partnership deed, supported the genuineness of the new partnership. The court held that the facts and circumstances did not show any legal flaw in the constitution of the partnership firm as evidenced by the deed of 1st December 1942, and there was no impediment to its registration under section 26A of the Income-tax Act. The question was answered in favor of the assessee, concluding that the partnership did come into existence and should be registered.