http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 10  

PETITIONER: S.P. GRAMOPHONE COMPANY

       Vs.

RESPONDENT: C.I.T., PATIALA

DATE OF JUDGMENT29/01/1986

BENCH: TULZAPURKAR, V.D. BENCH: TULZAPURKAR, V.D. MUKHARJI, SABYASACHI (J)

CITATION:  1986 AIR 1152            1986 SCR  (1) 164  1986 SCC  (2)   1        1986 SCALE  (1)137

ACT:      Indian Income Tax Act 1922 & Income Tax Act 1961:      Section 26A/Sections 184 & 185 - Firm - Registration of - Refusal  by Tax  Authorities -  When valid - Instrument of partnership -  Not militating against firm’s validity in law But pointer against factual genuineness.

HEADNOTE:      Prior to the Assessment Year 1961-62 the appellant-f1rm was a  partnership concern  consisting of two partners, each having 50%  share in  the profits and losses of the firm and it was  granted registration.  Both the partners met with an accident  on  19.10.1958  in  which  they  suffered  serious injuries and  became invalid.  On 1.4.1960  a fresh  Deed of Partnership was executed by virtue of which the two original partners retained 25% share each while the four new incoming partners were  given 12.1/2%  share  each.  Prior  to  April 1,1960 two of the new incoming partners were already working as employees  in the  original firm.  The fresh  Partnership Deed, inter  alia, provided that the partnership was at will determinable by one month’s notice in writing.      For the  Assessment Year  1961-62 an  application  duly signed by  all the partners seeking registration of the firm under s.  26A of  the Income Tax Act 1922 on the strength of the fresh  Partnership Deed  was made on 15th September 1960 annexing therewith  the original  Partnership Deed. The four new incoming  partners  were  examined  by  the  Income  Tax Officer and  their statements  were recorded, which, the ITO felt, clearly suggested that they were not real partners but dummies brought  in to avoid the higher tax incidence. After considering the  Partnership Deed, the statement of the four new incoming partners and the fact that profits had not been shown to  have been  distributed in the books and no entries made  in   the  year   of  account,  the  ITO  rejected  the application and refused registration.      The view  taken by the Income Tax Officer was confirmed by the Appellate Assistant Commissioner and by the Tribunal. 165 The Tribunal,  however,  was  of  the  view  that  four  new incoming  partners   were  benmidars  of  the  two  original partners.      On Reference  made to  the High  Court, the  High Court

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 10  

felt that  the first  question referred  to it did not bring into focus  the real  issue and, therefore, recast the same. The High  Court upholding  the refusal of registration held: (1) that  no genuine partnership had come into existence and that the finding of the lower authorities in that behalf was based on  ample material on record; (2) that the assessee is not entitled  to the  registration under s.26A of the Income Tax Act,  1922 read  with Rule  6 of  the Income  Tax Rules, 1922; and  (3) that the mere fact that the four new incoming partners were  found to  be benamidars  of the  two original partners  could   not  be   a  proper  ground  for  refusing registration.      In the  appeal to this Court on behalf of the appellant it was  contended: (i) that refusal to grant registration to the extent  that it  was based  on the  ground that no valid partnership   in   law   had   come   into   existence   was unsustainable; (ii)  that there  was no  evidence to justify the finding  on the  genuineness of  the appellant firm, and (iii) that  the High  Court having  held  that  registration could not  be refused  merely on the ground that some of the partners were  benamidars, registration  ought to  have been granted.      On behalf  of the  Revenue it  was contended:  (1) that even if  a valid  partnership in  law came into existence by executing the  Deed registration  could be  refused  on  the ground  that   factually  no  genuine  firm  had  come  into existence; (2)  that it is open to the High Court to reframe or recast  a question  formulated  by  the  Tribunal  before answering it  so as  to bring  out a  real issue between the parties; (3)  that the  High Court  had rightly affirmed the view  of  the  Tribunal  that  the  appellant-firm  had  not genuinely come  into existence;  (4) that  though under  the 1922 Act  no provision similar to the Explanation to Sec.185 of 1961  Act obtained  and the  fact that  some members were benamidars of  others in a firm could be no bar to the grant of registration, if the taxing authorities were to record an adverse finding  on the  factual  genuineness  of  the  firm registration could  be refused;  and (5)  that so far as the actual  division  or  distribution  of  profits,  the  lower authorities were  justified in  not relying  on loose sheets indicating the  working of  the firm and the assessee cannot be allowed  to fill  the lacuna  by producing  books for the following year.      Dismissing the Appeal, 166 ^      HELD: 1.The  concept of  a firm  being valid  in law is distinct from the factual genuineness and for the purpose of granting registration  both aspects are relevant and must be present and  one without  the other  will  be  insufficient. [l73 G]      2. Even  if a  firm brought into existence by executing an instrument  of partnership  deed is  shown to possess all the  legal  attributes  it  would  be  open  to  the  taxing authority to  refuse registration  if it were satisfied that no genuine  firm has been constituted. Moreover, some of the provisions contained  in such  instrument may  not  militate against the  firm’s validity  in law  but  these  can  be  a pointer against its factual genuineness. [173 G-H; 174 A]      3. Clause  5 of  the Partnership  Deed in  the  instant case, vests  the control  and management  of the partnership business in the original two partners and denies to the four new incoming  partners any  right in  the management  of the affairs or the accounts of the partnership business, may not show lack  of the  element of  mutual agency but has a vital

