MOTI CHANDRA Vs. INCOME-TAX OFFICER

JUDGEMENT

(1.) These two petitions under Article 226 of the Constitution were heard together and are being disposed of by a common order for they raise common questions of fact and law. Writ partition No. 1553 of 1958 relates to proceedings under Section 34 of the Income-tax Act and Rule 6-B of the Income-tax Rules in respect of the assessment year 1949-50 while writ petition No. 1370 of 1959 relates to similar proceedings for the assessment year 1950-51. The petitioners in case No. 1553 of 1958 are Shri Moti Chandra, Sri Kailash Nath, Shri Sarwan Lal Agarwal and Master Krishna Chandra (minor), while the petitioners in the other case are Shri Moti Chandra and Shri Sarwan Lal. The opposite party in both the cases is the Income-tax Officer, District III (ii), Kanpur. It is stated that a business was carried on in the name and style of Messrs. Roopnarain Ramchandra at Kanpur and this business belonged to a firm which in the relevant accounting period was constituted under an instrument of partnership dated the 28th of March 1947. The constitution of the firm, according to this instrument of partnership, a copy of which is annexure 'C' to the affidavit filed in support of petition No. 1370 of 1959 was as follows : 1. Lala Ajodhya Prasad 3/20 Lala Sharwanlal 3/20 Lala Moti Chandra 2/20 Lala Musaddi Lal 3/40 Lala Shiva Pershad 3/40 Lala Radhey Lal 3/40 Lala Shree Kishan 3/40 and Lala Moti Chandra (minor) admitted to benefits of partnership to the extent of 6/20.

(2.) The firm was assessed to tax for the assessment years 1949-50 and 1950-51 in the status of a registered firm and the instrument of partnership dated the 28th of March 1947 was the basis of the registration of the firm under Section 26-A of the Income-tax Act. It appears that on the 27th of November 1952, another instrument of partnership was exe- cuted according to which the constitution of the firm became as follows: 1. Shri Ajodhya Prasad 24/160 2. Shri Sarwan Lal 24/160 3. Shri Moti Chandra 24/160 4. Shri Musaddi Lal 15/160 5. Shri Kailash Nath 11/160 6. Shri Radhey Lal 15/160 7. Shri Shree Kishen 15/160 8. Shri Amar Nath 8/160, and Master Krishna Chandra (minor) admitted to the benefits of partnership to the extent of 24/160.

(3.) It is stated in the petition that this firm also was dissolved on the 1st March 1956. The firm constituted under the earlier instrument of partnership was registered under the Income-tax Act for the assessment year 1948-49, and the registration was renewed for the years 1949-50, 1950-51, 1951-52 and 1952-53. For the assessment year 1953-54 an application for the registration of the new instrument of partnership dated the 27th November 1952 was made and was allowed. During the course of assessment proceedings for the year 1954-55 an application for renewal of registration was made and a similar application was made in the proceedings for the year 1955-56. These two renewal applications were rejected by the Income-tax Officer who took the view that the constitution of the firm as evidenced by the instrument of partnership dated the 27th November 1952, was not genuine and that the profits of the firm were shared not by the nine partners specified in the petition but by twenty more persons. He held that while two of the ostensible partners had joined the partnership in their individual capacities, one had done so in his capacity as Karta, of a Hindu undivided family and six ostensible partners did so on behalf of their respective firms. The Income-fax Officer was of opinion that the members of the undivided family and the partners of the smaller firms were also recipients of the profits of Messrs. Rup Narain Ram Chandra and as profits were shared by all these persons the instrument of partnership did not show the real state of affairs and could not be said to be, a genuine agreement of partnership between nine persons. On the finding that 29 persons were associated together in earning the profit of the business he held that the income was in fact of an association of persons consisting of those 29 individuals. The Income Tax Officer referred to Section 4 of the Indian Companies Act 1913 and held that as an agreement of partnership between more than twenty persons was not legally permissible, those 29 persons constituted not a firm but an association of persons. This view was upheld by the Appellate Assistant Commissioner.