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TMI Blog1975 (8) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) Vasantkumar s/o. Manilal ... 2 " (3) Pravinchandra Manilal ... 2 " (4) Champaklal ... 3 " (5) Subodhchandra Champaklal ... 2 " (6) Ashokkumar Champaklal ... 2 " It appears that Manilal and Champaklal were brothers who were the principal partners in the earlier partnership, M/s. Champaklal Jamnadas, and the other partners were only their sons. This firm had been granted registration under section 26A and so it was a registered firm in the assessment year 1958-59. It appears that some time prior to October 24, 1957, Champaklal purchased a broker's card on the stock exchange in his own name and since, according to the rules of the stock exchange, a broker could not at the same time be a partner in any firm which had business in the stock exchange (although he could do business on his own account), Champaklal is said to have retired from the old firm with effect from October 24, 1957, and the new firm called " Manilal Jamnadas " carried on the partnership business of the erstwhile old firm with new partners having different shares. A new partnership deed was executed on January 8, 1958, under which the new firm was said to be carrying on business under the new sty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engineer in the Bombay Port Trust and that, therefore, they could not genuinely become partners while in such service ; that Jitendra was a student and was never available in Bombay for the purpose of the business of the firm and that the statements of Pravinchandra, Jitendra, Navinchandra, Vasantkumar, Subodhchandra and Vinaykumar which were recorded by him under section 37 of the Income-tax Act, conflicted with each other and (4) that clause 11 of the partnership deed showed that Shri Champaklal controlled the affairs and management of the firm. He, therefore, concluded that Champaklal Jamnadas has continued to retain his interest in the partnership. In the following assessment year 1960-61 the Income-tax Officer refused renewal of registration for the reasons he indicated in his order passed by him for that year. The assessee appealed to the Appellate Assistant Commissioner who took a contrary view of the material on record and held that the aspects which had influenced the Income-tax Officer in coming to his own conclusion did not affect the question of genuineness of the new firm and he, therefore, directed that registration be granted. The Appellate Assistant Commissioner poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he department preferred appeals to the Income-tax Appellate Tribunal and the Tribunal, having regard to the manner in which the bank account had been opened and having regard to the material clauses contained in the deed of partnership, viz., clauses 9, 11, 12 and 13, came to the conclusion that there was no real retirement of Champaklal on October 24, 1957, and that he had retained all his interest in the business. As regards Pravinchandra and Subodhchandra, the Tribunal also observed that it was not satisfied that they were the real partners and not mere names. However, the Tribunal ultimately took the view that whatever might be the true position of Pravinchandra and Subodhchandra, the position of Champaklal was unquestionably of a partner who had not retired from the erstwhile partnership and who had retained his interest in the partnership business and it, therefore, held that the partnership which had applied for registration could not be regarded as genuine and the registration had been rightly refused by the Income-tax Officer. At the instance of the assessee, therefore, the aforementioned question, which has been set out by us at the commencement of the judgment, has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions contained in the deed of partnership dated November 13, 1951, had been granted registration for the assessment year 1958-59 and that upon retirement of Champaklal from that firm a new partnership deed was executed on January 8, 1958, specifying who the partners of the new partnership firm were and also specifying their individual specific shares in the profit and loss account of the new firm and, therefore, on the face of the document as also on the facts which were established in the case all the essentials of the partnership had been established and as such the necessary application to obtain registration having been made within the time prescribed by law ought to have been granted. With regard to the findings recorded by the Tribunal Mr. Dastoor raised the following contentions. In the first place, he contended that the Tribunal's conclusion that Champaklal continued to retain his interest in the new firm was contrary to evidence on record and in fact there was no material on record on the basis of which such a conclusion could be drawn. He further contended that the Tribunal's non-satisfaction about Pravinchandra and Subodhchandra being the real partners was without eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e necessary to consider the relevant and material facts and aspects which have emerged on record. It is true that the old partnership called M/s. Champaklal Jamnadas which carried on business under the deed of partnership dated November 13, 1951, had been granted registration under section 26A of the Act for the assessment year 1958-59. It does appear that some