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 10  

bearing on  the factual  genuineness of  the firm  and  read along with  Clauses 3,6,7  and 8  would go  to show that the four new  incoming partners  were no  real partners but were dummies thus  throwing doubt on the genuineness of the firm. Moreover, the facts that the four new incoming partners were very close  relatives of  the two original partners and that two of  them were working as employees in the erstwhile firm whose service as such were continued in the relevant year on existing  remuneration  with  such  increments  as  the  two original partners may agree to give cannot be lost sight of. In  addition,  the  statements  of  the  four  new  incoming partners that  were recorded  in November  1965 clearly show that they  had signed  the instrument  mechanically  without knowing  or  reading,  much  less  after  understanding  the implications thereof. [174 A-D]      4. In  the instant  case, the  profit and  loss account statement prepared  on  loose  sheet  did  not  contain  any distribution of  profits and  or allocation  thereof to each one of the new partners. [175 E]      5. Production  of  account  books  in  this  Court  has deprived the taxing authorities an opportunity to make their comments thereon.  Apart from this aspect the question would be whether  even such  entries were genuine entries intended to be  acted upon  or mere  paper entries  making a  show of allocation 167 of the  share of  profits due  to each one of these four new incoming   partners   and   this   would   require   further investigation  into   relevant  facts.  This  aspect  throws considerable doubt  on the point whether or not entries were intended to be acted upon. [175 G-H; 176 B]      6. In  the instant  case, there was sufficient material on record  on the  basis of  which the taxing authorities as well as  the Tribunal could record an adverse finding on the genuineness  of   the  firm   against   the   assessee   and registration was rightly refused. [176 C]

JUDGMENT: CIVIL APPELLATE JURISDICTION: CIVIL Appeal No. 850 of 1974.      From the  Judgment and  Order dated  24.9.1973  of  the Punjab and Haryana High Court in Income Tax Reference No. 21 of 1972.      S.T. Desai,  M/s. J.B.  Dadachanji, Harish  Salve, P.K. Ram and Mrs. A.K. Verma for the appellant.      V.S. Desai,  Gauri Shankar  and Miss  A. Subhashini for the respondent.      The Judgment of the Court was delivered by      TULZAPUKAR, J.  This  appeal  raises  the  question  of granting registration  to the  appellant-firm (the assessee) under s. 26-A of the Income Tax Act, 1922 for the Assessment Year 1961-62.  The taxing  authorities, the Tribunal and the High  Court   have  refused   registration  sought   by  the appellant-firm and hence this appeal.      Prior to the Assessment Year 1961-62 the appellant-firm was a  partnership concern  consisting of two partners, Shri Pal Singh and Shri Sadhu Singh, each having 50% share in the profits and  losses of  the firm  and it  was being  granted registration. It  appears that  the two partners met with an accident on  19.10.1958 in  which Shri  Pal Singh suffered a serious head  injury and lost his memory for quite some time while Shri Sadhu Singh suffered an injury to the spinal cord which rendered  him invalid  for quite  a long  time and the case put  forward was  that as the business was on extensive

