The Judgment of the Court was delivered by

Srinivasan, J.:— The question referred for the determination of this court is:

“Whether there were materials for the Tribunal to hold that the firm was not genuine so as to disentitle it to registration under section 26A for the assessment year 1953-54?”

2. The assessee firm owns the South India Lucifer Match Works which originally belonged to a Hindu undivided family consisting of a father, two major and two minor sons. On February 24, 1952, in the account books of the business, a sum of Rs. 25,000 was debited to the capital account of the Hindu undivided family and transferred to the capital accounts of Graham Durai, one of the adult sons, and Rajathi Animal and Bhanumathi, two daughters. Following upon this, a deed of partnership was entered into, the parties thereto being Ayya Nadar, the father, Graham Durai, the adult son, Rajathi Ammal and Bhanumati, the two married daughters of Ayya Nadar. Each of these was entitled to share the profits in the ratio of 3: 3: 1: 1 respectively. In September, 1953, Graham Durai, the son, and Vyraprakasam, another adult son, finally separated themselves from the family by executing deeds of releases. In so far as Graham Durai was concerned, of the sum of Rs. 30,000 payable to him as and for his share in the joint family moveable properties, he was paid on the date of release the sum of Rs. 15,000 only, the balance of Rs. 15,000 being accounted for by the credit of that amount to his capital account referred to earlier. When the partnership was sought to be registered, the Income-tax Officer declined to grant the application, one of the grounds taken by him being, that the capital of the three new partners was not their own but only adjustments from the Hindu undivided family funds, and that the power of the kartha to give away gifts was limited. It may be mentioned that at the time of the application for registration it was represented that the father, Ayya Nadar, gave amounts of Rs. 15,000, Rs. 5,000 and Rs. 5,000 to Graham Durai and the two daughters by way of gifts. In appeal, the Assistant Commissioner also held that the father was not competent to make these gifts, that the theory of the gift was inconsistent with the release deed subsequently executed by Graham Durai, that the three partners other than the father, Ayya Nadar, had no business experience and were merely sleeping partners, and that there was no necessity to enter into this partnership. He came to the conclusion that there was no genuine firm in existence and that the business continued to belong to the Hindu undivided family.

3. In the appeal before it, the Appellate Tribunal held that the allocation of capital to the partners was not real and that the amounts continued to belong to the Hindu undivided family. The validity of the gifts to the daughters was also questioned by the Tribunal, the Tribunal further holding that mere adjustment of entries in the books of account would not constitute valid gifts. Though the Tribunal accepted the position that there could be a valid partnership between a kartha of a Hindu undivided family, on the one hand, and a member of that family in his individual capacity, on the other, the fact that the capital introduced in the name of the latter was found to belong to the Hindu undivided family was destructive of the claim that a real partnership had been brought into existence. The appeal was dismissed. The question set out above has been referred under section 66(1) of the Act.

