Case: Commissioner Of Income-Tax, Punjab Vs. M/S. Chander Bhan Harbhajan Lal

Bachawat, J. [for self and Sarkar, J.]1. This appeal by special leave is from an order of the Punjab High Court rejecting an application by the Commissioner of Income-tax, Punjab, under S. 66(2) of the Indian Income-tax Act, 1922. On April 21, 1953, 14 partners of the firm of Messrs. Chander Bhan Harbhajan Lal of Rupar (hereinafter referred to as the assessee firm) constituted under the instrument of partnership, dated December 5, 1952, applied to the Income-tax Officer, Project Circle, Ambala, for registration of the firm under S. 26-A of the Indian Income-tax Act. It may be mentioned at this stage that there was another firm of the name of Chander Bhan and Co., of Ferozepore (hereinafter referred to as the Ferozepore firm), consisting of 8 partners and constituted under a deed, dated June 14, 1952 which provided inter alia :"If any one of the executants enters into business individually or along with another person, all the "partners of the firm shall be entitled to the profit and liable for the loss, accruing from that business according to the shares hereinbefore mentioned."2. One Gosain Chander Bhan was a partner of both the assessee firm and the Ferozepore firm. In course of proceedings arising out of the application for registration of the asseessee firm under S. 26-A, Harbhajan Lal, one of its partners, stated on January 30, 1954:"I Harbhajan Lal son of Shri Ram Chand of Rupar solemnly declare that firm M/ s. Chander Bhan Harbhajan Lal consisted of 14 partners as mentioned in the return and deed of partnership. Gosain Chander Bhan was partner not in his individual capacity but on behalf of the firm M/s. Gosain Chander Bhan and Company Ferozepur having about six partners. Other partners are partners in their individual capacity."It seems that other partners of the assessee firm made similar statements on February 27, 19543. The capital of the assessee firm was supplied by Gosain Chander Bhan. It appears that Gosain Chander Bhan had taken the capital from the Ferozepore firm, and the amount was shown as an item in his accounts with the Fezorepore firm.4. By his order, dated February 27, 1954, the Income-tax Officer rejected the application under S. 26-A. He held that (I) the deed, dated December 5, 1952 did not specify the date of the constitution of the assessee firm; (2) some of the parties to the deed having no experience in the business of the firm were not really partners therein, and the number of partners in the firm had been artificially increased with a view to reduce the taxable liability; (3) the firm was not genuine, as it had no banking account, did not possess the income-tax clearence certificate, did not notify its constitution to the P. W. D. and payments were received from the P. W. D. and payments were received from the P. W. D. in the name of Harbhajan Lal. On appeal, the Appellate Assistant Commissioner, Ambala Branch, set aside all these findings of the Income-tax Officer. The correctness of the decision of the Appellate Assistant Commissioner on these points is no longer challenged.5. The Income-tax Officer also held that though the deed, dated December 5, 1952, stated that Gosain Chander Bhan was the partner having 6/16th share, in reality the Ferozepore firm was the partner of the assessee firm having 6/16th share therein and consequently, the assessee firm was illegally constituted, because (1) the Ferozepore firm could not legally be a partner in the assessee firm; (2) the total number of partners of the assessee firm was 21, and (3) moreover, the individual shares of the eight partners of the Ferozepore firm were not specified in the deed, dated December 5, 1952. On these findings, the Income-tax Officer rejected the application under S. 26-A. On appeal, the Appellate Assistant Commissioner set aside these findings, and held that Goasin Chander Bhan was the partner of the assessee firm in his individual capacity and not as representative of and on behalf of all the partners of the Ferozepore firm. He held that Gosain Chander Bhan had merely agreed to share his profits and losses in the assessee firm with his other partners of the Ferozepore firm, that such an agreement did not make the other partners of the firm, partners in the assessee firm, and the effect of the agreement was to constitute a sub-partnership only. On further appeal, the Income-tax Appellate Tribunal, Delhi, Branch, upheld these findings of the Appellate Assistant Commissioner and held that those findings were supported by the decisions in Commissioner of Income-tax B. and O. v. M/s. Agardih Colliery, AIR 1955 Pat 225 and Commissioner of Income-tax, Punjab v. Laxmi Trading Co., 1953-24 ITR 173 (Punj). The Commissioner of Income-tax, Punjab then applied to the Appellate Tribunal under S. 66 (1) of the Indian Income-tax Act requiring the Tribunal to refer the following questions to the Punjab High Court.1. Whether the Income-tax Appellate Tribunal was right in applying the decision of the Patna High Court in the case of a AIR 1955 Pat 