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PETITIONER: COMMISSIONER OF INCOME-TAX, AHMEDABAD

       Vs.

RESPONDENT: A. ABDUL RAHIM & CO., BARODA

DATE OF JUDGMENT: 04/11/1964

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1965 AIR 1703            1965 SCR  (2)  13  CITATOR INFO :  R          1965 SC1708  (1,4)  MV         1966 SC1490  (23)  F          1967 SC 383  (14)  RF         1969 SC 493  (12)  RF         1970 SC1343  (22)  R          1971 SC 383  (5)  D          1986 SC1152  (6,12)

ACT: Income   Tax   Act,  1922,  Section  26A   registration   of partnership-More   than  two   partners--Otherwise   genuine Whether  can  be refused registration when  one  partner  is benamidar. Benamidar-Status of-If trustee of the real owner.

HEADNOTE: A partnership consisting of three partners was reconstituted to take in a 4th partner who was a nephew of, and was  given a  part  out  of  his own share  by,  one  of  the  existing partners.   The application by the new partnership firm  for registration under s. 26-A of the Income-tax Act, 1922,  was rejected by the Income-tax Officer on the ground that as the new  partner  was  a benamidar, the partnership  was  not  a genuine  one.   The Appellate  Assistant  Commissioner,  the Appellate  Tribunal  and the High Court, all took  the  view that the new partnership agreement was valid in law and  the fact that one of the partners was a benamidar of another was not a sufficient ground for refusing to register the firm. It  was contended on behalf of the Revenue that  apart  from the fact that the 4th partner was a dummy and therefore  the new  partnership was not a genuine one, the actual share  of the old partner was not what was stated in the agreement but was  the  total  of  his apparent  share  and  that  of  the benamidar;  to this extent the agreement did not  contain  a correct  specification of the individual shares of  partners as  required under s. 26-A and registration was,  therefore, rightly rejected. HELD : (dismissing the appeal) (i)  When  a firm makes an application under s. 26-A of  the Act for registration, the Income-tax Officer can reject  the application   if  he  comes  to  the  conclusion  that   the

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partnership is not genuine or the instrument of  partnership has  not  specified correctly the individual shares  of  the partners.   But  once he comes to the  conclusion  that  the partnership  is  a genuine and valid one, he  cannot  refuse registration  on  the ground that one of the partners  is  a benamidar  of  another.  If the partnership is  genuine  and legal,  the  share given to the benamidar  will  be  correct specification  of his individual share in  the  partnership. The  beneficial  interest in the income  pertaining  to  the share  of  the  said benamidar -nay have  relevance  to  the matter  of assessment, but non in regard to the question  of registration. [21D-F] R.   C.  Mitter & Sons v. C.I.T., Calcutta, (1959)  Supp.  2 S.C.R. 641; C.I.T. Madras v., Sivakasi Match Exporting  Co., (1964)  53 I.T.R. 204; Sir Sunder Singh Majithia  v.  C.I.T. C.P. & U.P., (1942) 10 I.T.R. 457, referred to. The  Central Talkies Circuit, Matunga, (1941) 9  I.T.R.  44, considered. Hiranand Ramsukh v. C.I.T., Hyderabad, (1963) 47 I.T.R. 598; P. A. Raju Chettiar v. C.I.T., Madras, (1949) 17 I.T.R.  51, distinguished. (ii) A benamidar is a mere trustee of the real owner and has no  beneficial interest in the property or the  business  of the  real owner.  As in the case of a trustee, he  possesses the legal character to enter into a 14 partnership   with  another,  and  the  fact  that   he   is accountable  for  his  profits to, and has  a  right  to  be indemnified for his losses by, a third party or even by  one of the partners does not disgorge him to the said character. [19D-E, G-H] Gur Narayan v. Sheo Lal Singh, (1918), L.R. 46 I.A. 1, Aruna Group of Estates, Bodinayakanur v. State of Madras, (1962) 2 M.L.J. 264, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 982 of 1963. Appeal  from the judgment and order, dated April 4, 5,  1961 of  the Gujarat High Court in Income-tax Reference No. 8  of 1960. K.   N.  Rajagopala  Sastri  and R.  N.  Sachthey,  for  the appellant. T.   A. Ramachandran and O. C. Mathur, for the respondent. The Judgment of the Court was delivered by Subba Rao, J. This appeal by certificate raises the question whether  the  Income-tax Officer can refuse  to  register  a genuine partnership entered into between more than 2 persons on  the  ground  that one of them is only  a  benamidar  for another. The relevant facts may briefly be stated.  Three persons  by name  Abdul Rahim Valibhai, Abdulla Rehman and  Abdul  Rahim Malanghbhai,  constituted  a partnership having 9  annas,  5 annas and 2 annas share respectively.  The said  partnership was carrying on business in goat and sheep skins.  From  the beginning  of  Samvat year 2012  (15-11-1955  to  2-11-1956) there was a change in the constitution of the said firm.   A 4th partner by name Abdul Rehman Kalubhai was inducted  into the partnership with 2 annas share carved out of the 9 annas share  of  Abdul  Rahim Valibhai.   The  said  Abdul  Rehman Kalubhai  is a nephew of Abdul Rahim Valibhai.  On March  6, 1956,  a  partnership deed was executed between the  said  4 persons.  Under the said partnership, Abdul Rahim  Valibhai, Abdulla  Rehman,  Abdul Rahim Malanghbhai and  Abdul  Rehman