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 10  

scale and the two partners were physically handicapped (they recovered during  the meantime)  they entered  into a  fresh Deed of Partnership on 1.4.1960 by virtue of which Pal Singh and Sadhu 168 Singh of  the one  part and  Sarvashri Surjit  Singh, Gulzar Singh, Hari  Singh and  Harbans Singh  of  the  second  part became partners  with  the  following  share  ratio  in  the profits and  losses, namely,  Pal Singh  and Sadhu Singh the original two  partners retained  25% share each while Surjit Singh, Gulzar Singh, Hari Singh and Harbans Singh were given 12-1/2% share  each. Admittedly  two  of  the  new  incoming partners, namely  Surjit Singh  and Gulzar Singh were relate to Pal Singh being his son and brother respectively who were obviously accommodated within the 50% share originally owned by Shri Pal Singh while the other two incoming partners Hari Singh and  Harbans Singh  were related  to Shri  Sadhu Singh both being his brothers who were accommodated within the 50% share originally  owned by  Sadhu Singh.  Moreover, prior to April 1,  1960 Hari  Singh and  Harbans Singh  were  already working as employees in the original firm.      At this stage it will be convenient to indicate some of the salient  clauses of  the Partnership  Deed entered  into between the parties on 1.4.1960. Under cl. 1 the partnership was declared  to be  one at will determinable by one month’s notice in  writing and under cl. 3 the parties of the second part (i.e. the four new incoming partners) were not required to contribute any capital but the original two partners were to do  so in  equal shares. Clause 4 provided that Shri Hari Singh and  Shri Harbans  Singh shall  continue to draw their salaries or  other remuneration  from the  firm as was being drawn by  them along  with any increment as agreed to by the parties of  the first  part (the original two partners) from time to  time. Clause  5 was significant as it provided that the four  new incoming  partners "shall not interfere in the management or the affairs or the accounts of the partnership business." Under  clause 7  it was provided that none of the four   new   incoming   partners   shall   sell,   mortgage, hypothecate, gift  or will  away  or  alienate  in  any  way whatsoever his share to any third person and that in case of need they  shall alienate  their shares  in  favour  of  the parties of  the first  part (the two original partners) only and not  even to  any  one  amongst  them.  It  was  further provided that  in case  of  a  dispute  among  the  partners regarding any of the clauses of the deed the decision of the partners of  the first part (two original partners) shall be final and  conclusive and  binding and  shall not  be called into question in any court of law. 169      For  the   Assessment  Year   1961-62   (the   relevant accounting year  in respect whereof ended on March 31, 1961) an application  duly signed  by  all  the  partners  seeking registration of  the firm under sec. 26-A on the strength of the  aforesaid   Deed  of   Partnership  was  made  on  15th September,  1960  and  the  original  Partnership  Deed  was annexed  thereto.   The  four  new  incoming  partners  were examined by  the I.T.O.  and their  statements were recorded which, the I.T.O. felt, clearly suggested that they were not real partners but dummies brought in to avoid the higher tax incidence. After  considering the  several clauses contained in the  partnership deed,  the statement  of  the  four  new incoming  partners   and   the   surrounding   circumstances including the  fact that  profits had not been shown to have been distributed  in the  books and  no entries  made in the year  of   account,  the  I.T.O.  rejected  the  application

