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PETITIONER: COMMISSIONER OF INCOME-TAX, PUNJAB

       Vs.

RESPONDENT: M/S.  CHANDER BHAN HARBHAJAN LAL

DATE OF JUDGMENT: 04/01/1966

BENCH: BACHAWAT, R.S. BENCH: BACHAWAT, R.S. SARKAR, A.K. MUDHOLKAR, J.R.

CITATION:  1966 AIR 1490            1966 SCR  (3) 176  CITATOR INFO :  F          1980 SC 769  (2)

ACT: Income-tax  Act (11 of 1922), s. 66(2)-Partner of  one  firm also  partner in assessee-firm-Whether all the  Partners  of first   firm   are  partners  of  the   assessee-firm-If   a substantial question of law.

HEADNOTE: The  assessee-firm, consisting of 14 partners,  applied  for registration under s. 26A of the Income-tax Act, 1922.   One G, who was a partner of the assessee-firm, was also  partner of  another firm, the Ferozepore firm.  The Ferozepore  firm consisted of 8 partners who had agreed that if any work  was carried  on by any one of them with others the  profits  and losses arising out of that work would be divided amongst all the partners in proportion to their shares in that firm.  In the  course of the proceedings for the registration  of  the assessee-firm all its partners had stated before the Income- tax Officer that G was a partner in the as firm, not in  his individual  capacity but on behalf of the  Ferozepore  firm. It  was found by the Income-tax Officer that the capital  of the assesseefirm was supplied by G who had taken the  amount from the Ferozepore firm, and, that the assessee-firm was to carry  on the same kind of business as the Ferozepore  firm. The  Incom-tax  Officer  rejected the  application  for  the reason that ’in reality it was not G but the Ferozepore firm that was the partner of the assessee-firm and  consequently, the  assessee-firm was illegally constituted because  :  (i) Ferozepore  firm  could  not legally be  a  partner  in  the assessee-firm;  (ii)  the total number of  partners  of  the assessee-firm  would  then be 21; and (iii)  the  individual shares  of  the  partners of the Ferozepore  firm  were  not specified in the partnership deed of the assessee-firm.  The Appellate  Assistant Commissioner, on appeal, reversed  that order, holding that G was a partner of the assaw-firm in his individual  capacity  and  not as a  representative  of  the Ferozepom  Am and that the effect of his agreement to  share his  profits and losses in the assessee-firm with the  other partners  of the Ferozepore firm was only to  constitute  a sub-partnership  between  G and the other  partners  in  the

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Ferozepore  firm,  in  respect  of the share  of  G  in  the assessee-firm.   The Appellate Tribunal upheld the order  of the  Appellate  Assistant Commissioner on the  short  ground that  there was no merit in the appeal in view  of  certain decisions  cited by it, and also dismissed  the  application under s. 66(1) to refer to the High Court four questions  of law.  The Commissioner preferred a petition before the High Court under s. 66(2) for directing the Tribunal to refer the questions; (1) whether G was a partner of the  assessee-firm in his individual capacity or representing the partners  of the  Ferozepore, firm, and (ii) whether the Ferozepore  firm was  a  sub-partnership; but the High  Court  dismissed  the application  holding  that the questions of  law  were  well settled. In  appeal to this Court, it was contended that : (i)  under the circumstances, G was a partner of the assessee-firm  not in  his individual capacity but on behalf of the  Ferozepore firm;  (ii)  the  High  Court held that  there  was  a  sub- partnership on the erroneous assumption that the: Ferozepore firm  came  into  existence  after  the  assessee-firm   was constituted; and since a sub-partnership can be entered into only after a partnership was constituted, there could be  no sub-partnership between the members of the 177 Ferozepore,  firm; and (iii) as a question of law arose  out of  the order of Tribunal, the High Court was bound to  call for a statement of case. HELD  : (per Sarkar and Bachawat, JJ.) on the  materials  on record,  the Appellate Tribunal was entitled to come to  the conclusion  that  G  and not the  Ferozepore  firm  was  the partner in this assessee-firm [181 D-E] Commissioner of Income-tax v. Sivakasi Match Exporting.  Co. [1964] 8 S.C.R. 18, followed. (ii) The  question  whether  there  was  a   sub-partnership between the members of the Ferozepore firm in respect of the share of G is not materail, because, assuming that there was no  sub-partnership, the members of the Ferozepore firm  did not  become partners in the assessee-firm by virtue  of  the clause which only regulated the relationship of the partners of  the Ferozepore firm inter se and created  a  partnership between  them in respect of the share of G in the  assessee- firm. [183 B-D] Commissioner  of Income-tax v. Bagyalakshmi & Co.  [1965]  2 S.C.R. 22, followed. (iii)     Though a question of law arose out of the order of the  Appellate  Tribunal,  since it was  not  a  substantial question  of  law and the answer to the question  was  self- evident,  the  High  Court  was not  bound  to  require  the Tribunal to refer the question. [184 D] Per  Mudholkar,  J. (dissenting) : The main  question  which arose  in the present cast was whether in the  circumstances of the case, the assesseefirm was registrable under s.  26A. Ascertainment of the legal effect of &we circumstances would be a question of law.  The Appellate Assistant  Commissioner and the Tribunal had not considered the question whether the application for registration reflected the true position  as regards  the  real  partners  in  the  assessee-firm.    The reasoning  of  the  Appellate  Assistant  Commissioner   was pertinent  only  to  a  case  of  sub-partnership,  and  the Tribunal merely referred to certain decisions and  dismissed the Department’s appeal.  Since the finding of the Appellate Assistant Commissioner and also of the Tribunal was  arrived at  by ignoring the relevant facts found by  the  Income-tax Officer,  the finding was vitiated by an error of law.   The High  Court has also committed an obvious error as  to  when

