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PETITIONER: COMMISSIONER OF INCOME-TAX, WEST BENGAL,CALCUTTA

       Vs.

RESPONDENT: JUGGILAL KAMALAPAT

DATE OF JUDGMENT: 07/10/1966

BENCH: BHARGAVA, VISHISHTHA BENCH: BHARGAVA, VISHISHTHA SHAH, J.C. RAMASWAMI, V.

CITATION:  1967 AIR  401            1967 SCR  (1) 784  CITATOR INFO :  RF         1971 SC2486  (7)  E&D        1974 SC1066  (4)

ACT: Income-tax Act (11 of 1922), is. 26A and 66-Registration  of firm  Legal  validity of existence of firm-Question  of  law referable to High Court.

HEADNOTE: Three  brothers and J entered into a  partnership  business. The  firm  owned  both  movable  and  immovable  properties. Later,  the three brothers created a Trust, with  themselves as  the  first  three  trustees.   They  also  executed   an unregistered   deed   of  relinquishment   by   which   they relinquished   their  rights  in  and  claims  to  all   the properties  and -assets of the firm, in favour of J. and  of themselves  in the capacity of trustees.  A new  partnership firm was constituted between J. and the Trust by means of  a partnership  deed  which  specified the shares  of  the  two partners in the profits and losses.  The Trust introduced  a sum. of Rs. 50,000 as its capital in the new firm.  For  the assessment   year   1943-44  the  new   firm   applied   for registration under s. 26A of the Indian Income-tax Act, 1922 but the Income-tax Officer, Appellate Assistant Commissioner ’and  the Appellate Tribunal rejected the application.   The Tribunal  relied  mainly  on the ground  that  the  deed  of relinquishment being unregistered could not legally transfer the  rights and the title to the immovable properties  owned by  the  -original  firm,  to the  Trust  and  that  as  the immovable  properties  were  not separable  from  the  other business  assets there was no legal transfer of any  portion of the business assets of the original firm in favour of the Trust.  On a reference to the High Court, as to whether  the new  partnership legally came into existence and,  as  such, should  be  registered, it was contended on  behalf  of  the Commissioner  that  the Tribunal had recorded a  finding  of fact  that the firm seeking registration was not  a  genuine one  and  had never come into existence.   The  High  Court, after calling for further statements, held that the Tribunal had not recorded any such finding of fact, that the firm did in  fact  come  into  existence,  and  that  there  was   no

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impediment to its registration. in appeal to this Court, HELD  : (i) The existence of a firm could be  challenged  on two  alternative grounds; (a) that a firm had not come  into existence at all, and (b) that though it came into existence in fact, its existence was not valid in law.  In the present case  it was only the second question that was  referred  to the  High Court.  The first could not at all be referred  to the  High Court as it would be a pure question of fact;  and if the Appellate Tribunal had in fact recorded a finding  of fact that the firm had not come into existence, the question of  law referred to the High Court, would not arise at  all. Therefore,  the  new firm did in fact come  into  existence. [788 E-H] (ii)The  new  partnership  between the  Trust  and  J.  was constituted  under a deed which was property  executed,  was valid in law, and so the firm should be registered. [791  C- D] 785 The deed of relinquishment was in respect of the  individual interests  of  the  three  brothers in  the  assets  of  the original firm, in favour of the Trust, and consequently, did not  require  registration, even though the assets  of  that firm  included immovable property.  The deed  was  therefore valid without registration. [790 F] Addanki Narayanappa v. Bhakara Krishnappa, [1966] 3  S.C.R., 400 followed. Even if the deed of relinquishment required registration, it could  only  be  invalid insofar as  it  affected  immovable properties, but to the extent that it purported to  transfer movable  assets of the original firm, it would be valid.   A deed  of relinquishment is in the nature of a deed  of  gift where  the various properties dealt with are separable.   In the present case, therefore, the deed of relinquishment  was valid  at  least in respect of movable properties,  and  the partnership  seeking registration thus became owner  of  all the  movable assets of the first partnership in addition  to the  Rs. 50,000 contributed as a capital investment  by  the Trust. [790 G; 791 A, C]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 127 of 1966 Appeal  from the judgment and order dated December 11,  1962 of the Calcutta High Court in Income-tax Reference No. 47 of 1962. S.   T.  Desai,  A. N. Kirpal and R. N.  Sachthey,  for  the appellant. A.   K. Sen and B. P. Maheshwari, for the respondent. The Judgment of the Court was delivered by Bhargava,  J.  This  appeal arises out  of  proceedings  for registration  of  the firm,  Juggilal  Kamalapat,  Calcutta, under  section  26A  ,of the  Income  Tax  Act  (hereinafter referred  to as "the Act") for the assessment year  1943-44. Prior to this assessment year, the three Singhania brothers, Sir  Padampat Singhania, Kamiapat Singhania  and  Lakshmipat Singhania,  were carrying on a hosiery business in the  name of  Messrs.  Juggilal Kamalapat with Head Office  at  Kanpur and a branch at Calcutta.  On November 29, 1939, these three brothers  executed  a  deed of  partnership,  by  which  one Jhabbarmal  Saraf was taken in as a partner, and under  this deed,  all the four partners had equal shares.   On  October 27, .1941, the three brothers executed a trust deed known as the Kamla Town Trust, the principal object of which was  the