225 and of the Punjab High Court in the case of 1953-24 ITR 173 (Punj) to the facts of this case.2. If the answer to question No. 1 is in affirmative whether the rulings noted above lay down a correct law.3. Whether there is any material to show that there was a sub-partnership formed by Gosain Chander Bhan with other persons at Ferozepur.4. Whether in the circumstances of the case, the correct status of the assessee was firm or association of persons and whether registration under S. 26-A of the Indian Income-tax Act could be allowed in this case."By its order dated September 5, 1955, the Tribunal rejected the application, and held that the questions were concluded by judicial decisions and no useful purpose will be served by referring them again to the High Court. On September 18, 1956, the Commissioner of Income-tax applied to the Punjab High Court under S. 66 (2) of the Indian Income-tax Act for an order directing the Tribunal to refer the aforesaid questions to the High Court. At the hearing of the application before the High Court, Counsel for the Commissioner of Income-tax gave up questions Nos. 2 and 4, and submitted that the following two questions of law arose for decision:"(a) is there any material on the record to support the finding that Gosain Chander Bhan was the real partner of the assessee firm and is not a partner in a representative capacity representing all the partners of Gosain Chander Bhan and Company of Ferozepore, and(b) whether the present is a case of sub-partnership to which the two cases referred to in the order by the Tribunal apply?"By its order, dated January 24, 1961, the High Court dismissed the application, and held that the questions of law were well-settled. The Commissioner of Income-tax now appeals to this Court special leave.6. Counsel for the appellant contended that all the partners of the Ferozepore firm were the partners in the assessee firm, having regard to (1) the fact that the capital of the assessee firm was secured by Gosain Chander bhan from the Ferozepore firm, (2) the clause in the deed of partnership, dated June 14, 1952, under which all the partners of the Ferozepore firm were entitled to the profit and liable for the loss in respect of the share of Gosain Chander Bhan in the assessee firm, and (3) the statement of Harbhajan Lal and other partners of the assessee firm that Gosain Chander Bhan was a partner in the assessee firm not in his individual capacity but on behalf of the Ferozepore firm. We are unable to accept this contention. The real question before us is whether any substantial question of law arises out of the order of the Tribunal. We think that no such question arises. The deed, dated December5, 1952 clearly stated that Gosain Chander Bhan and 18 other parties to the deed were the partners of the assessee firm. On the face of the deed, it does not appear that Gosain Chander Bhan was a partner in a representative capacity on behalf of the Ferozepore firm, or that the Ferozepore firm was the partner in the assessee firm. On the material on the record, the Appellate Tribunal was entitled to come to the conclusion that Gosain Chander Bhan and not the Ferozepore firm was the partner in the assessee firm.7. The capital of the assessee firm was supplied by Gosain Chander Bhan. Gosain Chander Bhan in his turn had taken the amount of the capital from the Ferozepore firm, but there is no evidence to show that he took the money otherwise than in his individual capacity. The clause in the partnership deed constituting the Ferozepore firm to the effect that all the partners of the Ferozepore firm are entitled to the profits and liable for the losses accrued in the share of Gosain Chander Bhan in the assessee firm may show that there is a partnership between Gosain Chander Bhan and other partners of the Ferozepore firm in respect of the share of Gosain Chander Bhan in the profits and losses of the assessee firm. This partnership, if any, between the members of the Ferozepore firm does not make the Ferozepore firm a partner in the assessee firm. The Ferozepore firm is not a party to the agreement of partnership constituting the assessee firm.Gosain Chander Bhan in his individual capacity could legally be a partner in the assessee firm, and the fact that he secured the capital from the Ferozepore firm, or that he entered into a partnership with the other members of the Ferozepore firm in respect of his share in the assessee firm does not show that the Ferozepore firm is a partner of the assessee firm, or that the assessee firm is not validly constituted. In Commissioner of Income-tax, Madras v. Sivakasi Match-Exporting Co., AIR 1964 SC 1813 at p. 1817, Subba Rao, J. observed:"A partner of a firm can certainly secure his capital from any source or surrender his profits to his sub-partner or any other person. Those facts cannot conceivably convert a valid partnership into a bogus one."8. The statements of Harbhajan Lal and other partners of the assessee firm do not carry the matter any further. In the statement dated January 30, 1954, Harbhajan Lal clearly stated