P. Banerjee v. Commissioner Of Income Tax — 1956 DIGILAW 100 (PAT)

Judgment Ramaswami, J. 1. In this case the assessment year is 1951-52 and the relevant accounting year is the financial year 1950-51. Dr. P. Banerjee had been carrying the business of manufacture and sale of certain patent medicines, and for the previous years he had been assessed to income-tax in the status of an individual. For the assessment year 1951-52 a notice was served by the Income-tax authorities under Sec.22(2) upon Dr. Banerjee. Thereafter a return was filed by his eldest son Parimal Banerjee as a partner of the firm P, Banerjee and an application was also filed for registration of the firm. The case of the assessee was that there was a partnership constituted of Mrs. Ava Banerjee, the wife of Dr. Banerjee, and his four sons, namely Parimal Banerjee, Prasanta Banerjee, Partha Banerjee and Pranab Banerjee. It was alleged that at the end of March, 1950, Dr. Banerjee had made a gift of the business and the good-will to the partnership, and from 1-4-1950, these five partners carried on the business as a partnership firm. It was also stated that on 6-11-1950, a formal partnership deed was executed between the five partners. The Income-tax Officer rejected the application for registration of the firm on the ground that it was a sham and illusory transaction. An appeal against the order of the Income-tax Officer was taken by the assessee, but the appeal was rejected by the Appellate Assistant Commissioner. The matter was then taken on appeal to the Tribunal by the assessee. The Tribunal dismissed the appeal, holding, in the first place, that as a matter of law there could be no valid partnership existent on 1-4-1950, because on that date only Mrs. Ava Banerjee was an adult and all the four sons of Dr. Banerjee were minors. The Tribunal took the view that unless there was a valid partnership between two adult members, the minors could not be admitted to the benefits of the partnership, and, therefore, the partnership which was said to have come into existence on 1-4-1950, was not valid in the eye of law and could not be registered. In the second place, the Tribunal examined materials produced by the parties and held that the gift of the business and goodwill made by Dr. In the second place, the Tribunal examined materials produced by the parties and held that the gift of the business and goodwill made by Dr. Banerjee in favour of the alleged partners was not genuine and that no gift either of the business or the assets was made by Dr. Banerjee to the alleged firm. The Appellate Tribunal hence took the view that the deed of partnership was a sham transaction and there was no partnership in existence as alleged by. the assessee. In view of these findings the Tribunal held that no registration could be granted under Sec.26A of the Income-tax Act and, therefore, dismissed the appeal. 2. Under Sec. 66(2) of the Income-tax Act the Appellate Tribunal has stated a case and referred it to the High Court upon the following question of law : "Whether in the circumstances of the case the partnership firm constituted under the document of partnership, dated 6-11-1950, should have been registered by the Income-tax authorities under Sec.26-A of the Income-tax Act." On behalf of the assessee Mr. S. N. Dutt put forward the argument that the finding of the Appellate Tribunal about non-existence of the alleged partnership was vitiated by error of law and cannot be allowed to stand. Mr. S. N. Dutt conceded that the question of the existence or non-existence of a partnership is essentially a question of fact, but the point taken by the learned counsel was that in reaching this Ending of fact the Appellate Tribunal has taken into account material which was irrelevant to the enquiry. Learned counsel also made the submission that the finding of the Appellate Tribunal is based mostly on conjecture or speculation. Counsel also said that at least on one point, namely, about the outstandings due to Dr. Banerjee, the Tribunal has committed a mistake of record. In support of his submission counsel referred to the statement of the case at page 18. At the stage when the application for reference was made the assessee disputed the finding of the Appellate Tribunal that the outstandings were due to Dr. Banerjee and those outstandings were not transferred to the alleged partnership. On this point the Tribunal which heard the reference application say that they "found nothing on the record to show that there were outstanding^ due to Dr. Banerjee at the date of alleged gift, excepting, the Bank balance in the name of Dr. Banerjee and those outstandings were not transferred to the alleged partnership. On this point the Tribunal which heard the reference application