BHIMRAJ BANSIDHAR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this case M/s Bhimraj Bansidhar carried on wholesale business in cloth and also owned house property in the town of Ranchi. The HUF carried on business till the 29th of June, 1946, on which date the books of the business were closed, the accounts were taken and the net assets were divided among all the members of the HUF, namely, Bhimraj (father), Janki Devi (mother) and the five sons Atma Ram, Chiranjilal, Savarmal, Prabhu Dayal and Jagdish. On the 30th June, 1946, a new business under the same name of Bhimraj Bansidhar was started in the first instance with the four major sons as partners of the firm. A deed of partnership was executed by the four sons, Chiranjilal, Atma Ram, Savarmal and Prabhu Dayal on the 3rd Sept., 1946, indicating therein that the partnership was formed with retrospective effect from the 30th June, 1946. This arrangement was varied by a second deed of partnership dt.30th Oct., 1946, by which the benefits of the partnership were extended to the minor son Jagdish. For the asst. year 1948 -49, the HUF filed a return showing an income of Rs. 2,612 and odd. It was claimed by Bansidhar, who filed the return as the Karta, that the cloth business no longer belonged to the joint family but belonged to a partnership consisting of the five sons. The accounting year for which the return was filed was the Rathjatra year 2003 -2004, which corresponds to 30th June, 1946, to 19th June, 1947. An application for registration of the new firm signed by the four major sons and by the father acting for the minor son was also made to the ITO who refused to register the firm on the ground that there had been no effective transfer of assets from the Hindu undivided family to the new partnership, and in any case the new partnership was not a genuine partnership and the ownership of the cloth business continued to remain in charge of the HUF. The ITO, therefore, rejected the application made by the partners for registration of the firm and at the same time increased the quantum of assessment upon the HUF to a sum of Rs. 37,292. An appeal was taken from the order of the ITO to the AAC who dismissed the appeal and affirmed the decision of the ITO on the ground that there was not valid transfer of the assets from the Hindu undivided family to the new partnership. The HUF through its Karta Bansidhar and the partners of the newly constituted partnership preferred appeals before the Tribunal but these appeals were dismissed with slight modification and the decision of the AAC was affirmed as regards the quantum of assessment upon the HUF and as regards the refusal to register the partnership under S. 26A of the Indian IT Act. At the instance of the High Court the Tribunal had referred the following question of law under s. 66(2) of the Indian IT Act :

(2.) THE contention on behalf of the assessee is that there was no material before the Tribunal for reaching the conclusion that there was no disruption of joint family status in respect of the business of cloth and there was not partnership firm constituted between the five sons of Bansidhar which was entitled to registration under S. 26A of the Indian IT Act. Mr. Dutt conceded that the question involved is primarily a question of fact but argued that since there is no material in this case to support the finding of the Appellate Tribunal, the question would become a question of law. Mr. Dutt pointed out that none of the reasons given by the Tribunal has any proximate bearing on the question whether the partnership was actually constituted in the accounting year. On behalf of the assessee the two documents of partnership dt. the 3rd Sept., 1946, and the 30th Oct., 1946, were produced in proof of the fact that the alleged partnership was formed. These documents are registered documents and the contention of Mr. Dutt is, that there is no valid reason given by the Tribunal for holding that the partnership was a fictitious transaction. Counsel also referred to the account books of the assessee dt. the 29th June, 1946, and said that the books of account showed that on the 29th June, 1946, there was an accounting of the assets and liabilities and the business was divided into seven shares and personal accounts were opened for the seven family members and a sum of Rs. 33,756 was credited to the account of each of the seven members. The Tribunal has said that the book balance were simply brought down from the old folios to the new folios and, therefore, some suspicion must be attached to the transaction. There is no point in this observation for the only method by which a business can be divided as a going concern is by dividing the book balances in the names of persons to whom the shares of business have been allotted. A partition may be brought about by mere specification of the shares in the accounts and making entries therein to show that business is held in severalty or in specified shares; it is not necessary that there should be physical division of the business. That is the view taken by the Madras High Court in Jakka Devayya vs. CIT (1952) 22 ITR 264, and by the Patna High Court in R. B. Bansidhar Dhandhania vs. CIT (1944) 12 ITR 126. The truth is that a business as a going concern cannot be divided into parts in the same manner as a house or a block of land and the partition of a business is only possible by making entries in the books of account. The next reason which the Tribunal has given is that there was no formal transfer of assets from the Hindu undivided family to the newly constituted partnership. The AAC thought that a registered document was necessary for transfer of the assets of the cloth business from the Hindu undivided family to the new partnership and in the absence of such a registered document, there was no effectual transfer of the business from the ownership of the family to the ownership of the firm. The point also appears to have influenced the mind of the Tribunal though it is not expressly referred to.

(3.) THE result of this examination is that there is no material to support the finding of the Tribunal that there was no disruption of joint family status on the 29th June, 1946, in respect of cloth business and that no partnership was constituted on the 30th of June, 1946, of the five sons of Bansidhar in the manner alleged on their behalf. We hold, on the contrary, that the entries of books of account dated the 29th June, 1946, and the two deeds of partnership executed on the 3rd Sept., 1946, and the 30th Oct., 1946, constitute sufficient materials in law for a finding as to the disruption of joint family status with respect to the cloth business and for bringing into existence a partnership firm. We are further of opinion that this partnership firm is entitled to registration under S. 26A of the Indian IT Act, and it was not open to the IT authorities to come to a contrary decision. We think that the question referred for the opinion of the High Court must be answered in favour of the assessee in both M. J. C. 147 of 1951 and M. J. C. 148 of 1951. The IT Department must pay the cost of this reference and we assess the hearing fee at Rs. 250 which is the consolidated fee for both the cases.