that the assessee firm consisted of 14 partners as mentioned in the deed of partnership, dated December 5, 1952. It is true that he stated also that Gosain Chander Bhan was a partner not in his individual capacity but on behalf of the Ferozepore firm, but this statement must be read in the background of the clause in the partnership deed constituting the Ferozepore firm, under which the partners of the Ferozepore firm were entitled to the profits and liable for the losses in the share of Gosain Chander Bhan in the assessee firm. The statement fairly read shows that only the 14 persons mentioned in the deed, dated December 5, 1952, were the partners in the assessee firm. If the 8 partners of the Ferozepore firm were partners in the assessee firm, Harbhajan Lal could not have stated that the number of the partners of the assessee firm was 14 only.9. Counsel for the appellant pointed out that the High Court erroneously assumed that the partnership deed constituting the Ferozepore firm was, dated June 14, 1954, whereas, in fact, this partnership was, dated June 14, 1952. Counsel for the appellant rightly pointed out that on the erroneous assumption that the partnership deed constituting the Ferozepore firm was executed after December 5, 1952, when the assessee firm was constituted, the High Court held that there was a sub-partnership between Goasin Chander Bhan and the other partners in the Ferozepore firm in respect of the share of Gosain Chander bhan in the assessee firm. Counsel then contended that, in law a sub-partnership can be entered only after the partnership is constituted, and, therefore, there, was no sub-partnership between the members of the Ferozepore firm in respect of the share of Gosain Chander Bhan in the assessee firm. In support of this contention, counsel relied on the following passage in Lindley on Partnership, 12th Edn., pp. 99-100:"A sub-partnership is, as it were, a partnership within a partnership; it presupposes the existence of a partnership to which it is itself subordinate."We need not enquire into the correctness of counsels assumption that this passage is an authority for the proposition that there cannot be an agreement of sub-partnership in anticipation of the head partnership coming into existence. But the question whether the relevant clause in the deed, dated June 14, 1952, created a sub-partnership in respect of the share of Chander Bhan in the assessee firm having regard to the fact that this deed was executed before the assessee firm came to be constituted is not material for the purpose of the case, and need not be decided. The clause regulated the relationship of the partners of the Ferozepore firm inter se, and created a partnership between them in respect of the share of Gosain Chander Bhan in the assessee firm. Assuming, without deciding, that this partnership was not, strictly speaking, a sub-partnership, it does not follow that the partners of the Ferozepre firm became partners in the assessee firm. By reason of this clause vis-a-vis the partners of the Ferozepore firm, Gosain Chander Bhan could be regarded as their representative in the assessee firm; nevertheless, they were strangers to the contract of partnership constituting the assessee firm, and did not become partners therein. In Commissioner of Income-tax v. Bagyalakshmi and Co., 1965-55 ITR 660 at p. 664: (AIR 1965 SC 1708 at p. 1710), Subha Rao J. observed:"A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the karta of a joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of persons, he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity, qua the third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their rights against the other partners nor the other partners can do so against the said third parties. Their right is only to a share in the profits of their partner-representative in accordance with the terms of the agreement, as the case may be."10. Quite plainly, the relevant clause in the deed, dated June 14, 1952 was not part of the agreement of partnership, dated December 5, 1952, constituting the assessee firm, and did not affect the right of the partners of the assessee firm, to claim registration of the assessee firm under S. 26-A. It is not possible to say that there are no materials on the record to support the finding that Gosain Chander Bhan was a partner of the assessee firm in his individual capacity and not as representing the Ferozepore firm. The question whether there was a sub-partnership between the members of the Ferozepore firm in respect of the share of Gosain Chander Bhan is not material because assuming that there was no sub-partnership, the members of the Ferozepore firm did not become partners in the assessee firm by virtue of the relevant clause in the deed, dated June 14, 1952 or otherwise. We are, therefore, satisfied that no substantial question of law arises out of the order of the Appellate Tribunal.11. Counsel for the appellant submitted that as a question of law arose out of the order of the Tribunal, the High court was bound to call for a statement of case.

