# Cj.T., Madras v. Amrutan;an Ltd

- **Citation:** [1964] 8 S.C.R. 18
- **Court:** Supreme Court of India
- **Decided:** 1964
- **Bench:** K. SUBRA RAo. J. C. SHAH, S. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/cj-t-madras-v-amrutan-an-ltd-3248
- **Pages:** 19

## Headnote

Income Tax-Partnership deed-Application for registratio11-Discretion
of [11come-tax Officer in granting Registration-Jurisdiction of the
Income Tax Officer-Jurisdiction of High Court on reference on
-•
8 S.C.R.
SUPREME COURT REPORTS
19
questions of fact-Indian Income-tax Act, 1922 (11 of 1922), s. 26-A
-Indian Income-tax Rules, 1922, rr. 2, 3, 4.
There were five 5.r..:is in Sivakasi manufacturing matches under the
name and style of Shenbagam Match Works:, Brilliant Match Works,
Manoranjitha Match Works, Pioneer Match Works and Gnanam Match
Works. The sole proprietor of Shenbagam
Match Works and
ono
partner from each of the four firms entered into a partnership in their
individual capacity and executed a partnership deed dated April 1, 1950.
The Income-tax Officer
registered the said partnership lleed under s.
26(A) of the Act; but the Commissioner of Income-tax acting under s.
33B of the Act. cancelled the registration of the sai'd partnership deed.
On appeaL the Tribunal held that the said partnership deed was not
a genuine one. On a reference the High Court held on. a constn1ction
of the partnership deed that the Match Works were not the real parties
to the partnership -but the parties to the document were the real partners.
This appeal has come by way of special leave.
HELD:-(i) (per K. Subba Rao and S. M. Sikri JJ) that the discretion conferred on the Income-tax Officer under s. 26-A of the Act is a
judicial one and he cannot refuse to register a firm on mere speculation,
but he shall base his conclusion on relevant evidence. The jurisdiction
of the Income-tax Officer under s. 20-A is, 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. (Partnership deed)
presented for registration is a bogus one or has no legal exis·
tence.
(ii) In the present case the partnership deed ex jacie conforms to
the requirements of the law of partnership as well as the Income·tax
Act. There is no prohibition under the partnership Act against a partner
or partners of other firms combining together to form a separate part·
nership to carry on a different business. The fact that such a partner or
partners entered into a sub-partnership with others in respect of their
share does not detract from the
validity of the partnership; nor the
manner in which the said partner deals with the share of his profits is
of any relevance to the question of validity of the partnership.
(iii) The tribunal erred in holding the partnership deed as not a
genuine one. In the present case the assessee-firm has a separate ~egal
existence, and as such the two circumstances ·relied upon by the Tribunal.
namely, that one of the partners of the assessee firm, brought in the
capital from his parent firm or that the profits earned by some of tho
partners were surrendered to the parent firm,
would be irrelevant. A
partner of a firm can certainly secure his capital from any source or
1964
C.1.T.,
Madr41
v.
Sivakasi Match
Export Co.
1964
C.I.T.,
Mndras
v.
Sivakasi Match
Export Co.
20
SUPREME COURT REPORTS
surrender his profits to his sub-partner or any other person. Those facts
cannot conceivably convert a valiCl partnership into a bogus one.
In the present case the partnership deed is a genuine document and
it complies with the requirements of law. It is not an attempt to evade
tax, but a legal device to reduce its tax liability.
(iv) A question of law within the meaning of s. 66(2) of the Act
arose for decision in this case as the Tribunal misconstrued the provisions
of the partnership deed and relied upon irrelevant considerations
in
coming to the conclusion.
Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, ,\1adras.
[1956] S.C.R. 691. relied on.
Per Shah. J.-(i) It was exclusively within the province of the Tribunal to tlecide the question whether the partners entered into the partnership in their individual capacities or as

## Text

_Characters 0–39,921 of 42,517. This is a partial read: ask again with offset=39921 for what follows._

1964
Cj.T., Madras
v.
Amrutan;an Ltd.
Shah J.
1964
April, 29.
18
SUPREME COURT REPORTS
But even that argument is of no value, for twenty-five per
cent of the voting power attached to the ordinary shares is
not exercisable by the public.
Thi3, tlm·efore, is a case in
which shares not entitled to a fixed dividend cauying not
less than twenty-five per cent of the voting power are not
shown to have been allotted unconditionally to, or acquired
unconditionally by or beneficially held by the public.
The
Explanation, therefore, has no operation.
Whether in view of the third proviso the company may
be regarded as one in which the public are substantially
interested, is a question to which no attention was paid by
the Tribunal.