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the  Ferozepore firm was constituted and that error has  led to  the  further  error that the Ferozepore  firm  was  sub- partnership in relation to the assessee-firm.  Moreover  the decisions  in Commissioner of Income-tax v.  Sivakasi  Match Exporting Co. [1954] 1 S.C.R. 18 and Commissioner of Income- tax v. Bagyalakshmi & Co. [1965] 2 S.C.R. 22 do not apply to the  facts of this case, because, the observations in  those cases  are based on the fact that the person admitted  as  a partner in the firm seeking registration was admitted as  an individual, whereas in the present case one of the  partners of  the firm seeking registration was a partner in  his  re- presentative  capacity.   Thus the question in  the  instant case  was a substantial question of law which has  not  been settled.  Therefore, the High Court should have directed the Tribunal to refer the question. [188 H; 190 H. 189 H; 188 A- B; 192 B-D]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 605 of 1963. Appeal  by special leave from the judgment and  order  dated the January 24, 1961 of the Punjab High Court in  Income-tax Case No. 16 of 1956. Niren De, Additional Solicitor-General, Gopal Singh and R.   N. Sachthey, for the appellant. 178 Bishan  Narain,  O.C. Mathur and J. B. Dadachanji,  for  the respondent. The  Judgment  of Sarkar and Bachawat JJ. was  delivered  by Bachawat J. Mudholkar J, delivered a dissenting Opinion. Bachawat,  J. This appeal by special leave is from an  order of  the  Punjab High Court rejecting an application  by  the Commissioner  of  Income-tax Punjab under S.  66(2)  of  the Indian Income-tax Act, 1922.  On April 21, 1953, 14 partners of the firm of Messrs.  Chander Bhan Harbhajan Lal of  Rupar (hereinafter  referred to as the assessee firm)  constituted under the instrument of partnership dated December 5,  1952, applied  to the Income-tax Officer, Project  Circle,  Ambala for  registration  of the firm under s. 26-A of  the  Indian Income-tax  Act.   It may be. mentioned at this  stage  that there was another firm of the name of Chander Bhan & Co., of Ferozepore (hereinafter referred to as the Ferozepore firm), consisting of 8 partners and constituted under a deed  dated June 14, 1952, which provided inter alia:               "If  any  one of the  executants  enters  into               business  individually or along  with  another               person  all the partners of the firm shall  be               entitled  to  the profit and  liable  for  the               loss, accruing from that business according to               the shares hereinbefore mentioned."               One Gosain Chander Bhan was a partner of  both               the assessee firm and the Ferozepore firm.  In               course  of  proceedings  arising  out  of  the               application  for registration of the  assessee               firm under s. 26-A, Harbhajan Lal, one of  its               partners, stated on January 30, 1954 :               "I  Harbhajan  Lal son of Shri  Ram  Chand  of               Rupar solemnly declare that firm M/s.  Chander               Bhan Harbhajan Lal consisted of 14 partners as               mentioned   in   the  return   and   deed   of               partnership.  Gosain Chander Bhan was  partner               not  in his individual capacity but on  behalf               of  the  firm M/s.  Gosain  Chander  Bhan  and               Company  Ferozepur having about six  partners.

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             Other   partners   are   partners   in   their               individual capacity.’ It  seems  that  other partners of the  assessee  firm  made similar statements on February 27, 1954. The  capital  of the assessee firm was  supplied  by  Gosain Chander Bhan.  It appears that Gosain Chander Bhan had taken the  capital  from the Ferozepore firm, and the  amount  was shown as an item in his accounts with the Ferozepore firm. 179 By his order dated February 27, 1954, the Income-tax Officer rejected  the application under s. 26-A.  He held  that  (1) the deed dated December 5, 1952 did not specify the date  of the  constitution  of  the assessee firm; (2)  some  of  the parties to deed having no experience in the business of  the firm  were  not really partners therein, and the  number  of partners in the firm had been artificially increased with  a view  to reduce the taxable liability; (3) the firm was  not genuine,  as it had no banking account, did not possess  the income-tax   clearance  certificate,  did  not  notify   its constitution to the P.W.D., and payments were received  from the  P.W.D.  in the name of Harbhajan Lal.  On  appeal,  the Appellate Assistant Commissioner, Ambala Branch,. set  aside all these findings of the Income-tax Officer.  The  correct- ness of the decision of the Appellate Assistant Commissioner on! these points is no longer challenged. The  Income  tax  Officer  so held  that  thought  the  deed dated  December 5, 1952 stated that Gosain Chander Bhan  was the  partner having 6/16th share, in reality the  Ferozepore firm  was  the partner of the assessee  firm  having  6/16th share  therein  and  consequently,  the  assessee  firm  was illegally constituted, because (1) the Ferozepore firm could not legally be a partner in the assessee firm; (2) the total number  of  partners of the assessee firm was  21;  and  (3) moreover, the individual shares of the eight partners of the Ferozepore  firm  were  not  specified  in  the  deed  dated December 5, 1952.  On these findings, the Income-tax Officer rejected  the  application ’Under s. 26-A.  On  appeal,  the Appellate  Assistant Commissioner set aside these  findings, and  held  that Gosain Chander Bhan was the partner  of  the assessee  firm  in  his  individual  capacity  and  not   as representative  of and on behalf of all the partners of  the Ferozepore  firm.   He  held that Gosain  Chander  Bhan  had merely  agreed  to  share  his profits  and  losses  in  the assesses  firm  with his other partners  of  the  Ferozepore firm, that such an agreement did not make the other partners of  the firm, partners in the assessee firm, and the  effect of  the agreement was to constitute a sub-partnership  only. On further appeal, the Income-tax Appellate Tribunal,  Delhi Branch,  upheld  these findings of the  Appellate  Assistant Commissioner, and held that those findings were supported by the  decisions  in  Commissioner of  Income-tax  v.  Messrs. Agardih Colliery(1) and Commissioner of Income-tax v.  Laxmi Trading Company(2).  The Commissioner of Income-tax,  Punjab then applied to the Appellate Tribunal under s. 66(1) of the Indian Income-tax Act (1)  A.I.R. 1955 Patna 225.            (2)  [1953]24  I.T.R. 173. 180 requiring  the Tribunal to refer the following questions  to the Punjab High Court:               "1. Whether the Income-tax Appellate  Tribunal               was  right  in applying the  decision  of  the               Patna  High Court in the case of  Commissioner               of  Income-tax versus M/s.   Agardih  Colliery               Company  and of the Punjab High Court  in  the