time prior to October 24, 1957, Champaklal purchased a broker's card on the stock exchange and according to the rules of the stock exchange, a broker could not at the same time be a partner in any firm which had business in the stock exchange (although he could do business independently on his own account). The old firm had business on the stock exchange and, therefore, Champaklal is said to have retired from the firm with effect from October 24, 1957. It is also not disputed that the new firm commenced its business from October 24, 1957, onwards and in respect thereof a new partnership deed was executed on January 8, 1958, under which the new firm was styled as " Manilal Jamnadas ". It would be relevant to refer to some of the recitals as well as the operative part of the document as, in our view, they would be having a bea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ah will be final and binding on all the partners. " On a consideration of the aforesaid material parts of the new deed of partnership dated January 8, 1958, two or three aspects emerge very clearly. In the first place, the deed recites that Champaklal has retired from the erstwhile partnership leaving the said business to be carried on by the continuing partners for their benefit and that the new firm " shall succeed to the assets and liabilities of the said concern of M/s. Champaklal Jamnadas ". Under clause 9 the banking account was to be opened in the name of the partnership firm with bank or banks approved by all the parties to the deed and that " the account shall be operated by any of the partners as mutually agreed upon. " In other words, the parties under clause 9 decided that the authority to operate the bank account belonging to the partnership should be conferred only upon one or the other partners of the firm and that such authorised partner should operate the bank account. Clauses 11 and 12 in clear terms bring out the position that was ascribed to Manilal and Champaklal so far as carrying on of the partnership business was concerned and the matters connected therewi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signed this bank account opening form as a partner of the new firm. It is only in the endorsement pertaining to introduction to the Bank of Baroda that Champaklal Jamnadas has put his signature showing himself as a partner of " C. Manilal Jamnadas ". The facts stand out very clearly that the bank account was not opened in the firm name but indisputably this account pertained to the new firm and Champaklal had associated himself with the opening of the account of the new partnership firm, in that the said account was a joint account of Manilal and Champaklal. It is true that an explanation has been given that that was done with a view to obviate the objection raised by the bank that certain credit facilities which were till then available to the erstwhile partnership would not be available unless Champaklal's name was associated. But, apart from the explanation, it cannot be gainsaid that the account pertaining to the partnership was opened in the joint names of Manilal and Champaklal and Champaklal had associated himself with the opening of the account with the Bank of Baroda. The aspects that Champaklal had retained full control with himself along with Manilal in regard to the car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cult to say that these aspects which emerge clearly on record do not render the retirement of Champaklal from the erstwhile partnership a make-believe affair. It was on the basis of this material and other aspects which we have indicated above that the Tribunal has come to the conclusion that the retirement of Champaklal was on paper only and that he retained his interest in the new firm constituted under the partnership dated January 8, 1958, and it is not possible for us to take a view that that finding recorded by the Tribunal could be said to be capricious or unreasonable or a finding based on no evidence at all. It was urged by Mr. Dastoor that there was no material or evidence on record to show that there was any agreement whereby Champaklal was a party to the share of profit of the new partnership and unless there was such material on record the conclusion drawn by the Tribunal could not be sustained. It is not possible to accept this submission of Mr. Dastoor for the simple reason that it is not that in every case direct evidence or direct material would be available for drawing such a conclusion and it is conceivable in any given case a conclusion could be drawn from oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he new firm. If clauses 11 and 12 were to be considered in isolation, then Mr. Dastoor's submission has some force. But, clauses 11 and 12 cannot be considered in isolation or by themselves and have to be considered in the context of other aspects which have emerged on record to which we have already referred above. Having regard to the manner in which the bank account was opened, having regard to the fact that even after the so-called retirement of Champaklal from the erstwhile partnership firm, the percentage of profit which Champaklal group retained was the same in the new firm and having regard to clauses 11 and 12 which are obtaining in the new deed dated January 8, 1958, it would be reasonable and proper on the part of the Tribunal to draw an inference that Champaklal had not really retired from the old