Whether in fact there exists such a control·
ling interest in the hands of one shareholder or a group of
shareholders as would render the company one in which the
public are not substantially interested is a question which
therefore cannot be decided by this Court.
The order of the High Court must therefore be con·
tirmed, but on different grounds. The interpretation of the
Explanation by the High Court, for reasons already set out,
was
incorrect.
The Explanation had
no
application,
because no presumption on the facts found could arise
thereunder.
The Revenue authorities have not made any
investigation on the question whether there existed any
controlling interest in a group of persons. so as to bring the
c~se within the third proviso.
The appeals must be dismissed with costs. One hearing
fee.
Appeals dismissed.
COMMISSIONER OF INCOME-TAX, MADRAS
v.
SJVAKASI MATCH EXPORT COMPANY
(K. SUBRA RAo. J. C. SHAH AND S. M. SIKRI. JJ.)
Income Tax-Partnership deed-Application for registratio11-Discretion
of [11come-tax Officer in granting Registration-Jurisdiction of the
Income Tax Officer-Jurisdiction of High Court on reference on
-•
8 S.C.R.
SUPREME COURT REPORTS
19
questions of fact-Indian Income-tax Act, 1922 (11 of 1922), s. 26-A
-Indian Income-tax Rules, 1922, rr. 2, 3, 4.
There were five 5.r..:is in Sivakasi manufacturing matches under the
name and style of Shenbagam Match Works:, Brilliant Match Works,
Manoranjitha Match Works, Pioneer Match Works and Gnanam Match
Works. The sole proprietor of Shenbagam
Match Works and
ono
partner from each of the four firms entered into a partnership in their
individual capacity and executed a partnership deed dated April 1, 1950.
The Income-tax Officer
registered the said partnership lleed under s.
26(A) of the Act; but the Commissioner of Income-tax acting under s.
33B of the Act. cancelled the registration of the sai'd partnership deed.
On appeaL the Tribunal held that the said partnership deed was not
a genuine one. On a reference the High Court held on. a constn1ction
of the partnership deed that the Match Works were not the real parties
to the partnership -but the parties to the document were the real partners.
This appeal has come by way of special leave.
HELD:-(i) (per K. Subba Rao and S. M. Sikri JJ) that the discretion conferred on the Income-tax Officer under s. 26-A of the Act is a
judicial one and he cannot refuse to register a firm on mere speculation,
but he shall base his conclusion on relevant evidence. The jurisdiction
of the Income-tax Officer under s. 20-A is, 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. (Partnership deed)
presented for registration is a bogus one or has no legal exis·
tence.
(ii) In the present case the partnership deed ex jacie conforms to
the requirements of the law of partnership as well as the Income·tax
Act. There is no prohibition under the partnership Act against a partner
or partners of other firms combining together to form a separate part·
nership to carry on a different business. The fact that such a partner or
partners entered into a sub-partnership with others in respect of their
share does not detract from the
validity of the partnership; nor the
manner in which the said partner deals with the share of his profits is
of any relevance to the question of validity of the partnership.
(iii) The tribunal erred in holding the partnership deed as not a
genuine one. In the present case the assessee-firm has a separate ~egal
existence, and as such the two circumstances ·relied upon by the Tribunal.
namely, that one of the partners of the assessee firm, brought in the
capital from his parent firm or that the profits earned by some of tho
partners were surrendered to the parent firm,
would be irrelevant. A
partner of a firm can certainly secure his capital from any source or
1964
C.1.T.,
Madr41
v.
Sivakasi Match
Export Co.
1964
C.I.T.,
Mndras
v.
Sivakasi Match
Export Co.
20
SUPREME COURT REPORTS
surrender his profits to his sub-partner or any other person. Those facts
cannot conceivably convert a valiCl partnership into a bogus one.
In the present case the partnership deed is a genuine document and
it complies with the requirements of law. It is not an attempt to evade
tax, but a legal device to reduce its tax liability.
(iv) A question of law within the meaning of s. 66(2) of the Act
arose for decision in this case as the Tribunal misconstrued the provisions
of the partnership deed and relied upon irrelevant considerations
in
coming to the conclusion.
Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, ,\1adras.
[1956] S.C.R. 691. relied on.
Per Shah. J.-(i) It was exclusively within the province of the Tribunal to tlecide the question whether the partners entered into the partnership in their individual capacities or as representing their match
factories and its decision that in entering into the deed of partnership.
the named partners represented their respective match factories, was not
open to be canvassed in a reference under s. 66(2) of the Indian Incomee
tax Act. In a reference under s. 66(2) the High Court was not authorised to disregard the finding of the Tribunal on a question which was
essentially one of fact.