say that they "found nothing on the record to show that there were outstanding^ due to Dr. Banerjee at the date of alleged gift, excepting, the Bank balance in the name of Dr. Banerjee." . The Tribunal added that the Bank account in the name of Dr. Banerjee prior to April, 1950, continued in his name up to the end of June, 1950, and that on 1-7-1950, the balance of Rs. 1106/-and odd of that account was carried over and thereafter the account stood in the joint names of Dr. Banerjee and his wife Mrs. Ava Banerjee. It is manifest, therefore, that the argument of Mr. Dutt on this point is not wholly correct, for the admitted position is that the Bank account which stood in the name of Dr. Banerjee was not transferred in the name of the partnership on 1-4-1950, but the account continued to stand in the name of Dr. Banerjee till the end of June 1950. But I shall assume in favour of the assessee that She reasoning of the Appellate Tribunal on this point is not factually correct and that there was no outstanding payable to Dr. Banerjee at the time when he made a gift of business to his wife and his sons. Even so, the finding of the Appellate Tribunal about the non-existence of the partnership is supported by other materials on the record of the case. In the first place, there is the important circumstance that the partners made no application to the Controller for registering their title under Sec. 63 of the Indian Patents and Designs Act with regard to the patent medicines. This is an important reason given by the Appellate Tribunal ID support of their finding that the partnership was bogus and non-existent. It was submitted by Mr. S. N. Dutt that the patent medicines of Dr. P. Banerjee were not really registered under the Indian Patents and Designs Act and that Dr. Ba-nerjee had merely registered the trade marks with regard to these medicines. The question of trade mark was not however raised by the assessee before the Income-tax authorities at any stage. In the document of .partnership dated 6-11-1956, it is stated that Dr. P. Banerjee were not really registered under the Indian Patents and Designs Act and that Dr. Ba-nerjee had merely registered the trade marks with regard to these medicines. The question of trade mark was not however raised by the assessee before the Income-tax authorities at any stage. In the document of .partnership dated 6-11-1956, it is stated that Dr. Banerjee was "an inventor and author of several patent medicines registered under different names". In the application under Sec. 66(1) made before the Tribunal the assessee again states that "Dr. P. Banerjee of Mihijam was an inventor and author of various patent medicines and was the founder of the busniess known as P. Banerjee Mihijam". A similar application was made by the assessee to the High Court under Sec. 66(2) of the Income-tax Act. In view of these statements it cannot be said that the Tribunal was wrong in assuming that the patent for medicines was taken out under the Indian Patents and Designs Act and, therefore, the assignees should have made an application to the Collector under Sec. 63 of that Act for the registration of their title. I shall, however, assume in favour of the assessee that the case is governed not by the Indian Patents and Designs Act but by the Indian Trade Marks Act. Even so, the basis of the reasoning of the Appellate Tri-bunal on this point would still be valid, for Sec.35 of the Indian Trade Marks Act imposes a duty upon the assignee to make an application to the Registrar in the prescribed manner for registering his title. After receipt of the application the Registrar shall demand proof of title of the applicant to his satisfaction and register the assignee as the proprietor of the trade mark in respect of goods and cause the particulars of the assignment or transmission to be entered in the register. Sec.35(2) of the Trade Marks Act is important and is to the following effect : "35. (2) Except for the purposes of an appeal against a decision of the Registrar under Sub-section (1) or of an application under Sec. 46, a document or instrument in respect of which no entry has been made in the register in accordance with Sub-section (1) shall not be admitted in evidence before any tribunal In proof of the title to a trade mark unless the tribunal otherwise directs," 3. In my opinion, therefore, the reasoning of the Appellate Tribunal on this point is highly relevant. In the next place the Tribunal took into account the circumstance that the profit and loss account filed by the assessee started with the opening stock of Rs. 2,638/8/-. It is pointed out by the Tribunal that if the deed of gift was true and the opening stock was received by the firm from Dr. Banerjee, an entry should have been