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welfare  of  the  employees  of  Juggilal  Kamalapat  Cotton Spinning and Weaving Mills Ltd.  Under this deed, the  three brothers became the first trustees.  On December 2, 1942,  a Deed  of Relinquishment was executed by the three  brothers, relinquishing their rights and claims to all the  properties and  assets  of the firm, Juggilal Kamalapat, in  favour  of Jhabbarmal  Saraf and of themselves in the capacity  of  the three  first  trustees  of  the  Kamla  Town  Trust.    This relinquishment  deed purported to recognise an earlier  oral relinquishment  which  was stated as having  been  operative with 786 effect  from  March  26,  1942.   On  December  1,  1942,  a Partnership Deed was executed between Jhabbarinal Saraf  and the three trustees, by which they purported to constitute  a partnership firm taking effect from March 27, 1942, the  two partners  in the firm being Jhabbarmal Saraf and  the  Kamla Town Trust represented by these three trustees.  The  shares of  the  two partners in this partnership were:  Kamla  Town Trust  ....  As. /12/-, and Jhabbarmal Saraf....  As.  /4/-. The firm, Juggilal Kamalapat, which had been carrying on the business  of  hosiery,  owned  both  movable  and  immovable properties at Belur near Calcutta.  The immovable properties consisted of lands and buildings constructed for the use  of the  factory for manufacturing hosiery, and they were  shown in their balance-sheet as properties belonging to the  firm. The  firm  had  also  been  showing  expenses  incurred  for maintaining  or  making additions or  alterations  to  these buildings   in   their  accounts  and  had   been   claiming depreciation   in  respect  of  them.   It  was   in   these circumstances  that  the  new  partnership,  purporting   to consist  of  the  Kamla Town  Trust  and  Jhabbarmal  Saraf, applied  for  registration under s. 26A of the Act  for  the assessment year 1943-44. The Income-tax Officer rejected this claim and, in doing so, also took notice of the fact that a sum of Rs. 50,000/-  had been  introduced  into this partnership firm by  the  Trust. The reason given by the Income-tax Officer for not accepting the  registration need not be mentioned here,  because  that reason  was not accepted by the Tribunal and was  not  urged before the High Court or before this Court on behalf of  the Commissioner.    On   appeal,   the   Appellate    Assistant Commissioner upheld the order of the Income-tax Officer  for reasons  given by him which were different from those  given by   the  Income-tax  Officer.   Those  reasons  are   again immaterial  because those reasons were not accepted  by  the Tribunal  or  the High Court and have not been  relied  upon before us. The Income-tax Appellate Tribunal upheld the order rejecting the  application for registration under s. 26A on  the  main ground that the Relinquishment Deed dated 2nd December 1942, being  an unregistered document, could not legally  transfer rights  and  title to the immovables owned by  the  firm  in favour of the Kamla Town Trust, and that the transfer of the immovable properties being thus legally ineffective and they being  not  separable from the other  business  assets,  the entire  business of the firm was not legally transferred  in favour of the Kamla Town Trust.  Two other reasons were also given that the constitution of the new firm was not notified to any of the Banks with which the old firm was dealing, and the  new  partnership  was  not  got  registered  with   the Registrar  of Firms till May, 1946.  On these facts, at  the request  of  the respondent firm,  Juggilal  Kamalapat,  the following  question was referred by the Tribunal or  opinion to the Calcutta High Court:-