In the present case the High Court was
not
justified in interfering with the fin'ding of the Tribunal on a question
of fact because it was not the case of the assessee that the conclusion
of the Tribunal was based on no evidence or that it was perverse·
(ii) Where the law prescribes conditions for obta!ning the benefit of
reduced liability to taxation, those conditions. unless otherwise provided,
must be strictly complied with. and if they are not so complied with,
the taxing authorities would be bound to refuse to give the tax payer
the benefit claimed. It would be open to the Income-tax OJlicer to decline
to register a 'deed, even if under the general law of partnership the
rights and obligations of the partners ex nomine thereto may otherwise
be adjusted.
If the requirements relating to the form in which the petition is to
be presented are not complied with, and the relevant information is withheld the Income-tax Officer may be justified in refusing registration. In
the present case the Income-tax Officer was bound to refuse registration
as the application submitted by the five partners of the assessee did not
conform to the requirements of rr. 2 and 3 of Indian Income-tax Rules.
CNIL APPELLATE JURISDICTION: Civil Appeal No. 700
of 1963.
Appeal by special leave from the judgment and order
dated January 11, 1961 of the Madras High Court in Case
Referred No. 131 of 1956.
-
)
\
'
SUPREME COURT REPORTS
21
H. N. Sanyal, Solicitor-General, N. D. Karkhanis and
1964
R. N. Sachthey, for the appellant.
c.1.r:, Madras
v.
K. Srinivasan and R. Gopalakrishnan, for the respondSivakasi Match
ent.
Export Co.
April 29, 1964.
The judgment of
SUBBA RAo AND
SIKR1 JJ. was delivered by SuBBA RAo J. SHAH J. delivered
a dissenting opinion.
SUB BA RAo, J .-This appeal by special leave is directed
against the order of the High Court of Madras in a reference
made to it by the Income-tax Appellate Tribunal under
s. 66(2) of the Indian lncome-tax Act, 1922, hereinafter
called the Act.
The facts that have given rise to the appeal may briefly be
stated.
There are 5 firms in Sivakasi manufacturing matches
under the name and style of Shenbagam Match Works, Bri1Iiant Match Works, Manoranjitha Match Works, Pioneer
Match Works and Gnanam Match Works. The total number
of the partners of all the 5 firms does not exceed 10 or 11 in
number. Rajamoney Nadar is the sole proprietor of Shenbagam Match Works and in the other 4 firms there are more
than one partner. In the year 1948 a person from each of
those firms in )lis representative capacity formed a partnership to carry on the business of banking and commission
agents, the principal business being the marketing of the products of the different match factories in Sivakasi. When the
said partnership applied for registration for the assessment
year 1949-50, it was refused by the Income-tax Department
on the ground that different firms could not constitute a valid
partnership. Thereafter, Sankaralinga Nada_!', Arumughaswarni Nadar, Arunachala Nadar, Palaniswamy Nadar and
Rajamoney N adar the first four being one of the partners of
their respective firms and the last being the sole proprietor
of his firm, in their individual capacity entered into a partnership for the aforesaid purpose and executed a partnership
deed dated April 1, 1950. They presented the said deed of
partnership to the Income-tax Officer for registration. The
Income-tax Officer by his order dated October 27, 1952, re·
gistered the same under s. 26A of the Act: but the Commissioner of Income-tax, acting under s. 33B of the Act, cancellSubba Rao I.
22
SUPREME COURT REPORTS
1964
.J.T.,
Madras
ed the registration by an order dated October 23, 1954, and
directed the assessment to take place as that of an unregistered firm. On appeal, the Income-tax Appellate Tribunal
held, on a construction of the partnership deed and also on
v.
oVakasl Match
Export Co.
'.ubba Rao I.
the basis of some other circumstances, that the said deed "is
not genuine and brought into existence only as a simulate
arrangement, that the profits which are distributed under the
deed to the individuals mentioned th,~rein are not the true
profits of those individuals." In short it held that the said
partnership deed was not a genuine one.
On a reference
made to the High Court of Judicature at Madras; a Division
Bench of that High Court, on a construction of the document,
came to the conclusion that the Match Works were not the
real parties to the partnership but the parties of the document were the real partners. Hence the present appeal.
Learned counsel for the Revenue raises before us the following two points, namely, (i) the findings of the Appellate
Tribunal was one of fact and that the High Court had no
jurisdiction to canvass the correctness of its finding on a reference made under s. 66(2) of the Act, and (ii) the conclusion arrived at by the Tribunal was the correct one and
the High Court erroneously interfered with it.