made to that effect in the account books. The Tribunal observed that there was no such entry in the account books and so there was good reason to doubt the validity of the gift made by Dr. Banerjee on the alleged date and also the existence of the alleged partnership. In my opinion, this is also very relevant reasoning and has a cogent bearing on the decision of the question whether the partnership alleged by the assessee was real or a bogus transaction. Thirdly, the Appellate Tribunal took into account the circumstance that Dr. Banerjee did not give a notice of discontinuance of his business under Sections 25(1) and 25(2) of the Income-tax Act. Sec.25(1) states : "Where any business, profession or vocation to which Sub-section (3) is not applicable, is discontinued in any year, an assessment may be made In that year on the basis of the income or profits or gains of the period between the end of the previous year and the date of such discontinuance in addition to the assessment, it any, made on the basis of the income, profits or gains of the previous year." Sec.25(2) states : "Any person discontinuing any such business, profession or vocation shall give to the income-tax Officer notice of such discontinuance within fifteen days thereof, and where any person fails to give the notice required by this sub-section, the Income-tax Officer may direct that a sum shall be recovered from him by way of penalty not exceeding the amount of tax subsequently assessed on him in respect of any income, profits or gains of the business, profession or vocation up to the date of its discontinuance." 4. On this point Mr. S. N. Dutt referred to. the allegation of the assessee in paragraph 13 of the application under Sec. 66(2). In this paragraph the assessee vaguely states that it was not a fact that Dr. On this point Mr. S. N. Dutt referred to. the allegation of the assessee in paragraph 13 of the application under Sec. 66(2). In this paragraph the assessee vaguely states that it was not a fact that Dr. P. Banerjee never informed the Income-tax Officer that he had ceased to have any connection with the business after the existence of the partnership". Even at this stage it is not alleged by the assessee that a written notice was given by Dr. P. Banerjee to the Income-tax authorities about the discontinuance of the business .under Sections 25(1) and 25(2). The reasoning of the Appellate Tribunal on this point cannot, therefore, be controverted. In my opinion, the omission on the part of Dr. Banerjee to give notice of the discontinuance of the business and the existence tit the partnership as required by Sections 25(1) and 25(2) is very important and has a crucial bearing on the decision of the question of fact which was before the Income-tax Appellate Tribunal, namely, whether there was in actual existence the alleged partnership under the deed of partnership dated 6-11-1950. Lastly, the Tribunal adverted to the circumstance that for the assessment year 1949-50 a sum of Rs. 4,891/5/- was due from Dr. Baaerjee as Income-tax. This amount was paid from the funds of the business in the accounting year 1950-51. The Tribunal rightly pointed out that the liability was fastened upon Dr. Banerjee but it was paid from the funds of the business. Upon this ground also the Tribunal reached the finding that the partnership was not real and genuine and ought not to be registered under Sec.26A. I have referred in detail to all the materials and the circumstances upon which the Appellate Tribunal had placed reliance and upon which the Appellate Tribunal reached the finding that the partnership was not existent and was not a genuine transaction and that it was merely a device on the part of Dr. P. Banerjee to evade payment of the proper amount of income-tax. It is not disputed that the income-tax authorities are entitled to go into the question as to the reality of the existence of a partnership before the grant of registration under Section 26A of the Income-tax Act. Sec.26A is in the following terms :- - "26A. P. Banerjee to evade payment of the proper amount of income-tax. It is not disputed that the income-tax authorities are entitled to go into the question as to the reality of the existence of a partnership before the grant of registration under Section 26A of the Income-tax Act. Sec.26A is in the following terms :- - "26A. Procedure in registration of firm.