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Kalubhai  had  7 annas, 5 annas, 2 annas and 2  annas  share respectively.   On May 8, 1956, the said firm  presented  an application  to the Income-tax Officer for its  registration under s. 26A of the Indian Income-tax Act, 1922, hereinafter called  the  Act.   The Income-tax  Officer  held  that  the partnership was a bogus one and, on that finding, refused to register  it.  The assessee took up the matter on appeal  to the  Appellate  Assistant Commissioner, who  held  that  the partnership  agreement  was valid in law and that  the  fact that one of the partners was a benamidar of another was  not a ground for refusing to register the firm, though 15 it  might  entitle the Income-tax Officer  to  consider  the income  pertaining to the share of the benamidar as part  of the  income  of  the real owner in  assessing  the  latter’s income  to  tax.   The  Income-tax  Officer  questioned  the correctness  of the decision by preferring an appeal to  the Appellate  Tribunal, Bombay Bench.  The Tribunal  also  held that  the  partnership was a genuine one and that  the  fact that one of the partners gave away a small part of his share to  his  nephew would not disqualify  the  partnership  from being  registered under s. 26A of the Act.  At the  instance of  the Revenue the following question was referred  to  the High Court               "Whether a partnership in which one partner is               the  benamidar  of another  partner  could  be               registered under s. 26A of the Indian  Income-               tax Act." The  learned  Judges  of the High  Court  thought  that  the question as framed did not really bring out the true  matter in  controversy  between the parties  and,  therefore,  they reframed the question as follows :               "Whether on the facts and in the circumstances               of the case, the partnership constituted under               the instrument of partnership, dated 6th March               1956 could be registered under Section 26A  of               the Indian Income-tax Act." The learned Judges answered the question in the affirmative. They held that as the partnership was a genuine one the fact that  one of the partners had no beneficial interest in  his share by reason of some arrangement between him and  another partner would not disentitle the firm from being  registered under the Act.  Hence the appeal. Mr.  Rajagopala  Sastri, learned counsel  for  the  Revenue, raised before us the following two points : (1) Abdul Rehman Kalubhai  is only a dummy and therefore, the partnership  is not  a genuine one; (2) even if Abdul Rehman Kalubhai  is  a benamidar of Abdul Rahim Valibhai in respect of the 2  annas share in the partnership, Abdul Rahim Valibhai has in fact 9 annas  share  in the partnership; as  the  partnership  deed shows  that  he has only 7 annas share instead  of  9  annas share,  there is no correct specification of his  individual share  within  the  meaning  of  s.  26A  of  the  Act  and, therefore,  the  Income-tax  Officer  rightly  rejected  the firm’s application for registration under s. 26A of the Act. Learned  counsel  for  the respondent, on  the  other  hand, argued that the question whether the partnership was genuine or not is one of fact and indeed presumably for that  reason the question 16 of  genuineness  was not referred to the High Court  by  the Tribunal and that the learned counsel for the Revenue cannot now  raise  that  question before this  Court.   He  further argued that, as the partnership is genuine, the circumstance that under some internal arrangement one of the partners  is

