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Petitioner: COMMISSIONER OF INCOME-TAX, MADRAS VS Respondent: SIVAKASI MATCH EXPORTING Co.Honorable Justice SUBBA RAOH. N. Sanyal,K. Srinivasan and R. Gopalakrishnan
1965 P T D 251
1965 P T D 251
[Supreme Court India]
Present : K. Subba Rao, J. C. Shah and S. M. Sikri, JJ
COMMISSIONER OF INCOME-TAX, MADRAS
Versus
SIVAKASI MATCH EXPORTING Co.
Civil Appeal No. 700 of 1963, decided on 29th April 1964.
Partnership-Registration-Scope of jurisdiction of Income tax Officer-Partners of manufacturing firms forming assessee firm, a separate partnership, in individual capacity-Validity Provision of capital by manufacturing firm on behalf of partner-Distribution of partners' share of profits between members of manufacturing firms Effect-Jurisdiction of High Court on reference-Indian Income-tax Act, 1922, Ss. 26-A & 66-Indian Income-tax Rules, 1922, rr. 2, 3, 4 & 6-B.
There were five match factories in Sivakasi run by five different concerns of which four were firms and the fifth a sole proprietorship. When in 1948, a person from each of these five concerns in his representative capacity formed a partnership, that partnership was refused registration under section 26-A of the Indian Income tax Act, 1922, on the ground that different firms could not constitute a valid partnership. Thereafter one partner from each of the four firms and the proprietor of the fifth concern in their individual capacity constituted the assessee-firm and executed a deed of partnership on April 1, 1950, to carry on the business of banking and commission agents and of marketing the products of the match factories. Under clause 16 of the deed the assessee-firm was to collect a commission on the entire production of the five match factories, irrespective of whether the sales were effected through the assessee-firm or not, and a further commission on the sales effected through the assessee-firm. Clause 22 declared that the business of the assessee-firm had no connection with the match manufacturing business carried on by the five concerns and under clause 23 any loss incurred by the assessee-firm by fire, accident or any other cause had to be borne by the assessee firm itself. The Income-tax Officer refused registration of the assessee-firm under section 26-A, and on appeal the Appellate Tribunal held that the partnership was not genuine for the following reasons : (a) registration of the earlier partnership formed in 1948, had been refused; (b) under clause 16 the assessee firm had the right to collect commission on the entire match production of the five concerns whether they effected their sales through it or not ; (c) capital was contributed to the assessee-firm directly by one of the four firms on behalf of its partner ; and (d) the other three firms divided amongst their partners the profits derived by their respective partners from the assessee-firm. On a reference of the question whether the refusal of registration of the assessee-firm was correct in law, the High Court found, on a construction of the partnership deed, that the business was the business of the partners alone and not of the firms and that the circumstances relied upon by the Tribunal were irrelevant in ascertaining whether the partnership was real or not and the registration of the assessee-firm under section 26-A was wrongly refused. On appeal :
Held, per Subba Rao and Sikri, JJ. (Shah, J. dissenting : (i) that if an order refusing registration of a firm went beyond the scope of the jurisdiction conferred on the Income-tax officer under-section 26-A, and the rules made thereunder, or if the decision depended upon the construction of the partnership deed, or if there was no evidence to sustain the finding of the Tribunal, then the High Court would have jurisdiction to entertain a reference under section 66 (2).
(ii) That the combined effect of section 26-A and the rules made thereunder was that the Income-tax Officer could not reject an application made by a firm if it gave the necessary particulars prescribed by the rules, and if there was a firm in existence as shown in the instrument of partnership. A firm might be said to be not in existence if it was a bogus or not a genuine one, or if in law the constitution of the partnership was void. The jurisdiction of the Income-tax Officer was, therefore, confined to ascertaining two facts, namely, (i) whether the application for registration was in conformity with the rules made under the Act, and (ii) whether the firm shown in the document presented for registration was a bogus one or had no legal existence. Further, the discretion conferred on him under section 26-A was a judicial one and he could not refuse to register a firm on mere speculation, but had to base his conclusion on relevant evidence.
(iii) That there was 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 entered into a sub-partnership with others in respect of his share did not detract from the validity of the partnership ; nor was the manner in which he dealt with his share of the profits of any relevance to the question of the validity of the partnership.
(iv) That a partner of a firm could acquire his capital from any source : he was entitled to borrow the capital from another firm of which also he was a partner.
(v) That clause 16 of the partnership deed did not detract from its genuineness: the clause did not confer any right on the assessee-firm to collect the commission on sales not effected through it.