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 10  

principally on  two  grounds:  (a)  that  in  law  no  valid partnership had  been created  inasmuch as  the  element  of mutual agency  was lacking and (b) factually no genuine firm has come  into existence  inasmuch as  the four new incoming partners were  y dummies.  Registration was  also refused on two other  grounds, namely,  there was a breach of the terms of the  Partnership Deed  in that,  even in the absence of a provision in  that ;  behalf, salary  and remuneration  were credited in  the personal  r accounts  of the  two  original partners Pal  Singh and  Sadhu  Singh  and  there  was  non- compliance of  income tax  rules. In appeal preferred by the assessee  the   Appellate   Assistant   Commissioner   after discussing the  several issues at great length confirmed the I.T.O.’s order  refusing registration. In the further appeal preferred by  the assessee  to the  Tribunal the view of the A.A.C. was  confirmed by  the Tribunal  but in  doing so the Tribunal expressed  the view that four new incoming partners were benamidars  of Shri  Pal Singh and Shri Sadhu Singh. At the instance  of the  assessee the following three questions were referred to the High Court for its opinion.           (1) Whether  on the facts and in the circumstances           of the  case and  on a  true construction  of  the           instrument of  partnership dated  1st April 1960 a           valid partnership came into existance?           (2) Whether  on the facts and in the circumstances           of  the   case  the   assessee  is   entitled   to           registration under  section 26-A of the Income Tax           Act, 1922  read with  Rule 6  of  the  Income  Tax           Rules, 1922? and 170           (3) Whether  on the facts and in the circumstances           of the  case and  in view  of the  fact  that  the           parties of  the second  part have been found to be           benamidars of  the parties  of the  first part the           assessee firm  is entitled  to the grant of regis-           tration?      The High Court felt that the first question referred to it by  the Tribunal  did not bring into focus the real issue that arose  between the  parties and  therefore the same was required to  be recast  or  reframed  and  it  reframed  the question thus:           Whether on  the facts  and in the circumstances of           the  case,   and  on   true  construction  of  the           instrument of  partnership dated  1st April,  1960           there is  a genuine  partnership, and  whether the           finding that  there is  no genuine  partnership is           based on evidence?" After considering  the entire material on the record as also the rival  contentions urged  before it  by counsel  on  the either side  the High  Court answered  the first question in favour of  the department  and against the assessee, that is to say,  it held  that no  genuine partnership had come into existence and  that the  finding of the lower authorities in that behalf  was based  on ample  material  on  record.  The second question  was also answered in the negative in favour of the  department and  against the assessee. As regards the third question it was answered in favour of the assessee and it was  held that  the mere  fact that the four new incoming partners were  found to  be benamidars  of the  two original partners  could   not  be   a  proper  ground  for  refusing registration. However,  in view  of its answers to the first two questions  particularly the  first question  as reframed refusal of registration was upheld by the High Court.      This refusal  to grant  registration for the assessment year 1961-62  has  been  challenged  by  the  appellant-firm

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 10  

(assessee) in  this appeal  and  counsel  for  the  assessee raised three  or four  contentions in  that behalf.  On  the aspect of  the firm’s validity in law counsel contended that the view  taken by  the taxing  authorities as  well as  the Tribunal that  no valid  partnership in  law had  come  into existence for  lack of  mutual agency  has  proceeded  on  a misconstruction of  s. 4  of the  Partnership  Act  as  also clause 5  of the  Partnership Deed in question; according to him so  far as the element of mutual agency is concerned all that is  required to  constitute a  valid firm under s. 4 is that the business must be carried on by all 171 or any  of them acting for all and therefore, if the control and management  of the  business of  the firm  was  left  by agreement between  the parties  in the  hands  of  even  one partner to  be exercised  by him on behalf of the others the legal requirement  could be  said to have been satisfied and clause 5  of the  Partnership Deed  in question  vests  such control and  management with  two partners (the two original partners) who  would be acting on behalf of all and the mere exclusion of  the  four  new  incoming  partners  from  such control and  management cannot  affect the  validity of the- firm and in this behalf counsel relied on a decision of this Court in  K.D. Kamath  and Co.  v. C.I.T.  Mysore, 82 I.T.R. 680. In  other words  counsel urged  that if clause 5 of the Deed is  properly read  it could  not be said that there was any lack  of the  element of  mutual agency.  On the  aspect whether a  genuine firm  had  come  into  existence  or  not counsel urged  that the  Tribunal had not recorded any clear finding but  had merely proceeded on the basis that no valid firm in  law had come into existence but the High Court went out of  its way  to deal with the question of genuineness of the appellant-firm  by  recasting  or  reframing  the  first question referred  to it,  and recorded  an adverse  finding thereon which  should not  have been done by the High Court. Counsel  further   pointed  out   that  the   Tribunal   had erroneously taken  the view  that because  four new incoming partners were  benamidars registration  could not be granted and he urged that the High Court, having reversed that view, ought to  have  held  that  the  assessee  was  entitled  to registration under  s. 26-A  of the  1922 Act;  and in  this regard counsel  pointed out that the position under the 1961 Act is  different in  view of  the Explanation that has been inserted in  s. 185  of that  Act but  in the absence of any similar provision  in the  1922 Act  the position  was  well settled that  a firm could not be denied registration merely because some  of its  partners were benamidars of others and in that  behalf reliance  was placed  on a  decision of this Court in C.I.T. Gujarat v. A.Abdual Rahir and Co.. 55 I.T.R. 651. Counsel  further urged  that undue emphasis was laid on the fact  that profits of the previous year ending March 31, 1961 had  not been  divided or  distributed  among  all  the partners by  making requisite  entries in  the books  in the year of account and registration was wrongly refused on this basis, though  profit and  loss account  and  balance  sheet worked out  on loose  sheets of papers (which were unsigned) had been  submitted before  the  authorities;  according  to counsel it  is not  necessary  that  the  requisite  entries pertaining to such division or distribution of profits 172 (or losses,  if any)  should be  made in  the books  in  the selfsame year  of account  and statement  prepared by way of profit and  loss account  and balance  sheet for working out such  distribution  among  the  partners  should  have  been regarded  as  sufficient  evidence  of  actual  division  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 10  