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787 "Whether on the above facts and in the circumstances of this case,  the  partnership, as evidenced by the Deed  of  1  st December  1942,  legally  came into existence  and  as  such should be registered?" When  this  reference came up before the High Court  on  two different  occasions, the High Court sent back the case  for submission  of  further  statements  of  the  case  to   the Tribunal, because the High Court felt that facts,  necessary to  hold whether the respondent firm  claiming  registration was  a genuine firm or not, had not been properly  found  by the Tribunal in its appellate order.  On the first occasion, when submitting the supplementary statement of the case, the Tribunal purported to submit two different questions in lieu of the question which had been already submitted for opinion to  the High Court.  The two questions thus newly  suggested were:- "(1)  Whether in the facts and circumstances of  this  case, can  the non-registration of Relinquishment Deed  invalidate the  transfer of the business assets to the new  partnership ?, and (2)Can the registration application be rejected merely  on the  ground  that  the  business  assets  were  not  legally transferred to the new partnership ?" The  High  Court  disposed of the reference  by  giving  the following answer:- "Regard  being had to the admissions made on behalf  of  the department,   the  facts  and  circumstances  mentioned   in paragraph  6 of the statement of case dated 13th March  1952 do  not  show that there was any legal flaw in  the  consti- tution  of the partnership firm as evidenced by the deed  of 1st  December,  1942.   Upon  such  evidence,  it  must   be concluded  that it did come into existence and there  is  no impediment  to  its registration under Section  26A  of  the Income-tax  Act.  It is made clear that the question  itself postulates  the facts and circumstances and  therefore,  the conclusion is based upon them.  In view of the facts in this case, there will be no order as to costs." This  appeal  has  been brought up by  the  Commissioner  of Income-tax against this answer returned by the High Court on certificate under section 66A(2) of the Act. It  appears  from the judgment delivered by the  High  Court that  when the reference came up before it, an argument  was raised on behalf of the Commissioner of Income-tax that  the Tribunal  had  recorded  a finding of  fact  that  the  firm seeking registration, consisting of the Kamla Town Trust and Jhabbarmal  Saraf,  was  not a genuine firm  and  that  this should be the answer returned by the 788 High  Court to the Tribunal.  It was in view of  this  point raised before the High Court that the High Court  considered it necessary to remand the case twice to the Tribunal to ask for supplementary .statements of the case under s. 66(4)  of the Act.  At the final hearing, however, the High Court held that  it could not be accepted that the Tribunal had,  as  a question  of  fact,  recorded the  finding  that  this  firm seeking registration was not genuine and had never come into existence,  and,  thereupon,  proceeded  to  deal  with  the question  referred as a question of law so as  to  determine whether the firm had come into existence as a legally  valid firm. In  this appeal before us, again, it was urged by Mr. S.  T. Desai on behalf of the Commissioner that the High Court  was wrong in holding that it was not bound to return the  answer to  the Tribunal that the partnership  seeking  registration

