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TMI Blog1976 (7) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal that : (i) the status of the partners was no more or higher than that of the dignified employees ? ; (ii) it could not be taken that the agency of the partners, inter se as partners of the firm, could be said to have been established thereby ? " In the individual assessment of Shri Dhanji Lalji the following questions have been referred : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income of the firm of M/s. Dhanji Lalji was rightly assessable in the hands of the applicant ? (2) Whether, on the facts and in the circumstances of the case, and upon the true construction of the partnership deed, dated 12th November, 1958, it could be held that the applicant was liable to be taxed on the entire profits of M/s. Dhanji Lalji and not only on the seven annas share of profits as claimed by him? " The question with regard to granting or not granting registration to the firm of M/s. Dhanji Lalji relates to the assessment year 1960-61, the corresponding accounting year being S.Y. 2015. Similarly, the questions pertaining to the individual assessment of Shri Dhanji Lalji relate to the assessment year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Income-tax Officer the latter being consequential upon the refusal of registration of the firm. Two separate appeals were filed, one by the firm and the other by the individual before the Appellate Assistant Commissioner, the firm claiming registration and the individual objecting to the inclusion of profits of the business in excess of his 7 annas share therein. The Appellate Assistant Commissioner passed two separate orders and in the case of appeal preferred by the firm he took a contrary view and held that the firm was entitled to registration and, consequently, in the case of individual assessment he held that only 7 annas share of profit in the business was liable to be included in his assessment. He principally took the view that it was for Dhanji Lalji to convert his business into a partnership, it was for him to select his partners and the fact that one of the partners was his brother who did not have adequate experience in grains business was not a bar to his being taken up as a partner. He also took the view that the instrument of partnership specified the respective shares of each of the partners in clear terms. Its registration with the Registrar of Firms, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examine the terms of the partnership deed with reference to some of which the Income-tax Officer had made his comments leading to the conclusion that in reality no firm had been brought into existence as claimed under the said deed. On an examination of some of the terms of the deed the Tribunal came to the conclusion that the inference which they had drawn from an examination of the three alleged working partners got confirmed and, therefore, the Tribunal held that the firm was not entitled to registration under section 26A of the Act and the individual, Shri Dhanji Lalji, was held to be liable to be taxed in respect of the entire profits of the business. An application for reference requesting the Tribunal to refer certain questions of law to this court having failed, the assessees preferred two applications to this court, being I.T. Application No. 33 of 1964 (in the matter of M/s. Dhanji Lalji) and I.T. Application No. 35 of 1964 (in the matter of the individual, Dhanji Lalji) and it was by reason of directions by this court under section 66(2) of the Act that the Tribunal has submitted the statement of case to this court and referred the question set out at the commencement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of this evidence of the three other partners that the Tribunal has in para. 8 of its order dated March 3, 1963, recorded its finding in these terms : " In our opinion, therefore, the examination of the three alleged working partners alone shows that they were not genuine partners, but were mere dummies in the business. " It is after arriving at such a conclusion on the oral evidence that has been recorded of the three witnesses by the Income-tax Officer that the Tribunal has then proceeded to consider the terms of the deed of partnership and even these two terms, on which some reliance was placed by the Income-tax Officer for coming to his own conclusion, have been regarded by the Tribunal as not leading to that conclusion, but the Tribunal has referred to a couple of other terms which, in its opinion, added strength to the conclusion which it had recorded as a result of examination of oral evidence that was led before the Income-tax Officer. The Tribunal's finding in this behalf may be quoted in its own words : " We do not, however, think that merely because the bank account continued in the same individual name of Dhanji Lalji and he alone was to operate the account and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stance in the contention of Mr. Mhaispurkar that the Tribunal has merely relied upon some terms for coming to the conclusion that the partnership firm was not genuine. In our view, though the inference that has to be drawn from the material on record would unquestionably be a question of law, the inference drawn by the Tribunal is based upon certain facts which are available on record and it would be difficult for us to come to a conclusion that the material which the Tribunal found on record was suck that no suck inference about non-genuineness of the partnership could at all be drawn by it. From this point of view, if some of the answers given by the three witnesses which were examined by the Income-tax Officer are taken into account, it will appear clear that there was no other material on record on the basis of which the Tribunal could come to the conclusion that the three alleged working partners were not genuine partners but were dummies in the partnership. In the first place, there is a recital in the deed of partnership which suggests the reason why Dhanji Lalji converted his proprietary business into a partnership business and the reason suggested is that Dhanji Lalji foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iving evidence