profits and in this behalf counsel relied upon a decision of the Orissa  High Court  in Rao  & Sons  v. C.I.T.  Bihar and Orissa, 58 I.T.R. 685. Further counsel pointed out that such division or  distribution had  been by  making the  relevant entries in  the assessee’s  books on  the first  day of  the following year  and books  pertaining to  the following year containing such  entries were  produced  before  us  at  the hearing. In  substance counsel’s  contentions were  that the refusal to  grant registration  to the  extent that  it  was based on  the ground  that no  valid partnership  in law had come into  existence was  clearly unsustainable,  that there was no evidence to justify the finding on the genuineness of the appellant  firm and that the High Court having held that registration could  not be refused merely on the ground that some of  the partners  were benamidars registration ought to have been granted to the assessee.      On the other hand counsel for the revenue supported the refusal of  registration by  contneding that even if a valid partnership in  law could  be said to have been brought into existence by  executing the  Deed in question it was open to the taxing  authority to  refuse registration  on the ground that factually  no genuine  firm  had  come  into  existence inasmuch as  the two  grounds were  quite distinct from each other and  therefore assuming that some fault could be found with the finding of the lower authorities on the question of validity of  the appellant  firm in law the refusal to grant registration should  not be  interfered with  as the adverse finding on  the genuineness of the appellant firm, for which there was  ample  evidence  on  record,  was  sufficient  to justify the  order. As  regards the  reframing of  the first question counsel  urged that  it is  well settled that it is open to  the High  Court to  reframe or  recast  a  question formulated by  the Tribunal  before answering  it so  as  to being out  the real  issue between  the parties and since in this case  the question  No. 1 as formulated by the Tribunal presumed or  assumed the factual existence of the appellant- firm (which  were  very  much  disputed  before  the  taxing authorities) the  High Court reframed it so as to bring into focus the  real issue  between the parties namely, whether a genuine firm  had been  constituted or  not. Further counsel for the  revenue pointed out that the High Court had rightly observed that the Tribunal had, though in a circuitous 173 manner, taken  the view  that the  appellant  firm  had  not genuinely come into existence. Counsel agreed that under the 1922 Act no provision similar to the Explanation to sec. 185 of the  1961 Act  obtained and  further fairly conceded that the fact  that some  members were  benamidars of others in a firm could be no bar to the grant of registration as held in Abdul Rahim  & Co.  case (supra) but contended that the said aspect was  not decisive  of the  matter and pointed out, as held that  very decision, that notwithstanding the said fact the firm must be found to be otherwise genuine and therefore if the  taxing authorities were to record an adverse finding on the factual genuineness of the firm registration could be refused. On  the point of actual division or distribution of profits  counsel  urged  that  the  lower  authorities  were justified in  not relying  on loose  sheets  indicating  the working of such distribution especially when the sheets were unsigned and  hence unauthentic  and the  assessee cannot be allowed to  fill the  lacuna  by  producing  books  for  the following year  in the  fifth Court.  On the  aspect of  the genuineness  of   the  firm   requisite  for  the  grant  of registration counsel  relied upon  two old decisions in Haji Ghulam Rasul-Khuda  Baksh v. C.I.T. Punjab, 5 I.T.R. 506 and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 10  