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             case  of  Commissioner  of  Income-tax  versus               Lakshmi  Trading Company to the facts of  this               case.               2.    If  the answer to question No. 1  is  in               affirmative  whether the rulings  noted  above               lay down a correct law.                3. Whether there is any material to show that               there  was a sub-partnership formed by  Gosain               Chander Bhan with other persons at Ferozepore.               4.    Whether in the circumstances of the case               the correct status-of the assessee was firm or               association    of    persons    and    whether               registration under section 26-A of the  Indian               Income-tax Act could be allowed in this case."               By  its  order dated September  5,  1955,  the               Tribunal  rejected the application,  and  held               that the questions were concluded by  judicial               decisions and no useful purpose will be served               by referring them again to the High Court.  On               September   18,  1956,  the  Commissioner   of               Income-tax  applied to the Punjab  High  Court               under  s. 66(2) of the Indian  Income-tax  Act               for  an order directing the Tribunal to  refer               the aforesaid questions to the High Court,  At the hearing  of the application  before  the               High  Court, Counsel for the  Commissioner  of               Income-tax gave up questions Nos. 2 and 4, and               submitted that the following two questions  of               law arose for decision :               "(a)  is there any material on the  record  to               support  the finding that Gosain Chander  Bhan               was the real partner of the assessee firm  and               is not a partner in a representative  capacity               representing   all  the  partners  of   Gosain               Chander  Bhan and Company of  Ferozepore,  and               (b)  whether  the present is a  case  of  sub-               partnership to which the two cases referred to               in the order by the Tribunal apply ?" By  its  order  dated  January  24,  1961,  the  High  Court dismissed the application, and held that the questions  of law  were well settled.  The Commissioner of Income-tax  now appeals to this Court by special leave. 181 Counsel  for the appellant contended that all  the  partners of  the  Ferozepore firm were the partners in  the  assessee firm having, regard to (1) the fact that the capital of  the assessee  firm was secured by Gosain Chander Bhan  from  the Ferozepore  firm, (2) the clause in the deed of  partnership dated  June  14, 1952 under which all the  partners  of  the Ferozepore firm were entitled together profit and liable for the  loss in respect of the share of Gosain Chander Bhan  in the  assessee firm, and (3) the statement of  Harbhajan  Lal and other partners of the assessee firm that Gosain  Chander Bhan  was a partner in the assessee firm not in his  indivi- dual capacity but on behalf of the Ferozepore firm.  We  are unable to accept this contention.  The real question  before us is whether any substantial question of law arises out  of the  order of the Tribunal.  We think that no such  question arises.  The deed dated December 5, 1952 clearly stated that Gosain  Chander Bhan and 13 other parties to the  deed  were the partners of the assesee firm.  On the face of the  deed, it does not appear that Gosain Chander Bhan was a partner in a representative capacity on behalf of the Ferozepore  firm, or that the Ferozepore firm was the partner in the  assessee firm.   On  the  materials  on  the  record,  the  Appellate