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a  benamidar  of another partner will not detract  from  its validity  or disqualify it from being registered  under  the Act. To  appreciate the contentions it will be convenient at  the outset  to read the relevant part of S. 26A of the  Act  and also the rules made thereunder.               Section  26A. (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.               Rules 2 to 6B of the Rules made under s. 59 of               the Act deal with the registration of firms.               Rule   2.  Any  firm  constituted   under   an               Instrument   of  Partnership  specifying   the               individual  shares of the partners may,  under               the  provisions of section 26A of  the  Indian               Income  Act, 1922 (hereinafter in these  rules               referred  to  as the Act), register  with  the               Income-tax Officer, the particulars  contained               in the said Instrument on application made  in               this behalf.               Such  application shall be signed by  all  the               partners personally..........               Rule  4.  If, on receipt  of  the  application               referred 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 ........               17               Rule  6B.   In  the event  of  the  Income-tax               Officer  being satisfied that the  certificate               granted  under Rule 4, or under Rule  6A,  has               been  obtained without there being  a  genuine               firm   in   existence,  he  may   cancel   the               certificate so granted. On  a  consideration of the said provisions,  among  others, this  Court  in  R. C. Mitter &  Sons.  v.  Commissioner  of Income-tax,  Calcutta(1), speaking through Sinha, J., as  he then  was,  held  that in order a firm may  be  entitled  to registration  under  s.  26A  of  the  Act,  the   following essential  conditions must be satisfied, viz., (i) the  firm should  be constituted under an instrument  of  partnership, specifying  the individual shares of the partners;  (ii)  an application  on behalf of, and signed by, all  the  partners and  containing all the particulars as set out in the  Rules must  be made; (iii) the application should be  made  before the  assessment  of  the firm under  section  23,  for  that particular  year; (iv) the profits or losses if any  of  the business  relating to the accounting year should  have  been divided or credited, as the case may be, in accordance  with

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the terms of the instrument; and (v) the partnership must be genuine  and must actually have existed in  conformity  with the  terms and conditions of the instrument of  partnership, in the accounting year.  This Court again in Commissioner of Income-tax, Madras v. Sivakasi Match Exporting Co. (2)  held :               "The  jurisdiction of the  Income-tax  Officer               is, therefore, confined to the ascertaining of               two facts, namely, (i) whether the application               for  registration  is in conformity  with  the               rules made under the Act, and (ii) whether the               firm  shown  in  the  document  presented  for               registration  is a bogus one or has  no  legal               existence."               It  is,  therefore,  settled  law  that  if  a               partnership  is a genuine and valid  one,  the               Income-tax Officer has no power to reject  its               registration if the other provisions of s. 26A               of  the Act and the rules made thereunder  are               complied with.               In the present case the partnership was  found               to  be  a genuine one.   All  the  formalities               prescribed  by  the rules have  been  complied               with.   The individual shares of the  partners               as shown in the Instrument of Partnership have               been specified in the application.  Therefore,               unless  there is some legal impediment in  the               way  of  a benamidar of one  of  the  partners               being  a partner of the firm,  the  Income-tax               Officer   would   not   be   exercising    his               jurisdiction  if he rejected  the  application               for registration.               (1) 1959] Supp. 2 S.C.R. 641.               (2)(1964) 53 I.T.R. 204,209.               18               The first question, therefore, is whether  the               benamidar  of a person can be a partner  of  a               firm.   Under  S. 2(6B) of  the  Act,  "firm",               "partner"  and  "partnership"  have  the  same               meanings   respectively  as  in   the   Indian               Partnership Act, 1932 (IX of 1932) :  provided               that  the  expression "partner"  includes  any               person who being a minor has been admitted  to               the  benefits of partnership.  Under S.  4  of               the  Indian Partnership Act, "Partnership"  is               the  relation between persons who have  agreed               to share the profits of a business carried  on               by all or any of them acting for all.  If  the               partnership  is genuine, as it is held in  the               present  case, it follows that the 4  partners               mentioned in the partnership deed must be held               to  have  agreed to share the profits  of  the               business  carried  on by them  in  the  manner               specified  in  the document.  Indeed,  in  the               present case the Instrument of Partnership and               the application for registration contain clear               recitals  that the 4 partners have  clear  and               definite shares in the profits of the firm.               The  Judicial  Committee in Sir  Sundar  Singh               Majithia v. Commissioner of income-tax, C.P. &               U.P.  (1) posed the question that  arises  for               consideration of the Income-tax Officer  under               s.  26A  of  the  Act.   Sir  George   Rankin,               speaking for the Board, said :               "When   a   document  purporting  to   be   an

