Case: Commissioner Of Income-Tax, Madras Vs. Sivakasi Match Export Company

2. The facts that have given rise to the appeal may briefly be stated. There are 5 firms in Sivakasi manufacturing matches under the name and style of Shenbagam Match Works, Brilliant Match Works, Manoranjitha Match Works, Pioneer Match Works and Gnanam Match Works. The total number of the partners of all the 5 firms does not exceed 10 or 11 in number. Rajamoney Nadar is the sole proprietor of Shenbagam Match Works and in the other 4 firms there are more than one partner. In the year 1948 a person from each of those firms in his representative capacity formed a partnership to carry on the business of banking and commission agents, the principal business being the marketing of the products of the different match factories in Sivakasi. When the said partnership applied for registration for the assessment year 1949-50, it was refused by the Income-tax Department on the ground that different firms could not constitute a valid partnership. Thereafter, Sankarlinga Nadar, Arumughaswami Nadar, Arunachala Nadar, Palaniswami Nadar and Rajamony Nadar, the first four being one of the partners of their respective firms and the last being the sole proprietor of his firm, in their individual capacity entered into a partnership for the aforesaid purpose and executed a partnership deed dated. April 1, 1950. They presented the said deed of partnership to the Income-tax Officer for registration. The Income-tax Officer by his order dated October 27, 1952, registered the same under S. 26-A of the Act; but the Commissioner of Income-tax, acting under S. 33-B of the Act, cancelled the registration by an order dated October 23, 1954, and directed the assessment to take place as that of an unregistered firm. On appeal, the Income-tax appellate Tribunal held, on a construction of the partnership deed and also on the basis of some other circumstances, that the said deed "is not genuine and brought into existence only as a simulate arrangement, that the profits which are distributed under the deed to the individuals mentioned there in are not the true profits of those individuals." In short it held that the said partnership deed was not a genuine one. On a reference made to the High Court of Judicature at Madras, a Division Bench of the High Court, on a construction of the document, came to the conclusion that the Match Works were not the real parties to the partnership but the parties of the document were the real partners. Hence the present appeal.

Reasoning: It is not disputed that the partnership deed exfacie conforms to the requirements of the law of partnership as well as the Income-tax Act. Under S. 4 of the Indian Partnership Act partnership is the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all persons who have entered into the partnership with one another called individually partners and collectively a firm and the name under which the business is carried on is called the firm name. The document certainly conforms to the said definition. There is also no prohibition under the partnership Act against a partner or partners of other firms combining together to form a separate partnership to carry on a different business. The fact that such a partner or partners entered into a sub-partnership with others in respect of their share does not detract from the validity of the partnership; nor the manner in which the said partner deals with the share of his profits is of any relevance to the question of the validity of the partnership. The document, therefore, embodies a valid partnership entered into in conformity with the law of partnership.6. But the Tribunal has held that the partnership is not genuine one for the following reasons: (i) previously the firm entered into a partnership but the registration of the same was rejected; (ii) under Cl. 16 of the partnership deed the firm has the right to collect the commission of the entire match production of the larger partnership whether they effect their sales through the firm or not; (iii) the books of Gnanam Match Works show unmistakably that the capital was contributed not by Palaniswamy Nadar in his individual capacity but by the larger firms as such; and (iv) regarding the other three larger firms also the profit delivered by their representatives from the assessee firm was divided amongst all the partners according to their profit sharing ratio in the larger firms. On the other hand, the High Court found, on a construction of the relevant clauses of the partnership deed that the business was the business of partners of the firms alone and that the two circumstances relied upon by the Tribunal were irrelevant in ascertaining whether the said partnership was real or not. We have already pointed out that the document exfacie discloses a valid partnership. The partnership was avowedly entered into by the partners in their individual capacity as their previous partnership in their representative capacity was not registered on the ground that such a partnership was illegal. If the larger firms cannot constitute members of a new partnership, some of the partners of those firms can certainly enter into a partnership shedding their representative capacity if they can legally do so. If they can do so, the mere fact that one of them borrowed the capital from a parent firm-we are using this expression for convenience of reference - or some of them surrendered their profits to the parent firm cannot make it any the less a genuine firm. Nor does cl. 16 of the partnership deed detract from its genuineness; that clause does not create any right in the partnership to collect the commission; in view of the close connection between the assessee firm and the parent firm, the parent firms were expected to effect all their sales through the assessee firm. If they did not and if they refused to pay commission, the assessee-firm could not enforce its right under the said clause. Clause 22 in express terms emphasizes the separate identities of the assessee firm and the parent firms and Cl. 23 declares that notwithstanding the fact that the loss to the assessee-firm has arisen on the sale or transaction relating to the match manufacturing concerns, the assessee-firm alone shall bear the loss and thereby indicates that the loss of the assessee-firms will not be borne by the parent firms. If the assessee-firm has a existence, the two circumstances relied upon by the Tribunal, namely, that Palaniswamy Nadar, one of the partners of the assessee-firm, brought in the capital from his parent-firm or that the profits earned by some of the partners were surrendered to the parent firm, would be irrelevant. 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.7. The Tribunal mixed up the two concepts, viz., the legality of the partnership and the ultimate destination of the partners profits. It also mixed up the question of the validity of the partnership and the object of the individual partners in entering into the partnership. If to avoid a legal difficulty 5 individuals, though four of them are members of different firms, enter into a partnership expressly to comply with a provision of law, we do not see any question of fraud or genuineness involved. It is a genuine document and it complies with the requirements of law. It is not an attempt to evade tax, but a legal device to reduce its tax liability. The fact that all the partners of all the firms did not exceed 12 in number and if they chose all of them could have entered into the partnership indicates that there was no sinister motive behind the partnership. As the Tribunal misconstrued the provisions of the partnership deed and relied upon irrelevant considerations in coming to the conclusion it did, the High Court rightly differed from the view of the Tribunal. In the circumstances, in view of the decision of this Court in Sree Meenakshi Mills case. (1957) 31 ITR 28 : ((S) 1957 SC 49)  a question of law within the meaning of S. 66 (2) of the Act arose for decision. The High Court rightly answered the question in thescope of the provision has been elaborately considered by this court in Sree Meenakshi Mills Ltd. v. Commissioner ofMadras (1957) 31 ITR 28  : ((S) AIR 1957 SC 49 ). Therein the scope of the provision has been laid down under different propositions. On the basis of the judgment it cannot be gainsaid that if the order refusing registration goes beyond the scope of the jurisdiction conferred on theOfficer under S. 26A of the Act and the Rules made thereunder or if the decision depends upon the construction of the partnership deed or if there is no evidence to sustain the finding of the Tribunal, then the High Court will have jurisdiction to entertain the reference under S. 66(2) of the Act.In our view, the finding of the Tribunal falls squarely under the said three heads.