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

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 aliaany 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.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,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 individualseems 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 Highthe 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 thisits 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 foris 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 Tribunalits 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 specials is an appeal from a judgment of the High Court of Punjab rejecting a petition made by the Commissioner of Income-tax, Punjab, under S. 66 (2) of the Indian Income-tax Act, 1922, for calling upon the Income-tax Appellate Tribunal to refer certain questions of law to the High Court.14. The relevant facts are these:On December 29, 1948, Gosain Chander Bhan and four others entered into a partnership for carrying on the business of contractors in the name of "Gosain Chander Bhan and Co ." The partnership was entered into at Ferozepore and GosainChander Bhan was a major shareholder in the firm. By a deed of partnership, dated June 14, 1952, the firm was reconstituted and three other persons were admitted as partners therein. The old name, however was continued. One of the terms of the partnership was that if any work was carried on by any one of the partners individually or in partnership with with others the profits and losses arising out of that work would be divided amongst all the partners in proportion of their shares in the firm. On December 5, 1952, a partnership firm bearing the name of "Messrs. Chander Bhan Harbhajan Lal" was formed at Rupar. The deed of partnership sets out the names of 14 persons including Gosain Chander Bhan as partners and the object of the firm was to carry on business similar to that carried on by Gosain Chander Bhan and Co. It may be mentioned that in this firm also Gosain Chander Bhan was the major shareholder. For convenience we would call the firm constituted on June 14, 1952, as the Ferozepore firm and the one constituted on December 5, 1952, as the Rupar firm.15. On April 21, 1953 an application was presented by the partners of the Rupar firm, accompained by the deed of partnership, dated December 5, 1952 before the Income-tax Officer, Ambala for registration of the firm under S. 26-A of the Act for the assessment year 1953-54. The Income-tax Officer examined the partners constituting the firm and recorded their statements in order to ascertain the true position with regard to the constitution of the firm. Harbhajan Lal in his statement, dated January 30, 1954 and the other partners in their statements, dated February 27, 1954 admitted that Gosain Chander Bhan had entered into the partnership not in his individual capacity but on behalf of the Ferozepore firm. The Income-tax Officer also found that the funds invested in the Rupar firm in the name of Gosain Chander Bhan were also provided by the Ferozepore firm. Upon these and some other facts he came to the conclusion that the deed of partnership, dated December 5, 1952 did not specify the real partners of the firm and, therefore, the firm cannot be registered. He further came to the conclusion that as in reality all the partners of the Ferozepore firm and not Gosain Chander Bhan alone, were also partners along with 16 other persons in the Rupar firm, the total number of partners exceeded 20. Such a partnership being invalid in law the firm could not be registered under S. 26-A of the Act. He, therefore, dismissed the application by his order dated February 27, 1954. In appeal his order was, however, reversed by the Appellate Assistant Commissioner by his order dated August 12, 1954. The appeal preferred therefrom by the Income-tax Officer before the Income-tax Appellate Tribunal (Delhi Branch) was dismissed by it by its order, dated September 5, 1955. In doing so the Tribunal based itself on the decision in AIR 1955 Pat 225   and 1953-24 ITR 173   (Punj). The Commissioner of Income-tax then applied to the Tribunal under S. 66 (1) to refer to the High Court four questions of law. The Tribunal, however, rejected the application on March 5, 1956. The Commissioner thereupon preferred a petition before the High Court under S. 66 (2) for directing the Tribunal to refer four questions of law to it. At the hearing, however, only the following two questions were pressed on hisWhether there is any material on the record to support the finding that Gosain Chander Bhan was the real partner of the assessee firm and was not a partner in the representative capacity representing all the partners of Gosain Chnader Bhan and Company of Ferozepur?(2) Whether the present is a case of sub-partnership to which two cases, AIR 1955 Pat 225   and (1953) 24 ITR 173 (Punj) referred to in the order of the TribunalHigh Court, as already stated, dismissed the application and now the matter is before us by special leave.

Reasoning: 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.