- (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." Rule 4 of the Income-tax Rules is also important in this connection. Rule 4 states :- - "4. (1) If, on receipt of the application refer-red 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 :-- This instrument of partnership certified copy of an instrument of partnership has this day been registered with me, the Income-tax Officer for ..... in the State of ..... under Sec.26A of the Indian Income-tax Act, 1922, and this certificate of registration shall have effect for the assessment for the year ending on the 31st day of March, 19. (2) If the Income-tax Officer is not so satisfied, he shall pass an order in writing refusing to recognise the instrument of partnership, or the certified copy thereof, and furnish a copy of such order to the applicants. * * * * * 5. It is, therefore, clear that the registration of a firm under Sec.26A cannot be granted unless the Income-tax Officer is satisfied that there was a firm in existence constituted as shown In the instrument of partnership. * * * * * 5. It is, therefore, clear that the registration of a firm under Sec.26A cannot be granted unless the Income-tax Officer is satisfied that there was a firm in existence constituted as shown In the instrument of partnership. In the present case the position was examined by the Income-tax Appellate Tribunal which found upon examination of the materials produced in this case that the partnership was not in existence and the deed of partnership was a bogus transaction. As I have said, the question at Issue is a question of fact and the High Court has no jurisdiction to Interfere with the finding of the Tribunal on such a question. It is true that in a limited class of cases the High Court has the power to interfere with the finding of the Tribunal on a question of fact. For instance, if a Tribunal bases its finding of fact upon no material, or if the Tri bunal applies a wrong legal principle in reaching the finding of fact, or if the Tribunal has wrongly applied the statute or misconstrued the statutory language, the High Court may interfere with the finding of the Appellate Tribunal. But in the circumstances of the present case I am satisfied that the question has not passed from the region of fact into the region of law and the High Court had no authority to interfere with the finding of the Tribunal on this question. 6. In the course of argument Mr. S. N. Dutt also raised the point that the Tribunal was wrong in saving that there could be no legal partnership between Mrs. Banerjee and her four sons. Learned Counsel raised the point on the assumption that the contract of partnership was a genuine transaction. The Tribunal which also considered this question took the view that on the 1st of April, 1950, Parimal Banerjee was a minor, and since only one adult, Mrs. Ava Banerjee, was the contracting party, there could be no valid partnership. Mr. S. N. Dutt conceded that if the partnership is said to have been constituted on the 1st of April, 1950, then there could be no valid partnership in the eye of law; but the argument presented by the learned Counsel is that there was ratification by the minor sons of Dr. Mr. S. N. Dutt conceded that if the partnership is said to have been constituted on the 1st of April, 1950, then there could be no valid partnership in the eye of law; but the argument presented by the learned Counsel is that there was ratification by the minor sons of Dr. Banerjee of the contract of partnership on the 6th of November, 1950, when the formal document was executed. It was contended, therefore, that at least from the 6th of November, 1950, there was a valid partr nership between Mrs. Banerjee and Parimal Banerjee and that the three minor sons were admitted to the benefits of this partnership on the 6th of November, 1950. In support of his argument Counsel referred to two authorities, Maganlal Kishordas V/s. Ramanlal Hiralal Shaha, AIR 1943 Bom 362 (A) and Gregson V/s. Rajah Sri Sri Adtiya Deb, 16 Ind App- 221 (PC) (B). I do not think that it is necessary In the circumstances of this case to decide this question. I shall assume in favour of the assessee that there could be a valid partnership between the contracting parties on the 6th of November, 1950, and that the minor sons of Dr. Banerjee could ratify the contract of partnership. But the application of the assessee must fail on the ground that the Tribunal has reached a finding that the transaction of partnership was a sham transaction and there was no genuine partnership in existence during the accounting year 1950-51 which could be registered under Sec.26A of the Income-tax Act. 7. For these reasons I hold that in the circumstances of the case the alleged partnership firm constituted under the document of partnership dated the 6th of November, 1950, could not have been registered by the Income-tax authorities under Sec.26A of the Income-tax Act. I would accordingly answer the question of law against the assessee, and in favour of the Department. The assessee must pay the cost of this reference. Hearing fee Rs. 250/-. Kishore Prasad, J. 8 I agree.