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             instrument  of partnership is  tendered  under               Section   26-A  on  behalf  of  a   firm   and               application  is made for registration  of  the               firm  as constituted under such instrument,  a               question  may arise whether the instrument  is               intended by the parties to have real effect as               governing  their rights and liabilities  inter               se  in relation to the business or whether  it               has been executed by way of pretence in  order               to  escape  liability  for  tax  and   without               intention that its provisions should in  truth               have  effect  as defining the  rights  of  the               parties as between themselves.  To decide that               an instrument is in this sense not genuine  is               to come to a finding of fact :................ In  view  of  the finding given by  the  Tribunal  that  the Instrument  of Partnership was genuine, it follows  that  it was not executed as a pretence in order to escape  liability for tax, but in truth it defined the rights and  liabilities of the parties between themselves. This  leads us to the question whether the benamidar can  be in law a partner of a firm.  In the context of the right  of a  benamidar  to sue in his own name to  recover  immoveable property, the (1)  (1942) 10 I.T.R. 457,461-462. 19 Judicial  Committee  in  Gur Narayan v.  Sheo  Lal  Singh(1) defined the status of a benamidar in law thus :               "As  already  observed, the benamidar  has  no               beneficial   interest  in  the   property   or               business   that   stands  in  his   name;   he               represents,  in fact, the real owner,  and  so               far  as  their  relative  legal  position   as               concerned   he   is   a   mere   trustee   for               him............. The bulk of judicial  opinion               in India is in favour of the proposition  that               in  a proceeding by or against the  benamidar,               the  person  beneficially  entitled  is  fully               affected by the rules of res judicata." In  Aruna  Group  of  Estates,  Bodinayakanur  v.  State  of Madras(2) a Division Bench of the Madras High Court, on  the basis  of  the said legal position, rightly  held  that  the benami character did not affect the benamidar’s capacity  as partner or his final relationship with the other members  of the  partnership.   It pointed out that "if any  partner  is only  a benamidar for another, it can only mean that  he  is accountable to the real owner for the profits earned by  him from and out of the partnership." Therefore, a benamidar  is a  mere trustee of the real owner and he has  no  beneficial interest in the property or the business of the real  owner. But  in law, just as in the case of a trustee, he  can  also enter into a partnership with others. If  so,  what is the principle of law  which  prohibits  the benamidar of a partner from being also a partner along  with the  said partner with others ? Qua the other  partners,  he has separate and real existence; he is governed by the terms of  the  partnership deed; his rights  and  liabilities  are governed by the terms of the contract and by the  provisions of  the Partnership Act; his liability to third parties  for the  acts  of the partnership is co-equal with that  of  the other partners; the other partners have no concern with  the real  owner; they can only look to him for  enforcing  their rights   or   discharging  their   obligations   under   the partnership deed.  Any internal arrangement between him  and another  partner  is  not  governed  by  the  terms  of  the