4. It appears to be a well settled position in law that there is nothing in the Indian Income-tax Act which prohibits two or more members of a Hindu undivided family, while remaining joint in status from entering into a partnership in respect of a business, being a portion of the joint family property which they have partitioned among themselves; and that merely for the reason that the joint family as such continues to exist, registration of such a partnership cannot be refused. The essential requirement which the department is entitled to examine is whether the partnership agreement is genuine or whether the arrangement is put up merely by way of pretence in order to escape the liability to tax. In the present case, on February 24, 1952, a sum of Rs. 25,000 belonging to the Hindu undivided family was transferred to the capital account of the adult son and the two married daughters. Subsequently, ledger accounts were opened in the names of these three persons. The ledger accounts of these three persons also show that they were operating upon these accounts. We shall defer for the present the question whether the transfer of the amounts in favour of these persons operated as valid gifts by the kartha of the family. For the present, it is sufficient to state that the sum of money represented by the transfer of capital to these persons was available with the Hindu undivided family, and the genuineness of the gifts, of course, was never in issue before the department. The subsequent partition, supported by the documents executed on September 19, 1953, clearly established that there had been a partition of the moveable assets of the family evert by the date when this partnership came into existence, which was on March 3, 1952, and, according to the partnership agreement, which is annexure “B” to the statement of the case, the business was thereafter carried on as a partnership concern. A somewhat similar case was considered by this court in Jakka Devayya and, Sons v. Commissioner of Income-tax [1952] 22 I.T.R 264 Mad... There, three brothers, one of whom was a minor, who constituted a Hindu undivided family, divided the moveables and began to live separately. The immoveable properties were, however, kept joint, and as regards the business of the family, it was arranged to carry it on as a partnership. The share of the three brothers was fixed at one-third each. In the absence of a fixed capital for the business when it was a joint family business, it was stated in the document that they had invested the amounts standing to the credit of each in their individual accounts as well as the amount credited in the business as capital. The profits were being credited in the accounts year after year. The department and the Tribunal took the view that the business continued to be the business of the undivided family and that there was no valid partnership. On reference, it was held there was a division of the business into definite portions, and that that asset was effectively taken out of the joint family properties by constituting a partnership after division. The learned judges observed that in order to constitute a partnership of business belonging to a joint family it was not necessary to establish physical division of the business. “A partition in the case of business in definite portions may be brought about by specification of the shares in the accounts and making the necessary entries therein to show that thereafter the business was held in severalty in specified or definite portions of shares. It is open to the members of the Hindu joint family to enter into a partnership thereafter in respect of the family business which they have divided by specified shares in the accounts among themselves. The property so held in partnership is taken out of the joint family and thereafter the income derived from the partnership would not be the income of the joint family. In other words, it ceased to be an asset owned by a Hindu undivided family. That this is permissible follows, in our opinion, from Meyyappa Chettiar v. Commissioner of Income-tax, and from the decision in Sunder Singh Majithia v. Commissioner of Income-tax [1942] 10 I.T.R 457 P.C.. The rest of the properties and the status of the family regarding them may continue to be joint.”3.

5. The principle of this decision has been followed in Bhimraj Bansidhar… v. Commr. Of Income-Tax, B. & O.…Opposite Party. [1954] 26 I.T.R 185 Pat.. In that case also, it was laid down that the only method by which a business can be divided as a going concern is by giving the book balances in the names of persons to whom the shares of the business have been allotted. A partition in the business can, therefore, be brought about by mere specification of the shares in the accounts and making entries therein to show that the business is held in severalty or in specified shares. It is not necessary that there should be physical division of the business. The decision in that case as indicated by the headnote was:

“The entries in the books of account dated 29th June, 1946, and the two partnership deeds, constituted sufficient materials in law for a finding as to the disruption of the joint family status with respect to the business and for bringing into existence the partnership firm which was entitled to registration under section 26A”5.

6. It should follow from the above that when the genuineness of the partition arrangement and the subsequent partnership cannot be questioned, the mere fact that the division and the allocation of shares were purported to be effected only by entries in the books of account does not bar the creation of an effective partnership of the business.

7. We stated earlier that a final partition was effected on September 19, 1953. This document recites that the two major sons, Graham Durai Nadar and Vyraprakasa Nadar, had become separated and divided from the joint family in 1952 and 1953 and that they had executed separate release deeds in respect of their shares in the moveable properties and only a division of the immoveable properties remained to be effected under the final partition instrument. On September 10, 1953, these two adult sons executed two release deeds. The one executed by Graham Durai Nadar states:

“Whereas the releasor desired and expressed his unequivocal intention of getting himself separated from the joint family and to cease to be a member of the family… and whereas the releasor became divided and separated from the joint family from March, 1952; whereas the releasor herein has received a sum of Rs. 30,000 from the releasee as and for his share in the joint family moveable properties and whereas after the receipt of the said sum of Rs. 30,000 the releasee had invested the sum as his capital towards his share in the partnership business in the match works…”

8. As we have indicated, this is in consonance with the partnership agreement and the corresponding entries in the accounts following the partnership.

9. Had it been a matter of only the father and his adult sons entering into a partnership of this description, the matter would have been simple, and no objection could have been raised by the department to the acceptance of the partnership as entitled to registration. In so fat as the sum of Rs. 15,000 credited to the account of the son Graham Nadar is concerned, it could not obviously be regarded as a gift, as it really followed a partition of the moveable properties of the family. The complication in the present case arises only by reason of the introduction of the two married daughters. Even in their case, if they had put in any sums of their own and entered into the partnership, the partnership could not be refused to be accepted by the department. But what happened in this case is, however, that the father purported to make gifts of a sum of Rs. 5,000 to each of his two daughters from out of the joint family assets, and it was these sums that were put into the capital account of the business as contributed by the daughters. The department and the Tribunal took the view that the gifts were not validly made, and continuing this line of objection, proceeded further to hold that the business continued to be an asset of the Hindu undivided family. It is this aspect of the matter that has now to be examined.