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Tribunal was entitled to come to the conclusion that  Gosain Chander Bhan and not the Ferozepore firm was the partner  in the assessee firm. The  capital  of the assesses firm was  supplied  by  Gosain Chander Bhan.  Gosain Chander Bhan in his turn had taken the amount of the capital from the Ferozepore firm, but there is no evidence to show that he took the money otherwise than in his individual capacity.  The clause in the partnership deed constituting the Ferozepore firm to the effect that all  the partners of the Ferozepore firm are entitled to the  profits and  liable  for the losses accrued in the share  of  Gosain Chander  Bhan in the assesses firm may show that there is  a partnership  between Gosain Chander Bhan and other  partners of  the  Ferozepore firm in respect of the share  of  Gosain Chander Bhan in the profits and losses of the assessee firm. This  partnership,  if  any,  between  the  members  of  the Ferozepore firm does not make the Ferozepore firm a  partner in the assessee firm.  The Ferozepore firm is not a party to the agreement of partnership constituting the assesses firm. Gosain Chander Bhan in his individual capacity could legally be  a  partner in the assessee firm, and the  fact  that  he secured  the  capital from the Ferozepore firm, or  that  he entered  into  a partnership with the other members  of  the Ferozepore firm in respect of his share in the assessee firm does  not show that the Ferozepore firm is a partner of  the assessee firm, or that the assessee firm is not validly 182 Exporting Co.(1), Subba Rao, J. observed:               "A partner of a firm can certainly secure  his               capital  from  any  source  or  surrender  his               profits  to  his  sub-partner  or  any   other               person.    Those  facts   cannot   conceivably               convert a valid partnership into a bogus one." The  statements of Harbhajan Lal and other partners  of  the assessee  firm do not carry the matter any further.  In  the statement  dated  January 30, 1954,  Harbhajan  Lal  clearly stated  that the assessee firm consisted of 14  partners  as mentioned in the deed of partnership dated December 5, 1952. It is true that he stated also that Gosain Chander Bhan  was a  partner not in his individual capacity but on  behalf  of the Ferozepore firm, but this statement must be read in  the background   of   the  clause  in   the   partnership   deed constituting  the Ferozepore firm, under which the  partners of  the  Ferozepore firm were entitled to  the  profits  and liable for the losses in the share of Gosain Chander Bhan in the  assessee  firm.  The statement fairly read  shows  that only the 14 persons mentioned in the deed dated December  5, 1952  were  the  partners in the assessee firm.   If  the  8 partners of the Ferozepore firm were partners in the  asses- see  firm,  Harbhajan Lal could not have  stated  ’that  the number of the partners of the assessee firm was 14 only. Counsel  for the appellant pointed out that the  High  Court erron eously assumed that the partnership deed  constituting the  Ferozepore  firm was dated June 14, 1954,  whereas,  in fact, this partnership was dated June 14, 1952.  Counsel for the  appellant rightly pointed out that on  the  erroneous assumption  that  the  partnership  deed  constituting   the Ferozepore  firm was executed after ’December 5,  1952  when the assessee firm was constituted, the High ’Court held that there  was a sub-partnership between Gosain  Chander.   Bhan and the other partners in the Ferozepore firm in respect  of the  share  of  Gosain Chander Bhan in  the  assessee  firm. ’Counsel  then contended that in law, a sub-partnership  can be  entered only after the partnership is constituted,  and, therefore, there was no sub-partnership between the members

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of  the  Ferozepore firm in respect of the share  of  Gosain Chander  Bhan  in  the assessee firm.  In  support  of  this contention  counsel  relied  on  the  following  passage  in Lindley on Partnership, 12th Edn, pp. 99-100:               "A   sub-partnership   is  as   it   were,   a               partnership    within   a   partnership;    it               presupposes the existence of a partnership  to               which it is itself subordinate." (1) [1964] 8 S.C.R. 18, 27. 183 We  did  not  enquire  into  the  correctness  of  counsel’s assumption  that  this  passage  is  an  authority  for  the proposition  that  there  cannot be  an  agreement  of  sub- partnership  in anticipation of the head partnership  coming into  existence.   But  the question  whether  the  relevant clause  in  the  deed dated June 14,  1952  created  a  sub- partnership  in respect of the share of Chander Bhan in  the assessee  firm having regard to the fact that this deed  was executed before the assessee firm came to be constituted  is not  material for the purpose of the case, and need  not  be decided.   The  clause  regulated the  relationship  of  the partners  of  the Ferezepore firm inter se,  and  created  a partnership  between them in respect of the share of  Gosain Chander  Bhan  in  the  assessee  firm.   Assuming,  without deciding that this partnership was not, strictly speaking, a subpartnership, it does not follow that the partners of  the Ferozepore  firm became partners in the assessee  firm.   By reason  of  this  clause  vis-a-vis  the  partners  of   the Ferozepore  firm, Gosain Chander Bhan could be  reagrded  as their  representative  in the assessee  firm;  nevertheless, they   were  strangers  to  the  contract   of   partnership constituting  the assessee firm and did not become  partners therein.  In  Commissioner of Income-tax v.  Bagyalakshmi  & Co.(1), Subba Rao, J. observed:               "A contract of partnership has no concern with               the  obligation of the partners to  others  in               respect  of  their  shares of  profit  in  the               partnership. it only regulates the rights  and               liabilities of the partners.  A partner may be               the Karta of a joint Hindu family; he may be a               trustee;  he may enter into a  sub-partnership               with  others;  he  may  under  an   agreement,               express or implied, be the representative of a               group  of persons; he may be a  benamidar  for               another.  In all such cases he occupies a dual               position.   Qua the partnership, he  functions               in  his  personal  capacity;  qua  the   third               parties, in his representative capacity.   The               third parties, whom one of the partners repre-               sents, cannot enforce their rights against the               other  partners nor the other partners can  do               so  against  the said  third  parties.   Their               right  is  only to a share in the  profits  of               their  partner-representative  in   accordance               with  the terms of the agreement, as the  case               may be." Quite  plainly, the relevant clause in the deed  dated  June 14, 1952 was not part of the agreement of partnership  dated December 5, 1952 constituting the assessee firm, and did not affect  the Tight of the partners of the assessee  firm,  to claim registration of (1)  [1955] 2 S.C.R. 2, 26. 184 the assessee firm under S. 26-A.  It is not possible to  say that  there  are no materials on the record to  support  the