(vi) That, therefore, the deed dated April 1, 1950, embodied a valid partnership entered into in conformity with the law of partnership.
(vii) That as the Tribunal misconstrued the provisions of the partnership deed and relied upon irrelevant considerations to hold that the partnership was not a genuine one, the High Court had jurisdiction under section 66 to entertain the reference.
Per Shah, J. (dissenting) : (i) It was exclusively within the province of the Tribunal to decide the question whether each partner who signed the deed dated April 1, 1950, was acting in his personal capacity or as representing the manufacturing concerns, and its decision that in entering into the deed of partnership the partners represented their respective concerns was not open to be canvassed in a reference under section 66 (2) of the Indian Income-tax Act.
(ii) It is open to a partner who receives a share in the profits of a firm to dispose of that share in any manner he pleases.
(iii) It is always open to a person consistently with the law to so arrange his affairs that he may reduce his tax liability to the minimum permissible under the law. The fact that the liability to tax has been reduced by the adoption of an expedient which the law permits is wholly irrelevant in considering the validity of that expedient.
Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax (1957) 31 I T R 28 ref.
H. N. Sanyal, Solicitor-General of India (N. D. Karkhanis and R. N. Sachthey with him) for Appellant.
K. Srinivasan and R. Gopalakrishnan for- Respondent.
JUDGMENT
SUBBA RAO, J.-This appeal by special leave is directed against the order of the High Court of Madras in a reference made to it by the Income-tax Appellate Tribunal under section 66 (2) of the Indian Income-tax Act, 1922, hereinafter called the Act.
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, Sankaralinga Nadar, Arumughaswami Nadar, Arunachala Nadar, Palaniswami Nadar and Rajamoney 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 section 26-A of the Act; but the Commissioner of Income-tax, acting under section 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 therein 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 to the documents were the real partners. Hence the present appeal.
Learned counsel for the revenue raises before us the following two points, namely, (i) the finding of the Appellate Tribunal was one of fact and that the High Court had no jurisdiction to canvass the correctness of its finding on a reference made under section 66 (2) of the Act, and (ii) the conclusion arrived at by the Tribunal was the correct one and the High Court erroneously interfered with it.
It is commonplace that under section 66 (2) of the Act a reference to the High Court lies only on a question of law. The scope of the provision has been elaborately considered by this court in Sree Meenakshi Mills Ltd. v. Commissioner of Income tax ((1957) 31 I T R 28). 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 the Income-tax Officer under section 26-A 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 section 66 (2) of the Act. In our view, the finding of the Tribunal falls squarely under the said three heads. The relevant provisions of the Act read thus:
"26-A. (1) Application may be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to income-tax or super-tax.
(2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed ; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed."
In exercise of the powers conferred by section 59 of the Act, the Central Board of Revenue made the following rules:
"2. Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of section 26-A of the Indian Income-tax Act, 1922 (hereinafter in these rules referred to as the Act) register with the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf.
Such application shall be signed by all the partners (not being minors) personally and shall be made-
(a) before the income of the firm is assessed for any year under section 23 of the Act, or. ,"
3. The application referred to in rule 2 shall be made in the form annexed to this rule and shall be accompanied by the original instrument of partnership under which the firm is constituted, together which a copy thereof : . . ."
"FORM I
Form of application for Registration of a Firm under section 26-A of the Indian Income-tax Act, 1922 . . . ."
"4. If, on receipt of the application referred to in rule 3, the Income-tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made, he shall enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate in the following form, namely:- . . . "
"6B. In the event of the Income-tax Officer being satisfied that the certificate granted under . . . rule 6-A, has been obtained without there being a genuine firm in existence, he may cancel the certificate so granted."
A combined effect of section 26-A of the Act and the rules made thereunder is that if the application made by a firm gives the necessary particulars prescribed by the rules, the Income-tax Officer cannot reject it, if there is a firm in existence as shown in the instrument of partnership. A firm may be said to be not in existence if it is a bogus or not a genuine one, or if in law the constitution of the partnership is void. The jurisdiction of the Income-tax Officer is, therefore, confined to the ascertaining of two facts, namely, (i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence. Further, the discretion conferred on him under section 26-A is a judicial one and he cannot refuse to register a firm on mere speculation, but he shall base his conclusion on relevant evidence.