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was  not  genuine  in fact.  In our  opinion,  the  question sought to be raised on behalf of the Commissioner should not have been allowed to be raised by the High Court even at the earliest stage, and that it was the error .committed by  the High  Court in entertaining this question that has  resulted in  unnecessary proceedings and consequent delay.  When  the case first came up before the High Court, the question  that was  referred in the statement of the case was, as  we  have mentioned  above, whether the partnership legally came  into existence and, as such, should be registered.  The existence of  a firm could be challenged on two  alternative  grounds. One was that, in fact, on the evidence, it could not be held that  such a firm had at all been constituted and  had  come into existence.  The other was that even though it purported to come into existence as a fact, it could not claim to be a valid partnership because of some legal defect, or, in other words, whether its existence was valid in law.  On the  face of it, the question that was referred to the High Court  for opinion was the second question and not the first one.   The first question, in fact, could not have been referred to the High Court at all for opinion, because that would be a  pure question of fact on which the decision of the Tribunal would be final and no reference to the High Court would lie  under S.  66.   A  reference  to the High Court  lies  only  on  a question  of law.  The High Court, when requested to  answer the  question referred in the first statement of  the  case, should, therefore, have confined itself to the legal  aspect of  the  existence of the partnership and  should  not  have entered at all into the question whether the partnership had come into existence in fact or not.  The Tribunal which  had passed the appellate order in these proceedings consisted of two  Members,  and  the  first statement  of  the  case  was submitted  by  those very Members.  It is  clear  that  they themselves,  when  making the reference to the  High  Court, were  of  the  view that they had not  anywhere  recorded  a finding  that the firm had not come into existence in  fact, because, if they had come ,to such a finding, no question of law could possibly have been 789 referred by them to the High Court.  The existence in law of a firm, which does not exist in fact, could not possibly  be found   by  the  High  Court  on  the   question   referred. Consequently,  we must reject the submission made on  behalf of  the  Commissioner  that, in this case,  the  High  Court should  have  gone  into the question of  existence  of  the respondent  firm as a question of fact; and in  this  appeal also, we must proceed on the basis that the respondent  firm did in fact come into existence, and that all that the  High Court  was  called upon to decide was whether it  also  came into existence It  appears to us that, in this case, the  submissions  that were  made  on behalf of the Commissioner  before  the  High Court  and which have been made before us have ignored-  the effect   of  the  important  relevant  documents  and   have unnecessarily  placed  too  much reliance  on  the  Deed  of Relinquishment.  The Tribunal found that a Kamla Town  Trust had  been constituted of which the three Singhania  Brothers were  the Trustees.  The Tribunal also found that a deed  of partnership  was  executed  so as  to  constitute  the  firm Juggilal  Kamalapat, consisting of two partners, the  Kamala Town   Trust,  represented  by  the  three   trustees,   and Jhabbarmal  Saraf.  Their shares in the profits  and  losses were  also specified in the deed of partnership.  There  was the further finding by the Income-Tax Officer that the Kamla Town  Trust,  which entered into the  partnership,  actually