It is common place that under s. 66(2) of the Act a
reference to the High Court lies only on a question of law.
The scope of the provision has been elaborately considered
by this Court in Sree Meenakshi Mills Ltd. v. Commissioner
of Income-tax, Madras( 1 ). Therein the scope of the
provision has been laid down under different propositions.
On the basis of the judgment it cannot be gainsaid that
if the order refusing registration goes beyond the scope of
the jurisdiction conferred on, the Income-tax Officer under
s. 26A of the Act and the Rules made thereunder or if the
decision depends upon the construction of the partnership
deed or if there is no evidence to sustain the finding of the
Tribunal, then the High Court will have jurisdiction to
entertain the reference under s. 66(2) of the Act. In our
view, the finding of the Tribunal falls squarely under the
said three heads.
The relevant provisions of the Act read
thus:
(t) r19s6J s.c.R. 691.
-
8 S.C.R
SUPREME COURT REPORTS
23
1964
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.
C.l.T.,
Madras
v.
Sivakasi Match
Export Co.
( 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.
In exercise of the powers conferred by s. 59 of the Act, the
Central Board of Revenue made the following rules:
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-tax 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 given by all the partners
(hot being minors) personally and shall be
made-
(a) before the income of the fili!Il is assessed for
any year under Section ~3 of the Act, or
....................................
Rule 3. The application referred to in Rule 2 shalf
be made in the form annexed to this rule and
shall be accompanied by the original Instrument
of Partnership under which the firm is constituted, together with a copy thereof;
................................. ' ..
Subba Rao J.
24
1904
SUPREME COURT REPORTS
FORM I
C.l.T.,
Madras
v.
For of Application for Registration of a Firm under section
26A of the Indian Income-tax Act, 1922
Sivakasi Match
Export Co.
:Subba Rao I.
. .................................. .
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 bi:, a
certificate in the following form, namely:-
.................................
~ ..
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 bi:ing a genuine firm in existence, he may
cancel the certificate so granted.
A combined effect of s. 26A of the Act and the rules made
thereunder is that if the application made by a firm gives the
necessary particulars prescribed by the rules, the Income-tax
Officer cannot reject it, if there is a firm in existence as shown
in the instrument of partnership. A firin may bi: said to be not
in existence if it is a bogus or not a genuine one, or if in
law the constitution of the partnership is void. 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. Further, the discretion conferred on him under s. 26A is
a judicial one and he caM.ot refuse to register a firm on mere
speculation, but he shiill base his conclusion on relevant evidence.
\)'hat are the facts in the present case? The partnership
deed is dated April 1, 1950. In the document five persons
are shown as its partners.
The name of the firm is given, the
-II S.C.R.
SUPREME COURT REPORTS
25
objects of the partnership business are described, the duration of the business is prescribed and the capital fixed is
divided between them in equal share.
Clause 16 of the
Partnership deed, on which the Tribunal relied, r\)ads:
"This firm shall collect a commission of half an anna
per gross on ·the entire production of the match
factories of the .12_artners, respectively, the Brilliant Match Works, Manoranjitha Match Works,
Pioneer Match Works, Shenbagam Match Works
and Gnanam Match Works produced from 1st
April 1950 whether sales were effected through
this firm or not and a further commission of
half an anna per gross on the sales effected
through this firm. This commission will be collected on all kinds of matches produced from
the abovesaid factories.
The commission of half
an anna per gross on the entire production of
these factories accrued due at the end of every
· month shall be debited to the respective factories
under advice to them."
Clauses 2.2 and 23 which throw further light on the question
raised read:
Clause 22. The business of this firm shall have and
has no connection with the match manufacturing
business carried on now by the partners separately or in partnersliip with others.
Clause 23. Any loss to the firm by way of fire accident or by any other cause during the course of
the business of the firm, notwithstanding the fact
that the loss might have arisen on the sale of or
transaction relating to the match ,manufacturing
concerns of the partners to this geed, shall be
borne by this firm and shall be equally divided
between the partners to this deed.
It is not disputed that the partnership deed ex facie conforms
to the requirements of the law of partnership as well as the
Income-tax Act. Under s.4 of the Indian Partnership Act
partnership is the relation between persons who have agreed
1964
C.l.T.,
Madra.
v.
Sivakasi Match,
Export Co.
Subba Rao J.
26
SUPREME COURT REPORTS
1964
C.I.T.,
Madras
to share the profits of the business carried on by all or any
of them acting for all persons who have entered into the partnership with one another called individually partner> and
collectively a firm and the name under which the bus:ness is
carried on is called the firm name.