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finding  that  Gosain  Chander Bhan was  a  partner  of  the assessee  firm  in  his  individual  capacity  and  not   as representing  the  Ferozepore firm.   The  question  whether there  was  a sub-partnership between the  members  of,  the Ferozepore  firm in respect of the share of  Gosain  Chander Bhan is not material because assuming that there was no sub- partnership  the  members  of the Ferozepore  firm  did  not become  partners  in  the assessee firm  by  virtue  of  the relevant  clause  in  the  deed  dated  June  14,  1952   or otherwise.  We are, therefore, satisfied that no substantial question  of  law arises out of the order of  the  Appellate Tribunal. Counsel  for the appellant submitted that as a  question  of law  arose out of the order of the Tribunal, the High  Court was  bound  to  call for a statement of case.   We  are  not inclined to accept this contention.  Where, as in this case, the question of law is not substantial and the answer to the question  is  self-evident, the High Court is not  bound  to require the Tribunal to refer the question.  In our opinion, the  High Court in the exercise of its discretion  under  S. 66(2) rightly rejected the appellant’s application. In the  result, the appeal is dismissed with costs. Mudholkar,  J.  This  is an appeal from a  judgment  of  the high  Court  of  Punjab rejecting a  petition  made  by  the Commissioner  of  Income-tax, Punjab under s. 66(2)  of  the Indian Income-tax Act, 1922 for calling upon the  Income-tax Appellate Tribunal to refer certain questions of law to  the High Court. The relevant facts are these On  December. 29, 1948 Gosain Chander Bhan and  four  others entered  into a partnership for carrying on the business  of contractors  in the name of "Gosain Chander Bhan & Co."  The partnership  was  entered  into  at  Ferozepore  and  Gosain Chander Bhan wag a major shareholder in the firm.  By a deed of  partnership  dated  June  14,  1952  the  firm  was  re- constituted  and  three other  persons  were  admitted  as partners  therein.  Th.-. old name, however, was  continued. One of the terms of the partnership was that if any work was carried  on  by any one of the partners individually  or  in partnership with others, the profits and losses arising  out of  that work would be divided amongst all the  partners  in proportion of their shares in the firm.  On December 5, 1952 a  partnership  firm bearing the name of  "Messrs.   Chander Bhan  Harbhajan  lal"  was formed at  Rupar.   The  dead  of partnership sets out the names 185 object of the firm was to carry on business similar to  that carried on by Gosain Chander Bhan & Co. It may be  mentioned that  in  this firm also Gosain Chander Bhan was  the  major shareholder.   For  convenience  we  would  call  the   firm constituted on June 14, 1952 as the Ferozepore firm and  the one constituted on December 5, 1952 as the Rupar firm. On April 21, 1953 an application was presented by the  part- ners  of  the  Rupar  firm,  accompanied  by  the  deed   of partnership  dated  December 5, 1952 before  the  Income-tax Officer,  Ambala for registration of the firm under s.  26-A of the Act for the assessment year 1953-54.  The  Income-tax Officer  examined  the partners constituting  the  firm  and recorded  their  statements in order to ascertain  the  true position  with  regard  to the  constitution  of  the  firm. Harbhajan  Lal in his statement dated January 30,  1954  and the  other partners in their statements dated  February  27, 1954 admitted that Gosain Chander Bhan had entered into  the partnership not in his individual capacity but on behalf  of the Ferozepore firm.  The Income-tax Officer also found that

