MANILAL DHARAMCHAND Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE short question which we have to decide in this reference is whether the purported partnership formed by the deed of partnership dated 12th November, 1953, is one which gives rise to a legal partnership and can be registered under S. 26A of the Indian INCOME TAX ACT, 1922. Manilal and Keshavlal were two brothers and they were coparceners in an HUF. They entered into a partnership with one Mangalji on 25th October, 1943. That partnership carried on business in grains at village Pimpalgaon under the name and style of Manilal Dharamchand. Then the two families of Manilal and Keshavlal separated by a partial partition between Manilal and Keshavlal. This was on the 24th October, 1946. Each of the two brothers, Manilal and Keshavlal, had sons and their joint undivided families with their male children were being separately assessed in the status of HUF with reference to their share of the income from the family firm, Manilal Dharamchand. At the end of the Samvat year 2009 (ending on 6th November, 1953), Mangalji retired from the partnership in the firm of Manilal Dharamchand. On 12th November, 1953, a new partnership deed came to be executed consisting of four partners who were given shares as follows :

(2.) THERE was no separation between the families of Manilal and Keshavlal and their respective sons and that is why Manilal and Keshavlal represented their respective undivided families. As regards the capital, the document is silent, but it has been found as a fact that no capital was introduced by any of the partners and the whole capital had come in by way of a loan from the firm of Manilal Dharamchand at Pimpalgaon. Thus, the entire capital brought into the new partnership were the funds of the HUF of Manilal Dharamchand. In paragraph 4 of the statement of the case it has also been stated that Manilal and Keshavlal are shown to have contributed, respectively, Rs. 50,000 and Rs. 44,500 as the capital of the firm, but the two other partners, namely, Rasiklal and Champalal, contributed nothing. Upon the formation of this new partnership on the 12th November, 1953, the firm applied for registration but the ITO considered that the firm was not a genuine partnership at all and, therefore, he rejected the application under S. 26A. He pointed out that Rasiklal had not introduced any capital into the firm, was staying all along at Nasik and taking into account several other circumstances held that he was not a genuine partner. He held similarly so far as Champalal was concerned. The AAC did not agree with the findings of the ITO. He came to the conclusion that the partnership was a genuine partnership and that since Manilal and Keshavlal, the two partners in the assessee - firm, were not partners in their individual capacity but as representatives of their respective families, it was clear that their shares could only be assessable in the hands of the original HUF of Manilal Dharamchand of Pimpalgaon. He, therefore, allowed the appeal and ordered the registration of the firm under S. 26A of the Act.

(3.) AT the instance of the assessee two questions were referred to this Court on 23rd March, 1962, as follows :