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introduced  a  sum of Rs. 50,000/- as its capital  ill  this partnership  firm.  On these facts by themselves, it  should have  been  held  that a valid  partnership  had  come  into existence. So  far as the deed of relinquishment is concerned,  learned counsel appearing on behalf of the Commissioner has not been able to show to us any provision of law, or any decision  of a  Court laying down that a deed of relinquishment  executed by partners of a firm in respect of their share and interest in  a  firm required registration, in case  the  firm  owned immovable  properties.  In this connection, learned  counsel for  the  respondent  firm brought to our  notice  a  recent decision of this Court in Addanki Narayanappa and Another v. Bhaskara  Krishnappa  (dead) and thereafter his  heirs,  and Others(1) where the question that came up for  consideration was whether the interest of a partner in partnership  assets comprising  of movable as well as immovable property  should be treated as movable or immovable property for the purposes of s. 17(1) of the Registration Act, 1908.  The Court upheld the view of the Full Bench of the Andhra Pradesh High  Court in  Addanki  Narayanappa  & Anr. v.  Bhaskara  Krishtappa  & Ors.()  Mudholkar,  J., speaking for this  Court  held:  "It seems to us that looking to the scheme of the Indian Act, no other  view can reasonably be taken.  The whole  concept  of partnership is to embark upon a (1) [1966] 3 S.C.R. 400. (2) I.L.R. 1959 A.P.p. 387 790 joint  venture and for that purpose to bring in  as  capital money  or even property including immovable property.   Once that  is done, whatever is brought in would cease to be  the exclusive  property  of the person who brought  it  in.   It would  be the trading asset of the partnership in which  all the  partners  would have interest in  proportion  to  their share  in the joint venture of the business of  partnership. The  person who brought it in would, therefore, not be  able to  claim or exercise any exclusive right over any  property which   he  has  brought  in,  much  less  over  any   other partnership property.  He would not be able to exercise  his right even to the extent of his share in the business of the partnership.   As  already  stated,  his  right  during  the subsistence  of  the  partnership is to  get  his  share  of profits  from time to time as may be agreed upon  among  the partners  and  after the dissolution of the  partnership  or with  his  retirement from partnership of the value  of  his share  in  the  net partnership assets as  on  the  date  of dissolution or retirement after a deduction of  liabilities- ,ties  and  prior  charges." On  this  basis,  the  ultimate decision  was  that a deed, evidencing the  transfer  of  an interest  of  a  partner in  partnership  assets,  does  not require registration even though the partnership assets  are comprised of movable as well as immovable property. A Full Bench of the Lahore High Court in Ajudhia Pershad Ram Pershad v. Sham Sunder and Others(’) held that the  interest in  a partnership of a partner is to be regarded as  movable property when it is sought to be dealt with under 0 . 21  r. 49,  Civil Procedure Code, notwithstanding that at the  time when  it is charged or sold, the partnership assets  include immovable property. The Deed of Relinquishment, in this case, was in respect  of the  individual interest of the three Singhania Brothers  in the  assets of the partnership firm in favour of  the  Kamla Town Trust, and consequently, did not require  registration, even  though  the assets of the  partnership  firm  included immovable property, and was valid without registration.   As

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a  result  of this deed, all the assets of  the  partnership vested in the new partners of the firm. In  the  alternative,  we think that, even if  it  had  been accepted   that   this  deed  of   relinquishment   required registration, that would not lead to the conclusion that the partnership  seeking registration was not valid and had  not come  into  existence in law.  The  deed  of  relinquishment could,  at  best,  be held to be invalid in  so  far  as  it affected the immovable properties included in the assets  of the  firm; but to the extent that it purported  to  transfer movable assets of the firm, the document would remain valid. The  deed could clearly be divided into two separate  parts, one  relating  to  immovable properties, and  the  other  to movable  assets;  and  the part of  the  deed  dealing  with movable assets could not be held invalid for want (1)  I.L.R 28 Lab. 417. 791 of registration.  A deed of relinquishment is in the  nature of  a deed of gift, where the various properties dealt  with are always separable, and the invalidity of the deed of gift in respect of one item cannot affect its validity in respect of  another.   This view was expressed by  the  Madras  High Court  in Perumal Ammal v. Perumal Naicker & Anr.(1) A  deed of relinquishment, or a deed of gift, differs from a deed of partition  in  which  it is not possible to  hold  that  the partition is valid in respect of some properties and not  in respect   of  others,  because  rights  of   persons   being partitioned  are adjusted with reference to  the  properties subject  to  partition as a whole.  In the case  before  us, therefore, the deed of relinquishment was valid at least  in respect  of movable properties, and the partnership  seeking registration,  thus, became owner of all the movable  assets of  the,partnership in addition to having contributed a  sum of Rs. 50,0001- as capital investment in it.  The Kamla Town Trust and Jhabbarmal Saraf constituted the partnership under a  deed of partnership, which was properly executed, and  in these   circumstances,  the  partnership  that   came   into existence was clearly valid in law.  There is, therefore, no force in this appeal and it is dismissed with costs. V.P.S.                                     Appeal dismissed. (1) I.L.R 44 Mad. 196. 794