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the  funds invested in the Rupar firm in the name of  Gosain Chander  Bhan  were also provided by  the  Ferozepore  firm. Upon  these and some other facts he came to  the  conclusion that the deed of partnership dated December 5, 1952 did  not specify  the real partners of the firm and,  therefore,  the firm   cannot  be  registered.   He  further  came  to   the conclusion  that  as  in reality all  the  partners  of  the Ferozepore firm and not Gosain Chander Bhan alone, were also partners along with 13 other persons in the Rupar firm,  the total  number of partners exceeded 20.  Such  a  partnership being invalid in law the firm could not be registered  under s. 26A of the Act.  He, therefore, dismissed the application by  his order dated February 27, 1954.  In appeal his  order was,   however,   reversed  by   the   Appellate   Assistant Commissioner  by  his’  order dated August  12,  1954.   The appeal preferred therefrom by the Income-tax Officer  before the   Income-tax  Appellate  Tribunal  (Delhi  Branch)   was dismissed  by it by its order dated September 5,  1955.   In doing  so the Tribunal based itself on the decisions in  The Commissioner  of Income-tax v. Agardih  Colliery  Company(1) and  Commissioner of Income-tax v. Laxmi Trading Co.(2)  The Commissioner  of  Income-tax then applied  to  the  Tribunal under s. 66(1) to refer to the High Court four questions  of law.   The  Tribunal, however, rejected the  application  on March  5,  1956.   The Commissioner  thereupon  preferred  a petition before the High Court under s. 66(2) for (1) A.I.R. 1955 Patna 225. L 9 Sup C T /66-13 (2) (1953) 24 I.T.R. 173. 186 directing  the  Tribunal to refer four question  of  law  to it.At the hearing, however, only the following two questions were pressed on his behalf :               "(1)  Whether  there is any  material  on  the               record  to  support the  finding  that  Gosain               Chander  Bhan  was  the real  partner  of  the               assessee  firm  and was not a partner  in  the               representative  capacity representing all  the               partners of Gosain Chander Bhan and Company of               Ferozepur ?               (2)   Whether  the present is a case  of  sub-               partnership  to  which two cases  A.I.R.  1935               Patna 225 and (1953) 24 I.T.R. 173 referred to               in the order of the Tribunal apply?"               The  High Court, as already stated,  dismissed               the  application and now the matter is  before               us by special leave.                Before  us the learned  Additional  Solicitor               General,  appearing  for the  department,  has               raised the following two points :               (1)   that  there was a question of law  which               it  was incumbent on the Tribunal to refer  to               the High Court;               (2)   that  both  the Tribunal  and  the  High               Court proceeded to decide the question of  law               on erroneous premises. The  question  of  law,  according  to  learned   Additional Solicitor   General,  is  :  "whether  on  the   facts   and circumstances  of the case the firm Chander  Bhan  Harbhajan Lal was registrable under s. 26A". It must be borne in  mind that  the  question  is not whether there  was  material  on record on the basis of which the Tribunal could come to  the conclusion  that the firm was registrable but whether,  upon the  facts  found it was registrable.  In other  words,  the question  is as to what is the cumulative effect of all  the

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facts  and not what is the effect of only some of the  facts found.   The  contention  of  learned  Additional  Solicitor General is that when a question of law is said to arise  the High  Court  is  bound to call for a  reference  and  it  is immaterial that the question is settled already. If in the facts and circumstances of the case a question  of Law  arises, there is little doubt that under S.  66(1)  the Tribunal  is  bound to draw up a statement of the  case  and refer  the question to the High Court.  The Tribunal has  no discretion  in  the matter.  Where,  however,  the  Tribunal refuses to do so and the High Court is moved under S.  66(2) of the Act, the position 187 becomes  different.  Section 66(2) confers a  discretion  on the High Court and if the High Court is of the opinion  that though  a  question of law arises it is not  substantial  or that  it is well settled it can reject the petition.   What we  have, therefore, to ascertain is whether a  question  of law  at  all arises in this case and if so whether it  is  a substantial question of law.  In order to ascertain  whether a  question of law arises it is necessary to  ascertain  the facts  which have been found established by  the  Income-tax authorities.   I  will recapitulate the facts found  by  the Income-tax Officer.               (1)   The original firm Gosain Chander Bhan  &               Co., was formed at Ferozepore on December  29,               1948.               (2)   Gosain  Chander Bhan had a  major  share               therein.               (3)   This   firm   was  dissolved   and   re-               constituted on June 14, 1952.               (4)   In  the original firm there were only  5               partners  including Gosain Chander Bhan  while               in   the  reconstituted  firm  there  were   8               partners including Gosain Chander Bhan.               (5)   The  largest share in the  reconstituted               partnership was that of Gosain Chander Bhan.                (6)  The partnership deed of December 5  1952               specified  the names of 14  persons  including               Gosain  Chander Bhan as partners but  did  not               specify  the  names  of all  the  partners  of               Gosain Chander Bhan & Co. of Ferozepore.               (7)   The  funds  invested by  Gosain  Chander               Bhan  in the Rupar firm came out of the  funds               belonging to the Ferozepore firm.               (8)   Harbhajan  Lal  and  other  partners  of               Rupar  firm admitted that Gosain Chander  Bhan               was  not  a partner in the Rupar Firm  in  his               individual  capacity  but  had  joined  it  on               behalf of the Ferozepore firm.               (9)   The  business  carried on by  the  Ruper               firm  is  similar to that carried  on  by  the               Ferozepore firm. None  of  these  findings on questions  of  fact  has,  been negatived  or upset by the Appellate Assistant  Commissioner or  by  the Tribunal.  These findings  must,  therefore,  be taken  as the basis for ascertaining whether a  question  of law arises, and if it does they have to be home in mind  for deciding the question.  At this stage 188 I would like to mention that the High Court committed an ob- vious  error  in  stating  in  its  judgment  that  the  re- constituted  Ferozepore partnership was formed on  June  14, 1954, that is, after the Rupar partnership was formed.  This error has obviously led it into a further error, that is, of