The document certainly
conforms to the said definition.
There is also no prohibition
under the Partnership Act against a partner or ;iartners of
other.firms combining together to form a separate partnership
to carry on a different busine~s. The fact that such a partner or partners entered into a sub-partnership_ with others in
respect of their share does not detract from the validity of the
partnership; nor the manner in which the said partner deals
with the share of his profits is of any relevance to the question of the validity of the partnership. The document, therefore, embodies a valid partnership entered into in conformity
with the law of partnership.
v.
6ivakasi Match
Export Co.
Subba Rao J.
But the Tribunal has held that the partnership i~ not a
genuine one for the following reasons: ( i) previously the
firm entered into a partnership but the registration of the
same was rejected; (ii) under cl. 16 of the partnership deed
the firm has the right to collect· the commission of the entire
match production of the larger partnerships whether
they effect their sales through the firm or not; •:iii) the
books of Gnanam Match Works show umnistakably
that the capital was contributed not by Palaniswamy
Nadar in his individual capacity but by the larger
firm
as such;
and
(iv)
regarding the
othe~ three
larger firms also the profit delivered by their renresentatives from the assessee firm was divided amongst all the
partners according to their profit sharing ratio in the larger
firms. On the other hand, the High Court found, on a construction of the relevant clauses of the partnership deed that
the business was the business of the partners of the firm alone
and that the two circumstances relied upon by the Tribunal
were irrelevant in acertaining whether the said pa·tnership
was real or not.
We have already pointed out that the document ex facie discloses a valid partnership. The partnership
was avowedly entered into by the partners in their individual
capacity as their previous partnership in their representative
capacity was not registered on the ground that such a part-
IS S.C:l(.
SUPREME COURT REPORTS
27
nership was illegal. If the larger firms cannot constitute
members· of a new partnership, some of the partners of those
firms can certainly enter into a partnership shedding their representative capacity if they can legally do so. If they can
do so, the mere fact that one of them borrowed the capital
from a parent firm-we are using this expression for convenience of reference-or some of them surrendered
their
profits to the parent firm cannot make it anytheless a genuine
firm.
Nor does cl.16 ,of the partnership deed detract from
its genuineness: that clause does not create any right in the
partnership to collect the commission; in view of the close
conn-;:ction between the assessee firm and the parent firms,
the parent firms were expected to effect all their sales through
the assessee firm. If they did not and if they refused to pay
commission, the assessee-firm could not enforce its right
under the said clause.
Clause 22 in express terms emphasize:> the separate identities of the assessee-firm and the parent
firms, and cl. 23 declares that notwithstanding the fact that
the loss to the assessee-firm has arisen on the sale or transaction relating to the match manufacturing concerns, the
assessee-firm alone shall bear the loss and thereby indicates
that the loss of the assessee-firm will not be borne by the
parent firms. If the assessee-firm has a separate legal existence, the two circumstances relied upon by the Tribunal,
namely, that Palaniswamy Nadar, one of the partners of the
assessee-firm, brought in the capital from his parent firm or
that the profits earned by some of the partners were surrendered tq_ the parent firms, would be irrelevant. 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.
1bose facts cannot conceivably convert a valid partnership
into a bogus one.
1964
CJ.T.,
Mad,_,
v.
Sivakasi Match
Export Co.
The Tribunal mixed up the two concepts, viz., the legality of the partnership and the ultimate destination of the
partners' profits. It also mixed up the question of the
validity of the partnership and the object of the individual
partners in entering into the partnership. If to avoid a legal
difficulty S individuals, though four of them are members of
different firms, enter into a partnership expressly to comply
with a provision of law, we do not see any question of fraud
Subba Rao 1.
1964
C.l.T.,
Madras
v.
Sf•:akasi Match
Export Co.
Subba Rao J.
Sha~ /.
28
SUPREME COURT REPORTS
or genuineness_ involved. It is a genuine document and
it
complies with the requirements of law. It is not an attempt
to evade tax, but a legal device to reduce its tax liability. The
fact that all the partners qf all the firms did not exceed 12 in
number and if they chose all of them could have entered into
the partnership indic.ltes that there was no sinister motive
behind the partnership. As the Tribunal misconstrued the
provisions of the partnership deed and relied upon irrelevant
considerations in coming to the conclusion it did, the High
Court rightly differed from the view of the Tribunal. In the
circumstances, in view of the decision of this Court in Sree
Meenakshi Mills' case('), a question of law· within the
meaning of s.66(2) of the Act arose for decision. The High
Court rightly answered the question in the negative.
In the result, the appeal is dismissed with costs.