Bafi Zabdul Gafoor and others v. C.I.T.C.P. & U.P., 7 I.T.R. 625 which  have been  subsequently  followed  in  P.A.  Raju Chettiar and  Brothers v.  C.I.T. Madras,  17 I.T.R.  51 and Hiranand Ramsukh v. C.I.T. Hyderabad, 47 I.T.R. 598. Counsel for the  revenue therefore, pressed for the dismissal of the appeal.       On  a  consideration  of the entire material on record and on  giving our  anxious thought to the rival submissions made by counsel on either side we are of the opinion that in the ultimate  analysis the  real controversy  in the  appeal centres round  the  question  whether  or  not  factually  a genuine firm had come into existence for the Assessment Year 1961-62 as  a result  of the  execution of the instrument of partnership on  April 1,  1960 and  whether for  recording a negative finding thereon against the assessee as done by the lower authorities  there was  evidence on  the record?  This being the  real issue  which was  not reflected in the first question formulated  by the  Tribunal the  High Court in our view was  justified in  reframing that  question. It is true that the taxing authorities and the Tribunal did go into the question of  the appellant-firm’s  validity in  law  but  it cannot be disputed that the concept of a firm being valid in law is  distinct from  its factual  genuineness and  for the purpose  of  granting  registration  both  the  aspects  are relevant and must be present and one without 174 the other  will be  insufficient. In  other words, even if a firm brought  into existence  by executing  an instrument of partnership  deed   is  shown   to  possess  ail  the  legal attributes it  would be  open to  the  taxing  authority  to refuse registration  if it  were satisfied  that no  genuine firm has  been constituted. Moreover, some of the provisions contained in  such instrument  may not  militate against the firm’s validity  in law  but these  can be a pointer against its factual  genuineness. The instant case is clearly a case of that type. For instance, Clause 5 of the Partnership Deed in question  which vests  the control  and management of the partnership business in the original two partners and denies to  the   four  new  incoming  partners  any  right  in  the management or the affairs of the accounts of the partnership business may  not show  lack of the element of mutual agency but surely has a vital bearing on the factual genuineness of the firm  and read  along with other provisions like Clauses 3, 6,  7 and 8 would go a long way to show that the four new incoming partners  were not  real partners  but were dummies thus  throwing   doubt  on  the  genuineness  of  the  firm. Moreover, the facts that the four new incoming partners were very close  relatives of  the two original partners and that two of  them were working as employees in the erstwhile firm whose services  as such  were continued in the relevant year on existing  remuneration with  such increments  as the  two original partners may agree to give cannot be lost sight of. In addition  to these aspects the statements of the four new incoming  partners  that  were  recorded  in  November  1965 clearly  show   that  they   had   signed   the   instrument mechanically without  knowing or  reading, much  less  after understanding the  implications thereof as we shall indicate presently.      For instance,  Hari Singh  in his  statement has stated that he  was not  aware of the profits of the firm in any of the three  accounting years 1960-61, 1961-62 and 1962-63; he asserted that  for the  relevant year 1960-61 the profit and loss account  and balance-sheet  were prepared  in the books and he  had inspected  these statements which assertions are obviously false  because admittedly  no such profit and loss