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coming to the conclusion that the Ferozepore partnership was a  sub-partnership  in relation to  the  Rupar  partnership. Now,  ordinarily  there can be a sub-partnership  only  when there  is already in existence another partnership.   ’Since in  point of fact the Rupar partnership came into  existence after the formation of the Ferozepore partnership the latter cannot stand in relation to the former as a sub-partnership. The law as stated in Lindley on Partnership at p. 99 is :               "A   sub-partnership   is  as  it were,   a               partnership   within   a  partnership   :   it               presupposes the existence of a partnership  to               which it is itself subordinate."               The  correctness of this statement of  law  is               not assailed before us by either side. It  is  no doubt settled law that where an  application  for registration of a firm complies with the requirements of  s. 26-A  and of the rules and it is found that the  partnership is not genuine the Income-tax Officer is not bound to  admit the firm to registration.  But it does not follow from  this that  for ascertaining whether the requirements of law  have been  satisfied  and  for ascertaining  whether  a  firm  is genuine  or is bogus or that it has no legal  existence  the Income-tax  Officer  must  confine himself to  the  deed  of partnership.   He has power to examine the partners  and  to require them to adduce evidence for satisfying himself about the  genuineness  or  otherwise of the  firm  and  also  for satisfying himself about compliance with the requirements of law.   Paragraphs  2  and 3 of the order  of  the  Appellate Assistant  Commissioner, however, show that he  has  treated the recitals in the partnership deed of December 5, 1952  as conclusive of the question as to who were the real  partners in  the  Rupar  firm.   I can find  no  discussion  or  even reference to the findings of the Income-tax Officer which  I have  earlier  summarised.  No doubt in paragraph 4  he  has referred  to  some  of the facts  found  by  the  Income-tax Officer  and the inference drawn by him and  rejected  them. Leaving  these  facts out of account there are  other  facts which are relevant for consideration but they appear to have been  ignored  by  the  Appellate  Assistant   Commissioner. ’Ascertainment  of the legal effect of those facts would  in my judgment be a question of law.  It is not disputed before us that the application for registra- 189 tion  should  set out the names of all the persons  who  are real partners of the firm and, therefore it is incumbent  on the  Income-tax authorities to ascertain whether any of  the partners  had  joined  the  partnership  in  his  individual capacity Dr as representing a group of persons.  If, to  the knowledge  of  the other partners he represents a  group  of persons,  be they members of another partnership or a  joint Hindu  family,  it would be a question for  decision  as  to whether  all those persons have thereby become partners  and that  would  be a question of law.  In paragraph  6  of  his order the Appellate Assistant Commissioner seems to have had this  in  mind and it will be useful to quote  the  relevant portion of the paragraph :               "There are two essential conditions before  it               can  be stated that  contractual  relationship               has  been brought about between  the  partners               which is the relationship of a partnership and               the two conditions are that the partners  must               agree to share the profits of the business and               the business must be carried on by all or  any               of them for all of them.  There can in law  be               a  partnership between the partner in  a  Head

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             Firm and another individual in respect of  the               partner’s  share  in the Head Firm  so  as  to               entitle the partners in the sub-firm to  apply               for registration thereof under section 26-A of               the Indian Income-tax Act.  If several persons               are  partners and one of them agrees to  share               the  profits derived by him with  a  stranger,               this  agreement does not make the  stranger  a               partner  in the original firm.  The result  of               such an agreement is to constitute a sub-part-               nership.  It makes the parties to it  partners               inter se; it does not affect the other members               of the principal firm." The  sole  ground given by the Appellate  Assistant  Commis- sioner for holding that Gosain Chander Bhan was a partner in the  Rupar  firm  in his individual  capacity  is  that  the preamble to the partnership deed ’clearly sets out that  the contracting parties were 14 and that Gosain Chander Bhan was a  partner in his individual capacity.’ It is true  that  he has  repelled  some of the grounds given by  the  Income-tax Officer in support of his conclusion but, as already stated, he has entirely omitted to consider other facts found by the Income-tax Officer which bear directly on the point.  It may be  that  the  finding  cannot be said to  be  based  on  no evidence but even so, as it has been arrived at by  ignoring relevant facts, it is vitiated by an error of law. 190 The first sentence of Para 6 of the order, of the  Appellate Assistant   Commissioner   quoted  above   paraphrases   the provisions   of  s.  4  of  the  Partnership  Act   and   is unexceptionable.  The rest of the quotation appears to  have been   lifted  from  the  head-note  of  the   decision   in Commissioner  of Income-tax, Punjab v. Laxmi Trading  Co(1). The question which fell for decision in that case was               "Whether  there could in law be a  partnership               between  a partner in a head firm and  another               individual  in respect of the partner’s  share               in the head firm so as to entitle the partners               in  the  sub-firm to  apply  for  registration               thereof  under section 26-A,  Income-tax  Act,               1922?"               and it was answered in the affirmative. A  sub-partnership  can  also,  as  stated  by  the  learned Appellate  Assistant  Commissioner, apply  for  registration under  S.  26-A.  But where does it all lead to ?  Here  the question  which arises is whether the head firm as such  has entered into partnership with another or whether only one of the  partners of the head firm has entered into  partnership with  another.   For, that is what the question  really  is. According  to the appellant, the Ferozepore firm as  a  firm has  become partner in the Rupar firm and not merely  Gosain Chander Bhan.  The learned Appellate Assistant  Commissioner has  not addressed himself to this aspect of the  case.   At the  end  of the paragraph the learned  Appellate  Assistant Commissioner has observed : "there is no data on the  record to  substantiate the finding of the Income-tax Officer  that the  firm was not genuine in view of the local enquiries  by him."  That, however, is not the whole question.  The  whole question  which arises in this case is whether in the  facts and  circumstances  of  this  case  the  firm  Chander  Bhan Harbhajan   Lal   was  registrable  under   S.   26-A,   the circumstances  being  that  a partner of  another  and  pre- existing firm became a partner in Chander Bhan Harbhajan Lal on  behalf of the partners of that other firm, that  he  had brought  in  funds belonging to that firm and that  the  new