SHAH J.-Sivakasi Match Export Company-hereinafter referred to as 'the assessee'-is a partnership "carrying
on business as bankers, commission agents and distributors of
the products of different match factories at Sivakasi in the
State of Madras".
The assessee was formed under a deed
dated April 1, 1950. There were five partners of the firm (1)
N.P.A.M. Sankaranlinga Nadar (2) K. S.S. Arumughaswami Nadar (3) K. A. S. Arunuchala Nadar (4) K. P.A. T.
Rajamoney Nadar and (5) V. S. V. P. Palaniswamy Nadar.
Before April 1, 1950, there existed a firm also named
Sivakasi Matches Exporting Company which "consisted of a
combine of six match factories" at Sivakasi constituted under
a partnership deed dated March 12, 1948.
Registration
of this partnership under s. 26-A of the Income-tax Act,
1922, was refused on the ground that the partnership deed
did not specify the actual shares of the individual partners.
'Thereafter a deed forming the partnership which is sought to
be registered in these proceedings was executed on April l,
1950.
It. was recited in the preamble that originally four
out of the five partners had been carrying on business in
partnership as representatives of their respective match concerns, and it was found necessary that they should carry on
the said business from April 1, 1950, jointly in their individual capacity, and it was agreed to admit into their part-
(1) [1956] S.C.R. 691
8S.C.R
SUPREME COURT REPORTS
29
nership as and from April 1, 1950 the fifth person, namely
V. S. V. Palaniswamy Nadar.
The following are the
material paragraphs of the agreement of partnership:
" ( 16) This finn shall collect a commission of haif
an anna per gross on the entire production of
the match factories of the partners, respectively,
the Brilliant Match Works, Manoranjitha Match
Works, Pioneer
Match
Works,
Shenbagam
Match Works and Gnanam Match Works, produced from 1st April 1950 whether sales were
effected through this firm or not and a further
commission of half an anna per gross on the
sales effected through this firm.
This commis-
•;ion will be collected on all kinds of matches
produced from the abovesaid factories.
The
commission of half an anna per gross on the
entire production of these factories accrued due
at the end of every month shall be debited to
the respective factories under advice. to 'them.
" ( 22) The business of this firm shall have and has
no connection with the match manufacturing
business carried on now by the partners separately or in partnership with others.
(23) Any loss to the firm by way of fire, accident
or by any other cause during the course of the
business of the firm, notwithstanding the fact
that the foss might have arisen on the sale of
or transaction relating to the match manufacturing concerns of the partners to this deed,
shall be borne by this firm and shall be equally
divided between the partners to this deed."
It is common ground that each partner was concerned in
the manufacture of matches either as owner or as partner
with others.
Sankaralinga Nadar carried on business as a
manufacturer of matches with two others in the name of- the
Brilliant Match Works; Armughaswamy Nadar as a partner
with three others in the name of the Manoranjitha Match
Works; Arunachala Nadar as a partner with two others in
the· name of the Pioneer Match Works. Rajamoney Nadar
1964
C.l.T.,
Madru
v.
Sivakasi
1l1atch
Export Co.
Shah J.
1964
C.1.T.,
Mtidra8
v.
$111aktul Match
Export Co,
SW/.
SUPREME COURT REPORTS
[rg64]
as a sole proprietor of the Shenbagam Match Works, and
Palaniswamy 'Nadar as a partner with three others in the
name of the Gnanam Match Works.
On October 27, 1952, the Income-tax Officer passed an
order under s. 26-A granting registration of the partnership
const~tuted under the deed dated April 1, 1950, but the
Commissioner of Income-tax, Madras, exercising revisional
jurisdiction under s. 33-B of the Act, set aside the order and
directed that the partnership be assessed to tax as an unregistered firm.
In the view of the Commissioner the partnership deed did not represent the true state of affairs anq
that "the actual position as distinguished from the recitals in
the partnership deed was· that all the partners of the Match
Factories were directly partners of the assessee" and as the
names of all the partners were not set out in the deed and the
other requirements relating to registration had not
been
complied with, registration be refused.
The order was confirmed in appeal to the Income-tax Appellate Tribunal.
At the direction cif the High Court of Madras under
s. 66(2) of the Indian Income-tax Act, 1922, the Tribunal
referred the following question:
"Whether on the facts and the circumstances of the
case the refqsal of registration of the assessee
firm under s. 26-A of the Income-tax Act was
correct in law?"
The High Court answered this question in the negative.
Against that order, with special leave, the Commissioner of
Income-tax has appealed to this Court.
