COMMISSIONER OF INCOME TAX Vs. THREE ACES

JUDGEMENT

(1.) Three identical questions are referred in these references. The assessee is common. The questions referred are :

(2.) Two persons, Bishanlal and Jagatram, constituted a partnership called Three Aces which was running a restaurant and bar at Abid Road, Hyderabad. On 21/11/1971, Jagatram retired from the partnership, with the result that the partnership firm came to an end. Bishanlal took over the business. On 4/01/1972, a deed of partnership was executed between Bishanlal and his four daughters. The fourth and youngest daughter attained majority only on the previous day, i.e., on 3/01/1972. The partnership deed stated that after Jagatram retired, the business of Three Aces was taken over by Bishanlal along with its assets and liabilities as a going concern and that he has admitted his four daughters into the partnership with them with effect from 22/11/1971. The accounting year followed by the assessee happens to be the financial year. For the assessment year 1972-73, two returns were filed in the name of the partnership firm, Three Aces; one pertained to the period 1/04/1971, to 21/11/1971, with two partners, namely, Bishanlal and Jagatram, and the other return was filed by the new partnership "Three Aces" consisting of Bishanlal and his four daughters. Registration under section 184 was applied for for the new partnership. For the next assessment year, i.e., 1973-74, the new firm submitted its return with an application to continue the registration for that year. The Income-tax Officer granted and renewed the registration to the new firm. Consequently, he made two separate assessments for the assessment year 1972-73 on the basis of the returns filed. However, the Commissioner of Income-tax revised the order of the Income-tax Officer in exercise of his powers under section 263. The Commissioner was of the opinion that what happened during the accounting year relevant to the assessment year 1972-73 is not a case of one partnership succeeding another but that it was merely a case of reconstitution of the firm. He was, therefore, of the opinion that a single assessment ought to have been made for the said assessment year on the firm "Three Aces". He was of the further opinion that the new partnership deed executed on 4/01/1972, suffered from a patent illegality inasmuch as the 5th partner, Sashi Rani, was admitted as a partner with effect from 22/11/1971, when she was still a minor (as stated above, she attained majority only on 3/01/1972). Moreover, under the partnership deed, Sashi Rani was made liable even for losses, if any, incurred in the business carried on from 22/11/1971, to 3/01/1972, i.e., during the period when she was a minor. This, the Commissioner held, was contrary to law. He gave yet another reason against granting registration to the new firm, viz., that the exclusion of the partner, Jagatram, and induction of four new partners was contrary to rule 39 of the Andhra Pradesh Foreign Liquor and Indian Liquor Rules, 1970, and hence the new partnership cannot be said to be having a licence to carry on the excise business. For the above reasons, he was of the opinion that there is scope for doubting whether the formation of the new firm was genuine, and if genuine, whether it was lawful. Accordingly, he set aside the order of the Income-tax Officer and remanded the matter to him to examine the genuineness of the new firm and also to examine whether it was a case where the licence under the excise law was obtained by one party and was actually used by the other party. It is evident that the reasons given by the Commissioner for setting aside the order of the Income-tax Officer and the order of remand apply equally to both the assessment years.

(3.) The assessee appealed against the order of the Commissioner. Two appeals were filed for the two assessment years. The Tribunal considered both the appeals together and allowed them. The Tribunal was of the opinion that (i) it was not a case of reconstitution of the firm, but succession of one firm by another firm in the middle of the relevant accounting year, and hence a single assessment for the assessment year 1972-73 was unsustainable in law; (ii) though the formation of an oral partnership on 22/11/1971, between Bishanlal and his four daughters (where under the minor, Sashi Rani, was admitted to the benefits of the partnership) is not established, yet in view of the fact that Sashi Rani, after attaining majority, entered into a partnership with others on 4/01/1972, and undertook to bear even losses, if any, incurred till then during that accounting year, there was no illegality in the deed of partnership or in the formation of the partnership. Since the profits or losses of a partnership do not arise on each day but only at the end of the accounting year, and because by 31/03/1972, Sashi Rani had become a major, there was nothing wrong in her undertaking to bear both profits and losses; and (iii) the violation, if any, of rule 39 of the Excise Rules does not render the partnership illegal. On this ground, therefore, registration cannot be refused.