10. The proposition of law that a gift of moveable property, unless it is effected by a registered deed, can only be completed by delivery of the property to the donee, cannot be disputed. In Mrs. Chambers v. Kelland Huxford Chambers, a testator, the head of a big business firm who had large assets but was not in a position to make gifts in cash, purported to give to his wife certain moneys which were credited to her name in the books of the company. The question arose whether there was a valid gift, or if there was no gift whether there was a declaration of a trust in respect of that sum. The learned judges decided that mere book entries did not confer or determine rights and did not establish completed gifts. It was further held that though there was perhaps evidence of an intention to create a gift there was nothing to show an intention to create a trust with regard to that sum. Ramanathan Chettiar v. Palaniappa Chettiar dealt with a trust and it was held that a mere credit entry in the donor's account without setting aside and appropriating the sum credited was not sufficient to create a valid trust. E.M. Muthappa Chettiar v. Commissioner Of Income-Tax, Madras also dealt with a case where a will directed the credit of two sums in the names of certain persons and was followed by a deed of declaration that the amounts so credited belonged to these persons only. But no assets or funds corresponding to the credit entries were set apart or allocated. The conclusion reached by the learned judges was that no gift or irrevocable trust was created. The question that arose in that case was, it may be stated, with reference to whether the assessee was entitled to deduct the interest on the sums alleged to have been so gifted.

11. The learned counsel for the department relies upon these decisions for the purpose of establishing that the gifts to the two daughters in the present case were not operative. A vague suggestion was also made that the kartha of the family was not competent to make gifts of this description and that the gifts should also fail on that account. On this latter point, we may mention that though the kartha may have only limited powers of making gifts, when in the making of these gifts he is obviously joined by the other adult members of the family, the validity of the gifts can hardly be brought into question. That a Hindu father has the power of making gifts is beyond question. The limitation is only to the extent to which that power can be exercised. When the two adult sons have agreed to the making of these gifts and these gifts are not of such amounts as are out of proportion to the assets of the family, it is impossible to hold that the gifts should fail as in excess of the powers of the kartha. It is true nevertheless that there was no delivery of the gifts to the donees. It does not seem to us in a case of this kind there should be actual handing over of the amounts in question to the daughters and the subsequent credit by them into the accounts of the partnership firm following upon the partnership agreement. A case of a somewhat similar nature was considered by the Bombay High Court in Commissioner Of Income-Tax, Ahmedabad v. New Digvijaysinhji Tin Factory. In that case, a father and son were two partners of a firm who carried on business. In the account books of the company, certain entries were made crediting specific amounts in the names of the wife and the minor children of the son. Various letters or documents were executed by the father in which he affirmed the gifts. The question arose whether these gifts had been validly made. The learned judges observed:

“We have here entries made with the knowledge and consent of the two partners whereby a large part of the monies which stood to the credit of one of the partners was debited to his account with such consent and credited to the account of the donees with the intention of making them the creditors of the firm. Had the matter rested at that, different considerations might have arisen but such is not the position. The writings executed by [the father]… clinch the whole matter. The donees accepted the transaction of gift, the firm accepted the transaction and not only paid interest on the amounts accepted as due to the donees but also allowed the donees to withdraw moneys from time to time. In the case of any gift of such a nature, the court has to satisfy itself that there is a substitution of some other obligations for the original one and that there is the animus novandi. There is, in our opinion, ample material which satisfies the legal requirements of a completed and a valid gift… Once you accept the genuineness of the facts relating to the transaction, there is little scope, in the facts and circumstances of the case, for suggesting that what was done was inchoate or incomplete or invalid in law.”

12. It seems to us that the facts of this decision are closely parallel to the facts of the present case and must lead to the conclusion that the validity of the gifts to the two daughters cannot be questioned.

13. It accordingly follows that the question has to be answered in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 250.

14. Reference answered accordingly.