The Tribunal held that the covenants in the deed of
partnership and especially in paragraphs 3 and 16 viewed
in the light of the entry in the books of account of Gnanam
Match Works debiting the capital contributed in the name
of Palamswamy N adar to the assessee, and not in the name
of its partner, .and division of the profits received from the
assessee by Palaniswamy Nadar, Sankarlinga Nadar, Arumaghaswamy Nadar and Arunachalam Nadar with others
owriers of their respective business, indicated that the named
partners were acting as representatives of those owners. The
!'! S.C.R.
SUPREME COURT REPORTS
31
High Court also held that cl. 16 of the partnership agreement did not impose any liability upon the manufacturing
concerns to pay any commission as stipulated therein on the
"production of the match factories".
The High Court observed:
"Clause 16 does not Jay any liability upon the
manufacturing conc::rns and cannot operate as
an enfo; ceable contract against those other
match companies. If one of those match companies should decline to put through its sales
business through the assessee-firm, the only
result would perhaps be that the partnership
would not advance moneys or finance to that
manufacturing concern; it might also be that
the particular partner interested in the manufacturing concern might stand to lose the benefit
of this partnership.
But that is not the same
thing as to say that those manufacturing concerns themselves had become partners of the
asses see partnership."
The High Court also observed that the assessee was not
concerned with the disposal of the profits received by its
partners.
Finally the High Court observed that "an individual member of the partnership is not prevented
from
engaging in business as member of another partnership. The
law does not prohibit such a course and even the Income-tax
law relating to registr_ation of partnerships only refuses registration when the formation of such pattnerships is intended to evade the incidence of income-tax and nothing more.
We are not satisfied that the Tribunal correctly appreciated
the facts of the present case in coming to the conclusion
that the match works were the real parties to this instrument of partnership''.
The Solicitor-General appearing for the Commissioner
contended that the High Court had in exercising its advisory
jurisdiction, in substance assumed appellate powers and had
sought to reappraise the evidence on which the conclusion
of the Tribunal was founded.
Counsel contended that the
Tribunal had recorded a clear finding on the facts that the
1964
C.l.T., Madras
v.
Sivakasi Match
Export Co.
Shah J,
1964
CJ.T.,
Madras
v.
Sivakasi Match
Export Co.
.
Shah J.
32
SUPREME COURT REPORTS
"match works were the real" partners, and the High Court
was bound on the question framed to record its opinion on
the questions of law referred on the basis of that finding.
Section 26-A of the Indian Income-tax Act enacts the
procedure for registration of firms. By that section on behalf of any fim1 application may be submitted to the Incometax Officer for registration, if the firm is constituted under
an instrument of partnership, specifying the individual
shares of the partners. The application has to be made by
such person or persons and at such times and shall contain
such particulars and shall be in such form as may be prescribed. It is open to a firm to carry on business without
registration under the Indian Registration Act. By obtaining an order of registration, the partners of the firm are
enabled to get the benefit of lower rates of tax than those
applicable to the whole income of the firm, when charged
as a unit of assessment. In the relevant year of assessment
if the firm was unregistered the tax payable by it had to be
determined as in the case of any other distinct entity and
tax had to be levied on the firm itself. If, however, the firm
was registered, the firm d.id not pay the tax and therefore
the tax payable by the firm was not determined, but the
share of profit received from the firm was added to the
income of each partner, and on the total so determined tax
was levied against the partners individually. It is manifest
that if the firm desired to secure this privilege it had to conform strictly to the requirements prescribed by law. Under
the rules framed under s. 59 of the Indian Income-tax Act,
1922, rules 2 to 6B deal with registration and renewal of
registration of firms. The application for registration has to
be signed by all the partners (not being minors) personally,
and the application has to be in the form prescribed by rule
3. The form prescribed requires the partners of the firm to
disclose the names of each partner, his address, date of admittance to partnership. and other relevant particulars including
each partner's share in the profits and loss, "particulars
of the firm as constituted at the date" of the application, and
particulars of the apportionment of the income, profits or
gains or loss of the business, profession or vocation in the
previous year between the partners who in that previous
8 S.C.R
SUPREME COURT REPORTS
33
year were entitled to share in such income, profits or gains
or loss, where the application is made after the end of the
relevanc previous year. If the Income-tax Officer is satisfied
that tl·.ere is a firm in existence constituted as shown in the
instru.nent of partnership and the application has been properly made, he h&s to enter in writing at the foot of the
instrument or certified copy, as the case may be, a certificate
of registration of the partnership under s. 26-A of the Act.
This certificate of registration ensures only for the year
mentioned therein. but the firm is entitled to obtain renewal
of the registration.