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 10  

account nor  balance sheet  was drawn  up in the books. When asked as  to whether Pal Singh and Sadhu Singh had consulted the incoming  partners before  the Deed  was written out and executed he has emphatically given a negative answer and has added that  they (original partners) called all four of them and asked  them to  sign the  Deed which  they did.  Harbans Singh 175 in his  statement admitted  that he  used to  do the work of painting but  could not  say how many factories the firm was running nor  did he remember the factory in which he used to do his  work; he  further asserted  that no  witnesses  were called when  the Deed  was signed which is obviously a false assertion. Surjit  Singh who passed his Intermediate Arts in September 1960,  B.A. in  1963 and  LL.B. in  1965 has shown utter ignorance  of even  the share  ratio in the profit and loss of the new incoming partners; he stated that he had two annas share  in the profits but no share in the losses; when questioned as  to how  he knew  that losses  were not  to be shared by him he stated that when he was a student of law he was taught  that losses  should never be shared; he admitted that he  had never read the deed which clearly shows that he mechanically signed  the document without even attempting to know what  he was  signing; he was also ignorant of the fact whether he  had withdrawn  his share  of profit in the first year of the partnership, i.e. 1960-61. Gulzar  Singh  stated that he  was called  from the  village and was asked to sign the document  which he  did without  bothering to  know  its contents; in fact he admitted that he knew nothing about the matter.  These  answers  given  by  the  four  new  incoming partners clearly go to show that they were not real partners but mere  dummies and the Deed appears to have been executed merely as  a cloak to secure registration and thereby reduce the tax incidence.      Counsel for  the assesee  made much  of the  fact  that profit and  loss account and balance sheet prepared on loose sheets of  paper had  been  submitted  before  the  ITO  and according to  him these  were wrongly rejected on the ground that requisite entries in regard to division or distribution of profits  had not  been made in the books in the self-same year of  account, which counsel urged, was not necessary. It must, however, be mentioned that the profit and loss account statement so  prepared on  a loose sheet did not contain any distribution of  profits and  or allocation  thereof to each one of  the new partners but such distribution or allocation was indicated  on a  loose paper  on which the balance sheet was prepared but even that loose sheet was an unsigned piece of  paper  and  therefore,  being  unauthentic  was  rightly rejected by  the taxing  authority. An  attempt was  made by counsel during  the hearing  of the appeal to produce before us the  books of account pertaining to the following year in which on the opening day entries showing distribution of the earlier  years’s   profit  had   been  made.  But  the  late production of such books has deprived 176 the taxing authorities an opportunity to make their comments thereon. Apart  from  this  aspect  the  question  would  be whether even  such entries  were genuine entries intended to be acted  upon or  mere  paper  entries  making  a  show  of allocation of  the share of profits due to each one of these four new  incoming partners  and this  would require further investigation into  relevant facts.  In this context it will not be out of place to mention that from their statements it appears clear  that none has made any withdrawal towards his share of profit in any of the three years, 1960-61, 1961-62,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 10  

1962-63 and  even after  the partnership had alleged to have been dissolved after 31.3.1963 and at least one of them Hari Singh stated  that a  sum of  Rs.73,600 became due to him as his share of profits till dissolution and in spite of demand nothing had been paid to him till his statement was recorded in November  1965. Only  two of them drew their remuneration as the  employees. Considering their economic position it is difficult to  appreciate that  they  would  have  needed  no withdrawal from  their share of profits in any year till the alleged dissolution.  This aspect  throws considerable doubt on the  point whether  or not  entries were  intended to  be acted upon.      Having regard  to the  aforesaid discussion it is clear that there was sufficient material on record on the basis of which the  taxing authorities  as well as the Tribunal could record an  adverse finding  on the  genuineness of  the firm against the  assessee  and  registration  in  our  view  was rightly refused.      We might  observe that  there was  nothing wrong on the part of  the High  Court to  have confirmed  the refusal  of registration to  the appellant  firm even after holding that the fact  that some members were benamidars of others was no bar to  the grant  of registration.  In A.  Abdul Rahim  and Co.’s case (supra) on which counsel for the assessee relied, the Tribunal  had held that one of the partners who had been inducted into  the erstwhile  partnership was a benamidar of one of  the three  original partners  but had otherwise held that the  partnership was  genuine and  valid and therefore, this Court  took the view that the mere fact that one member was a  benamidar of  another as  no  bar  to  the  grant  of registration and  directed registration  but the ratio would be inapplicable  to a  case where the firm is otherwise held to be not a genuine one.      In the  result the  appeal fails  and is dismissed with costs. A.P.J.                                Appeal dismissed. 177