firm and had retained his interest in the profits of the new firm and that, therefore, the new partnership deed was merely a make-believe document and was not genuine in respect of which registration could be granted. In the above context we will refer to a couple of decisions on which strong reliance was placed by Mr. Dastoor in support of his contention. The first case to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of Mr. Dastoor for more than one reason. In the first place, the decision of the Madras High Court will have to be considered in the context of facts obtaining in that case and the ratio must be confined to the facts of that case. Secondly, the Madras High Court decision is clearly distinguishable on facts. It appears that the Income-tax Officer exercising the power under section 37 of the Income-tax Act had undertaken what may be called a most gruelling task of cross-examining of all the four ladies during the assessment proceedings and relying upon some infirmities which had occurred in their statements had taken the view that the partnership constituted by the four ladies in question was not a genuine partnership. In particular reliance was placed upon one of the answers given by one of the four ladies when examined to the effect that the two persons to whom the management had been entrusted by the four ladies were partners in the business, which statement had been corrected by her at a later stage by asserting that the partners of the partnership were the only four ladies in question. The High Court pointed out that the inquisitorial examination conducted by the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er that whereas Pravinchandra had categorically stated that all the partners shown in the deed sponsored the idea of forming a firm and that the deed of partnership was drawn out in the presence of all the partners excepting the minor, Nitin, and that Champaklal was also present as an adviser on that occasion, an attempt was being made by a couple of other partners, such as for instance Vinaykumar, to show that when the idea of forming a new partnership was sponsored, all the partners were present but Champaklal was not present. Champaklal himself in his statement made a crude attempt to disown his presence at the time when reconstitution of the new firm was thought of. He stated in his statement that when he decided to retire from the erstwhile partnership it was left to the remaining partners to decide the future of the firm and he was not a party to the reconstitution of the firm. The anxiety on the part of Champaklal in trying to keep himself away from the idea of forming or reconstituting the new firm is perfectly understandable in view of his pronounced stand that he had retired from the erstwhile partnership and had nothing to do with the new partnership firm. But apart from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... happened to be common, namely, that management of the partnership business has been entrusted to a so-called outsider. In our view, therefore, the ratio of the Madras case would be inapplicable to the facts of the present case. The next case on which reliance was placed by Mr. Dastoor was a decision of the Patna High Court in the case of Himalaya Engineering Company v. Commissioner of Income-tax reported in [1965] 57 ITR 762 (Pat). In that case a firm was reconstituted by admitting two sons of the old partners. Registration was refused to the firm as reconstituted on the grounds that the deed was a sham, as no capital was contributed by the new partners, and the change in the constitution of the firm was not notified to the banks in which the old firm had accounts. The Patna High Court held that the fact that no share capital was contributed by some of the partners or the fact that the reconstitution was not disclosed to bankers were not grounds for refusing registration to the firm. There was no material before the income-tax authorities to support the conclusion that the firm was not genuine and, therefore, the firm was entitled to registration. This decision was relied upon ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the instant case. We may mention that several other decisions were cited by Mr. Dastoor at the Bar but we do not think it necessary to refer to those decisions in detail as, in our view, those decisions turn on the peculiar facts which obtained in each one of those cases. There is yet one aspect on which a contention was raised by Mr. Dastoor and that pertains to two partners, Subodhchandra and Pravinchandra. It was not disputed before us that Subodhchandra, son of Champaklal, was an engineer in the Bombay Port Trust while Pravinchandra, son of Manilal, was working as a sales-tax inspector in the service of the Government of Bombay. It was urged by Mr. Dastoor that these facts as also the fact that Vasantkumar was practising as a doctor should be regarded as irrelevant for determining whether the firm was entitled to registration or not and his further contention was that the Tribunal's non-satisfaction about Subodhchandra and Pravinchandra being the real partners was also without any evidence on record. His contention was that, at the highest, the fact that Subodhchandra and Pravinchandra were in Government service may subject them to disciplinary action at the hands of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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