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TMI Blog1986 (1) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ered a serious head injury and lost his memory for quite some time while Shri Sadhu Singh suffered an injury to the spinal cord which rendered him invalid for quite a long time and the case put forward was that as the business was on an extensive scale and the two partners were physically handicapped (they recovered in the meantime), they entered into a fresh deed of partnership on April 1, 1960, by virtue of which Pal Singh and Sadhu Singh of the one part and Sarvashri Surjit Singh, Gulzar Singh, Hari Singh and Harbans Singh of the second part became partners with the following share ratio in the profits and losses, namely, Pal Singh and Sadhu Singh, the original two partners retained 25% share each while Surjit Singh, Gulzar Singh, Hari Singh and Harbans Singh were given 121% share each. Admittedly, two of the new incoming partners, namely, Surjit Singh and Gulzar Singh, were related to Pal Singh being his son and brother respectively who were obviously accommodated within the 50% share originally owned by Shri Pal Singh while the other two incoming partners, Hari Singh and Harbans Singh, were related to Shri Sadhu Singh, both being his brothers who were accommodated within the 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e statement of the four new incoming partners and the surrounding circumstances including the fact that profits had not been shown to have been distributed in the books and no entries made in the year of account, the Income-tax Officer rejected the application principally on two grounds : (a) that in law no valid partnership had been created inasmuch as the element of mutual agency was lacking, and (b) factually no genuine firm had come into existence inasmuch as the four new incoming partners were dummies. Registration was also refused on two other grounds, namely, there was breach of the terms of the partnership deed in that, even in the absence of a provision in that behalf, salary and remuneration were credited in the personal accounts of the two original partners, Pal Singh and Sadhu Singh, and there was non-compliance of the Income-tax Rules. In appeal preferred by the assessee, the Appellate Assistant Commissioner, after discussing the several issues at great length, confirmed the Income-tax Officer's order refusing registration. In the further appeal preferred by the assessee to the Tribunal, the view of the Appellate Assistant Commissioner was confirmed by the Tribunal but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1961-62 has been challenged by the appellant firm (assessee) in this appeal and counsel for the assessee raised three or four contentions in that behalf. On the aspect of the firm's validity in law, counsel contended that the view taken by the taxing authorities as well as the Tribunal that no valid partnership in law had come into existence for lack of mutual agency has proceeded on a misconstruction of section 4 of the Partnership Act as also clause 5 of the partnership deed in question ; according to him, so far as the element of mutual agency is concerned, all that is required to constitute a valid firm under section 4 is that the business must be carried on by all or any of them acting for all and, therefore, if the control and management of the business of the firm was left by the agreement between the parties in the hands of even one partner to be exercised by him on behalf of the others, the legal requirement could be said to have been satisfied and clause 5 of the partnership deed in question vests such control and management with two partners (the two original partners) who would be acting on behalf of all and the mere exclusion of the four new incoming partners fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the partners should have been regarded as sufficient evidence of actual division of profits and, in this behalf, counsel relied upon a decision of the Orissa High Court in Rao Sons v. CIT [1965] 58 ITR 685. Further, counsel pointed out that such division or distribution had been made by making the relevant entries in the assessee's books on the first day of the following year and books pertaining to the following year containing such entries were produced before us at the hearing. In substance, counsel's contentions were that the refusal to grant registration to the extent that it was based on the ground that no valid partnership in law had come into existence was clearly unsustainable, that there was no evidence to justify the finding on the genuineness of the appellant firm and that the High Court having held that registration could not be refused merely on the ground that some of the partners were benamidars, registration ought to have been granted to the assessee. On the other hand, counsel for the Revenue supported the refusal of registration by contending that even if a valid partnership in law could be said to have been brought into existence by executing the deed in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year in the fifth Court. On the aspect of the genuineness of the firm requisite for the grant of registration, counsel relied upon two old decisions in Haji Gulam Rasul Khuda Baksh v. CIT [1937] 5 ITR 506 (Lah) and Hafiz Abdul Gafoor v. CIT [1939] 7 ITR 625 (Nagpur) which have been subsequently followed in Raju Chettiar and Brothers v. CIT [1949] 17 ITR 51 (Mad) and Hiranand Ramsukh v. CIT [1963] 47 ITR 598 (AP). Counsel for the Revenue, therefore, pressed for the dismissal of the appeal. On a consideration of the entire material on record and on giving our anxious thought to the rival submissions made by counsel on either side, we are of the opinion that in the ultimate analysis, the real controversy in the appeal centres round the question whether or not factually a genuine firm had come into existence for the assessment year 1961-62 as a result o the execution of the instrument of partnership on April 1, 1960, and whether for recording a negative finding thereon against the assessee, as was done by the lower authorities, there was evidence on the record ? This being the real issue which was not reflected in the first question formulated by the Tribunal, the High Court, in our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the relevant year 1960-61, the profit and loss account and balance-sheet were prepared in the books and he had inspected these statements which assertions are obviously false because admittedly no such profit and loss account nor balance-sheet was drawn up in the books. When asked as to whether Pal Singh and Sadhu Singh had consulted the incoming partners before the deed was written and executed, he has emphatically given a negative answer and has added that they (original partners) called all the four of them and asked them to sign the deed which they did. Harbans Singh, in his statement, admitted that he used to do the work of painting but could not say how many factories the firm was running nor did he remember the factory in which he used to do his work; he further asserted that no witnesses were called when the deed was signed which is obviously a false assertion. Surjit Singh who passed his Intermediate in Arts in September, 1960, B.A. in 1963 and L.L.B. in 1965 has shown utter ignorance of even the share ratio in the profit and loss of the new partners ; he stated that he had two annas share in the profits but no share in the losses; when questioned as to how he knew tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant facts. In this context, it will not be out of place to mention that from their statements, it appears clear that none has made any withdrawal towards his share of profit in any of the three years 1960-61, 1961-62 and 1962-63, and even after the partnership was alleged to have been dissolved after March 31, 1963, and at least one of them, Hari Singh, stated that a sum of Rs. 73,600 became due to him as his share of profits till dissolution and in spite of demand, nothing had been paid to him till his statement was recorded in November, 1965. Only two of them drew their remuneration as employees. Considering their economic position, it is difficult to appreciate that they would have needed no withdrawal from their share of profits in any year till the alleged dissolution. This aspect throws considerable doubt on the point whether or not the entries were intended to be acted upon. Having regard to the aforesaid discussion, it is clear that there was sufficient material on record on the basis of which the taxing authorities as well as the Tribunal could record an adverse finding on the genuineness of the firm against the assessee and registration, in our view, was rightly r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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