nor was he aware of the rate prevailing a day or two earlier. He was specifically asked as to what work he had done in the firm for the last two months, that is, two months prior to his giving evidence and he stated that he had done nothing for the firm during those two months. He also admitted that though his share of profit amounted to Rs. 12,000 he had not withdrawn any amount in S.Y. 2015 but in the next year he had withdrawn Rs. 6,000. He admitted his relationship with Dhanji Lalji, viz., that he was his younger brother. To a pointed question as to whether he could say that the services rendered by him to the firm were such as to entitle him to a partnership share or that he had been admitted as a partner out of consideration of relationship with Dhanji Lalji, he stated that he had become a partner both on account of the work as well as on account of his relationship. So far as the other two witnesses are concerned it became clear from their evidence that the change in their status had not given them any more power nor brought about additional work or responsibility to them. Whatever work the two were doing in the proprietary firm of Dhanji Lalji was continued b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows that one of the three other alleged partners was the younger brother of Dhanji Lalji and the other two were his employees and also related to them, being his brothers-in-law. None of them had contributed any capital to the firm. This entire evidence clearly runs counter to the reason which has been incorporated in the deed of partnership as to why Dhanji Lalji thought of having these three persons as his partners. It is on appreciation of the entire evidence that the Tribunal came to the conclusion that the other three partners were dummies in the partnership. It is impossible to take the view that for this finding there was no material or no evidence whatever available on record. In fact, the material was such that such an inference could legitimately be drawn. Turning to the deed of partnership, there are four terms which are material. Under clause 10 it is provided that the bank account shall be in the name of Shah Dhanji Lalji and he alone has been given the power to draw, accept or endorse the bills or cheques in the name of the partnership in the usual course of partnership ; under clause 12 it has been provided that it is Shah Dhanji Lalji alone who shall employ such p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch have emerged from the oral evidence given by the three witnesses read along with some of the terms of the partnership deed they clearly lead to an inference that the partnership was not genuine and that is exactly what the Tribunal has done and, therefore, it is not possible to come to a contrary conclusion than what has been arrived at by the Tribunal. In this view of the matter, we would only make a brief reference to some of the decisions to which our attention was drawn by Mr. Mhaispurkar. He first referred us to the case of Krishna Flour Mills v. Commissioner of Income-tax [1962] 44 ITR 501 (SC). He pointed out that in this case the Supreme Court has categorically laid down a proposition that whether a firm is genuine or not is normally a question of fact ; but whether in the facts and circumstances found by the Tribunal there was material to come to the conclusion that the partnership firm constituted by a certain deed of partnership was not genuine is a question of law. There is no dispute with regard to this proposition enunciated by the Supreme Court in the above case. He further pointed out that in that case the facts were that a person entered into a partnership with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as merely a dummy and not a partner of the firm. In supporting this contention reliance was placed by him upon the decision in United Patel Construction Co.'s case [1966] 59 ITR 424 (MP). But, as we shall point out, the facts obtaining in that case are entirely different from the one which are obtaining in the instant case before us. The first part of the head-note runs thus : "A partnership may comprise some member known as a dormant or sleeping partner, who is not generally interested in the conduct of the business and who could not be expected to be aware of the details of the partnership business, but it cannot be reasonably inferred from his ignorance about the details that the partnership was not genuine." Relying upon the aforesaid aspect which has been brought about by the aforesaid decision it was sought to be urged by Mr. Mhaispurkar that simply because Govindji Lalji was an inexperienced person and was not doing anything worthwhile for the partnership firm it cannot be inferred that he was not a genuine partner of the firm. Now, the proposition enunciated by the Madhya Pradesh High Court is entirely different. The proposition is in connection with how a dormant partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l because of any of the decisions on which reliance was placed by Mr. Mhaispurkar. It is not possible to accept Mr. Mhaispurkar's contention that the circumstances or factors which have been taken into account by the Tribunal could be said to be irrelevant material or irrelevant factors. All that he could really urge was that one or the other of such factors by itself was not sufficient to lead to that inference with which proposition there could be no quarrel. Having regard to the above discussion, therefore, our answers to the two questions in I. T. Application No. 33 of 1964 would be as follows, respectively : (1) Several restrictions contained in the instrument of partnership dated November 12, 1958, by themselves had not rendered the partnership void in law but the said restrictions taken along with several facts and circumstances that emerged on record are sufficient to come to the conclusion that the partnership was not a genuine partnership. (2) There was sufficient evidence on record to support the finding of the Tribunal that the status of the partners was no more or higher than dignified employees and for a further finding that the agency of the partners inter se h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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