Decision reasoning: 1[ds]The deed, dated December5, 1952 clearly stated that Gosain Chander Bhan and 18 other parties to the deed were the partners of the assessee firm. On the face of the deed, it does not appear that Gosain Chander Bhan was a partner in a representative capacity on behalf of the Ferozepore firm, or that the Ferozepore firm was the partner in the assessee firm. On the material on the record, the Appellate Tribunal was entitled to come to the conclusion that Gosain Chander Bhan and not the Ferozepore firm was the partner in the assessee firm.8. The statements of Harbhajan Lal and other partners of the assessee firm do not carry the matter any further. In the statement dated January 30, 1954, Harbhajan Lal clearly stated that the assessee firm consisted of 14 partners as mentioned in the deed of partnership, dated December 5, 1952. It is true that he stated also that Gosain Chander Bhan was a partner not in his individual capacity but on behalf of the Ferozepore firm, but this statement must be read in the background of the clause in the partnership deed constituting the Ferozepore firm, under which the partners of the Ferozepore firm were entitled to the profits and liable for the losses in the share of Gosain Chander Bhan in the assessee firm. The statement fairly read shows that only the 14 persons mentioned in the deed, dated December 5, 1952, were the partners in the assessee firm. If the 8 partners of the Ferozepore firm were partners in the assessee firm, Harbhajan Lal could not have stated that the number of the partners of the assessee firm was 14for the appellant rightly pointed out that on the erroneous assumption that the partnership deed constituting the Ferozepore firm was executed after December 5, 1952, when the assessee firm was constituted, the High Court held that there was a sub-partnership between Goasin Chander Bhan and the other partners in the Ferozepore firm in respect of the share of Gosain Chander bhan in the assessee firm. Counsel then contended that, in law a sub-partnership can be entered only after the partnership is constituted, and, therefore, there, was no sub-partnership between the members of the Ferozepore firm in respect of the share of Gosain Chander Bhan in the assessee firm. In support of this contention, counsel relied on the following passage in Lindley on Partnership, 12thclause regulated the relationship of the partners of the Ferozepore firm inter se, and created a partnership between them in respect of the share of Gosain Chander Bhan in the assessee firm. Assuming, without deciding, that this partnership was not, strictly speaking, a sub-partnership, it does not follow that the partners of the Ferozepre firm became partners in the assessee firm. By reason of this clause vis-a-vis the partners of the Ferozepore firm, Gosain Chander Bhan could be regarded as their representative in the assessee firm; nevertheless, they were strangers to the contract of partnership constituting the assessee firm, and did not become partnerse need not enquire into the correctness of counsels assumption that this passage is an authority for the proposition that there cannot be an agreement ofin anticipation of the head partnership coming into existence. But the question whether the relevant clause in the deed, dated June 14, 1952, created ain respect of the share of Chander Bhan in the assessee firm having regard to the fact that this deed was executed before the assessee firm came to be constituted is not material for the purpose of the case, and need not beQuite plainly, the relevant clause in the deed, dated June 14, 1952 was not part of the agreement of partnership, dated December 5, 1952, constituting the assessee firm, and did not affect the right of the partners of the assessee firm, to claim registration of the assessee firm under S.It is not possible to say that there are no materials on the record to support the finding that Gosain Chander Bhan was a partner of the assessee firm in his individual capacity and not as representing the Ferozepore firm. The question whether there was abetween the members of the Ferozepore firm in respect of the share of Gosain Chander Bhan is not material because assuming that there was nothe members of the Ferozepore firm did not become partners in the assessee firm by virtue of the relevant clause in the deed, dated June 14, 1952 or otherwise. We are, therefore, satisfied that no substantial question of law arises out of the order of the Appellate Tribunal.