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firm  was to carry on business of the same kind as  the  old firm  was  carrying  on.   Further,  the  reasoning  of  the Appellate Assistant Commissioner would be pertinent only  to a  case of sub-partnership.  To put it somewhat  differently the  question  is whether the application  for  registration reflects  the true position as regards the real partners  in the Rupar Firm.  This has not been considered either by  the Appellate Assistant Commissioner or by the Tribunal. (1)  A.I.R. 1955 Pat. 225. 191 The  Tribunal  merely  referred to the  decisions  in  Laxmi Trading Co.’s case (1) and in Agardih Colliery Co.’s case(2) and dismissed the department’s appeal.  The latter is also a case  of sub-partnership and does not assist us in  deciding the matter arising here. It  is  contended  on behalf of  the  respondents  that  the question  arising  here has already been  settled  by  three decisions of this Court.  The first of these is Commissioner of  Income-tax,  Madras  v. Sivakasi  Match  Exporting  Co., Sivakasi(3).   In that case this Court held that  the  mere fact  that  one  of  the,  partners  of  the  firm   seeking registration brought his capital from another firm of  which he was one of the partners and the further circumstance that he  shared the profits received by him from the former  firm with his partners in the latter firm did not make the former partnership bogus.  In the first place the circumstance that upon  a  certain  set  of facts  this  Court  arrived  at  a particular  decision  would  not  necessarily  make  that  a binding  precedent  even though the inference drawn  by  the Court  upon which its judgment rests is one of law.  In  the second place we have here the fact that one of the  partners of  the  firm  seeking registration was  a  partner  in  his representative  capacity  and not merely a  partner  in  his individual   capacity.    The  next  case   relied   on   is Commissioner  of  Income-tax,  Ahmedabad v.  Abdul  Rahim  & Co.(4)  In that case this Court held that  the  circumstance that  one of the partners was a benamidar for  another  does not justify a refusal to register the firm under s. 26-A and reiterated the essential conditions which must be  satisfied by  the firm seeking registration which have been stated  in Commissioner  of  Income-tax, Bombay v. Dwarkadas  Khetan  & Co.(5)  It  does  not  advance  the  respondent’s  case  any further.   The  third decision is that  in  Commissioner  of Income-tax  v.  Bagyalakshmi & Co.(6). There Subba  Rao  J., speaking for the Court has observed :               "A  partner may be the karta of a joint  Hindu               family; he may be a trustee; he may enter into               a  sub-partnership with others; he may,  under               an  agreement,  express  or  implied,  be  the               representative  of a group of persons; he  may               be a benamidar for another.  In all such               cases  he occupies a dual position.   Qua  the               partnership  he  functions  in  his   personal               capacity;  qua  the  third  parties,  in   his               representative  capacity.  The third  parties,               whom               (1)   A.I.R. 1955 Pat. 225.               (3)   [1964] 8 S.C.R. 18.               (5)   [1961] 2 S.C.R. 821.               (2)   [1953] 24 I.T.R. 173.               (4)   [1965] 2 S.C.R, 13.               (6)   [1965] 2 S. C.R. 22.               192               one of the partners represents, cannot enforce               their  rights against the other  partners  nor

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             the other partners can do so against the  said               third parties.  Their right is only to a share               in the profits of their partner-representative               in  accordance with law or in accordance  with               the  terms of the agreement, as the  case  may               be." It  is upon these observations that learned counsel for  the respondents has placed strong reliance.  These  observations are based on the fact that the person admitted as a  partner in  the  firm  seeking registration was so  admitted  as  an individual.   They  cannot  apply and  were  apparently  not intended to apply to a kind of case as the one we have here, that  is,  where  the  partner to  the  knowledge  of  other partners  was joining on behalf of and representing  several persons.  What has to be determined is the cumulative effect of  this  circumstance  taken  along  with  the  other  cir- cumstances  established in the case.  That is a question  of law  and I am clear that question is far from being  settled and also that it is a substantial question of law. A  further question which arises on the particular facts  of this  case  is whether the Rupar firm can be  said  to  have legal existence because its real partners are not merely  14 persons but there are 7 persons in addition to that  number. Under the provisions of s. 11 of the Companies Act, 1956 (s. 4  of the 1913 Act) where the number of partners exceeds  20 the  firm has to be incorporated and that is admittedly  not what  has been done here.  If, therefore, the number  is  in excess  of  20 the firm being unincorporated, it  cannot  be said  to have a legal existence.  Unfortunately the  Income- tax  Appellate  Tribunal  has not discussed  the  facts  and circumstances  of this case but dismissed the second  appeal preferred  by the appellant on the short ground  that  there was no merit in it in view of the decisions cited by it.  It was  necessary for the Tribunal to ascertain whether on  the facts  of  this case those decisions concluded  the  matter. The  questions which arise are, in My  Opinion,  substantial between the parties and are not settled.  For these  reasons I allow the appeal, set aside the judgment of the High Court and  direct the Tribunal to refer the question  earlier  set out to the High Court.  Costs so far incurred will abide the result.                            ORDER In accordance with the opinion of the majority, Civil Appeal No. 605 of 1963 is dismissed with costs.  Civil Appeals Nos. 810 and 811 are dismissed, but there will be no order as  to costs. 193