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partnership;  that arrangement operates only on the  profits accruing  to  the benamidar; it is outside  the  partnership arrangement.   If a benamidar possesses the legal  character to  enter into a partnership with another. the fact that  he is  accountable for his profits to, and has the right to  be indemnified for his losses by, a third party or even by  one of the partners does not disgorge him of the said character. (1) (1918) L.R. 46 I.A. 1, 9.   (2) (1962) 2 M.L.J. 294. 20 It  is true that different considerations may arise, if  the partnership  is  only between two persons of whom one  is  a benamidar  of the other.  In that event the partnership  may be bad not because the benamidar has no power to enter  into the  partnership but because the partnership in law  is  the relationship between at least two persons and in the case of a  benamidar  and the real owner in fact there is  only  one person.  It may also be that in a case where a benamidar  is taken  as a partner with the consent of the other  partners, he will only be a "dummy".  We do not propose to express any final  opinion  on the said two questions, as  they  do  not arise in this appeal. A  Division  Bench of the Bombay High Court in  The  Central Talkies  Circuit,  Matunga,  In re(1) held  that  there  was evidence   to   justify  the  finding  of   the   Income-tax authorities  that the alleged partnership was not a  genuine partnership  and  that  they acted rightly  in  refusing  to register  the firm.  That finding was sufficient to  dispose of  the reference before the Court.  But Beaumont, C.J.,  in the course of the judgment made some observations which lend support  to  the contention of the appellant.   The  learned Chief Justice said :               "Speaking for myself, I should say that if  it               were shown that one of the partners was only a               nominee of a share allotted to him or her  for               another  partner,  the  deed  would  not  then               specify  correctly the individual  shares.   I               think it must specify correctly the individual               and  beneficial  shares,  because  that  is  a               matter  which  is relevant from the  point  of               view  of the Income-tax authorities.   If  the               Assistant Commissioner had any evidence before               him to lead to the conclusion that the  mother               in  the  case  was not really  entitled  to  a               beneficial  interest of 4 1/2 annas  share,  I               think he was justified in refusing to register               the deed." With   great  respect,  we  cannot,  agree  with  the   said observations.  If a benamidar has the character of a trustee and,  therefore, can enter into partnership with another  in his  own name, the share allotted to him in the  partnership must  be  held  to specify correctly  his  individual  share therein.   Kania,  J., as he then was, did not  express  any opinion on this aspect of the case.  A Division Bench of the Andhra  Pradesh  High  Court in  Hiranand  Ramsukh  v.  Com- missioner  of  Income-tax, Hyderabad(1) held that  a  person shown  as a partner in a partnership deed was not a  genuine partner and (1)(1941)91.T.R.44,52. (2) 1963)47 T.R. 98. 21 therefore the Income-tax Officer was perfectly justified  in refusing  to  register the firm.  There  the  assessee  firm originally  consisted  of  2  partners  with  equal  shares, namely,  Ramprasad  and  Bhagwandas.   After  the  death  of Bhagwandas,  Ramprasad took his aunt, Mrs.  Chandrabai,  and

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his minor son as partners.  The Income-tax Officer held that both  Mrs.  Chandrabai and Ramprasad’s minor  son  were  not genuine partners but were mere dummies, and they were  shown merely  as partners to reduce the incidence of tax.  As  two of  the  three  partners  were  not  genuine  partners,  the partnership  itself  was not genuine.  Though  some  of  the observations  in the judgment are wide, that  decision  does not touch the present case.  The decision of the Madras High Court in P. A. Raju Chettiar v. Commissioner of  Income-tax, Madras(’)  is  also  one  where the  finding  was  that  the partnership  was not a genuine one.  ’Mat decision  also  is besides the point. The legal position may be stated thus: When a firm makes  an application  under s. 26A of the Act for  registration,  the Income-tax  Officer can reject the same if he comes  to  the conclusion  that  the  partnership is  not  genuine  or  the instrument  of  partnership does not specify  correctly  the individual shares of the partners.  But once he comes to the conclusion  that the partnership is genuine and a valid  one he cannot refuse registration on the ground that one of  the partners  is a benamidar of another.  If the partnership  is genuine    and legal, the share given to the benamidar  will be the correct specification of his individual share in  the partnership.    The  beneficial  interest  in   the   income pertaining  to  the  share of the said  benamidar  may  have relevance to the matter of assessment, but none in regard to the question of registration. In  the result, for the aforesaid reasons, we hold that  the answer given by the High Court-is correct.  The appeal fails and is dismissed with costs. Appeal dismissed. (1) (1949) 17 I.T.R. 51. 22