What are the facts in the present case ? The partnership deed is dated April 1, 1950. In the document five persons are shown as its partners. The name of the firm is given, the objects of the partnership business are described, the duration of the business is prescribed and the capital fixed is divided between them in equal shares.. Clause 16 of the partnership deed, on which the Tribunal relied, reads:
"This firm shall collect a commission of half an anna per gross on the entire production of the match factories of the partners, respectively, the Brilliant Match Works, Manoranjitha Match Works, Pioneer Match Works, Shenbagam Match Works and Gnanam Match Works, produced from 1st April 1950, whether sales were effected through this firm or not and a further commission of half an anna per gross on the sales effected through this firm. This commission will be collected on all kinds of matches produced from the abovesaid factories. The commission of half an anna per gross on the entire production of these factories accrued due at the end of every month shall be debited to the respective factories under advice to them."
Clauses 22 and 23 which throw further light on the question raised read:
"22. The business of this firm shall have and has no connection with the match manufacturing business carried on now by the partners separately or in partnership with others.
23. Any loss to the firm by way of fire, accident or by any other cause during the course of the business of the firm, notwithstanding the fact that the loss might have arisen on the sale of or transaction relating to the match manufacturing concerns of the partners to this deed, shall be borne by this firm and shall be equally divided between the partners to this deed."
It is not disputed that the partnership deed ex facie conforms to the requirements of the law of partnership as well as the Income-tax Act. Under section 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 are 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.
But the Tribunal has held that the partnership is not a genuine one for the following reasons : (i) previously the firm entered into a partnership but the registration of the same was rejected ; (ii) under clause 16 of the partnership deed the firms have the right to collect the commission of the entire match production of the larger partnerships 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 firm as such; and (iv) regarding the other three larger firms also the profit derived 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 the 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 ex facie 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 clause 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 firms, 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 clause 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 firm will not be borne by the parent firms. If the assessee-firm has an 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 firms, 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.
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 a question of law within the meaning of section 66 (2) of the Act arose for decision. The High Court rightly answered the question in the negative.
In the result, the appeal is dismissed with costs.
SHAH, J.-Sivakasi Match Export Company-hereinafter referred to as "the assessee" is a partnership "carrying on business as bankers, commission agents and distributors of the products of different match factories at Sivakasi in the State of Madras.". The assessee-firm was formed under a deed dated April 1, 1950. There were five partners of the firm (1) N.P.A.M. Sankaralinga Nadar (2) K.S.S. Arumugaswami Nadar (3) K.A.S. Arunachala Nadar (4) K.P.A.T. Rajamoney Nadar and (5) V.S.V.P. Palaniswamy Nadar. Before April 1, 1950, there existed a firm also named Sivakasi Matches Exporting Company which "consisted of a combine of six match factories" at Sivakasi constituted under a partnership deed dated March 12, 1948. Registration of this partnership under section 26-A of the Incometax Act, 1922, was refused on the ground that the partnership deed did not specify the actual shares of the individual partners. Thereafter, a deed forming the partnership which is sought to be registered in these proceedings was executed on April 1, 1950. It was recited in the preamble that originally four out of the five partners had been carrying on business in partnership as representatives of their respective match concerns, and it was found necessary that they should carry on the said business from April 1, 1950, jointly in their individual capacity, and it was agreed to admit into their partnership as and from April 1, 1950, the fifth person, namely, V.S.V.P. Palaniswamy Nadar. The following are the material paragraphs of the agreement of partnership:
"(16) This firm shall collect a commission of half an anna per gross on the entire production of the match factories of the partners, respectively, The Brilliant Match Works, Manoranjitha Match Works, Pioneer Match Works, Shenbagam Match Works and Gnanam Match Works produced from 1st April 1950, whether sales were effected through this firm or not and a further commission of half an anna per gross on the sales effected through this firm. This commission will be collected on all kinds of matches produced from the abovesaid factories. The commission of hall an anna per gross on the entire production of these factories accrued due at the end of every month shall be debited to the respective factories under advice to them.
(22) The business of this firm shall have and has no connection with the match manufacturing business carried on now by the partners separately or in partnership with others.
(23) Any loss to the firm by way of fire, accident or by any other cause during the course of the business of the firm, notwithstanding the fact that the loss might have arisen on the sale of or transaction relating to the match manufacturing concerns of the partners to this deed, shall be borne by this firm and shall be equally divided between the partners to this deed."
It is common ground that each partner was concerned in the manufacture of matches either as owner or as partner with others. Sankaralinga Nadar carried on business as a manufacturer of matches with two others in the name of the Brilliant Match…
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