On the conclusion recorded by the Tribunal that the
partnership deed dated April I, 1950 was in truth an instrument relating to an agreement to carry on business by
all the persons who owned the five businesses of which the
representa.ives signed the deed, the application submitted
by the five named partners of the assessee did not conform
to the requirements of rules 2 and 3 and the Income-tax
Ofilcer was bound to refuse registration. It is true that the
ground given by the Tribunal that the share of profits received by individual partners of the assessee was distributed by
four of those partners who had entered into
partnership
contracts with other persons in the business of their respective match factories, standing independently of other
grounds, may not be of much value in deciding whether all
the partners of the match factories were intended to be
partners of the assessee. It is open to a partner who receives
his share in the profits of the firm to dispose of that share
in any manner he pleases, and no inference from 'the distribution of the share of such profits alone can lead to the
inference that the persons who ultimately received the benefit of the profits are partners of the firm which had distributed the profits.
But the Tribunal adverted to three circumstances. The terms of the deed of partnership purported to impose an obligatio1· to pay Commission on the production of the five match factories, representatives of which
sought to join as partners eo nomine. Imposition of such
an obligation was in the view of the Tribunal inconsistent
with the representatives of those factories being partners of
!he assessee in their individual capacities.
Again it was
51 S. C.-3
1964
C.1.T.,
MadrM
"·
Sivakasi Match
Export Co.
Sh•lz J.
1964
CJ.T.,
MQIJr..,
v.
Sivakasi Maleh
Export Co.
Shah J.
34
SUPREME COURT REPORTS
found that Gnanam Match Works had contributed capital
to the assessee directly and not through its representative.
These ,wo circumstances, coupled with the ultimate distribution of profits by the individual partners ·among the panners of the match factories, led to the inference that each
partner who signed the deed dated April 1, 1950 was acting
not in his personal capacity, but as represen.ing his match
factory.
Granting that the evidence from which the inference was drawn was not very cogent, it was still exclusively
within the province of the Tribunal to decide that question
on the evidence before it, and its decision that in entering
into the deed of partnership, the named partners represented
their respective match factories, was not open to be canvassed in a reference under s. 66(2) of the Indian Income-tax
Act. The High Court observed that cl. 16 of the partnership deed did no, impose any obligation upon the partners
or their representatives of the five firms to pay commission
as stipulated under that clause.
Undoubtedly, there is no
covenant expressly imposing such liability upon the matcil
factories, but it was open to the Tribunal from ,he incorporation of such an unusual covenant to infer that the
named partners of the assessee were acting as representatives of their respective factories. To assume from the ,erms
of cl. 16 that the owners of these match factories were not
bound by the covenants contained in cl. 16 is to assume
the answer to the question posed for opinion.
There was
also ;he circumstance that in the books of account of the
Gnanam Match Works of which Palaniswamy Nadar was
a representative, capital was debited as contributed to the
assessee.
This indicated that the Gnanam Match Works
was directly interested in the partnership. If that factory
had made an advance to Palaniswamy Nadar to enable the
latter to contribute his share of the capital, the entry in the
factory's books of account would have been in the name of
its partner and not in the name of the assessee. That also is
a circumstance justifying an inference that in e'1tering into
the deed dated April I, 1950 Palaniswamy acted for and on
behalf of all the partners of the Gnanam Match Works.
Sharing of profits received by !he named partners, with their
partners in the respective match factories may not, as I have
8 S.C.R.
SUPREME COURT REPORTS
3$
already observed, by itself be a decisive circumstance. But
that did not authorise the High Court to disregard the finding of the Tribunal on a question which was essentially one
of fact.
When the High Court observed that they were
satisfied that the Tribunal had not correctly appreciated
the evidence in arriving at the conclusion that each Match
factory was the real party in the instrument of partnership,
they assumed to themselves jurisdiction which they did not
possess.
It was not the case of the assessee that there was no
evidence on which the conclusion arrived at by the Tribunal
could be founded, nor was it the oase of the assessee that
the conclusion was so perverse that no reasonable body
of men properly instructed in the law could have arrived
at that conclusion. It is also clear from the record that no
such question
was even canvassed before
the Tribunal.
Manifestly such a question could not arise out of the order
of the Tribunal, and none such was referred to the High
Court.
By the question actually referred, the Tirbunal
sought the opinion of the High Court whether on the facts
and circumstances refusal of the application for registration
.of the assessee was correct in law. If it was the case of the
assessee that the conclusion of the Tribunal was based on
no evidence, or that it was perverse, the High Court could
be asked to call for a reference from the Tribunal on that
question. But that was never done.
It is true that the object of enacting s.