The Judgment of the Court was delivered by

Ramaswami, J.:— The assessee was a partnership concern constituted under a deed of partnership dated August 1, 1948, consisting of three partners. The business of the partnership is that of conducting classes and giving private tuition and educational instructions to students appearing for various technical examinations. It was conducting a technical educational institution under the name and style of “Indian Institute of Engineering Technology”. The accounting year adopted by the firm was the year ending 30th April. Up to the assessment year 1959-60, the firm applied for registration and was granted registration under section 26A of the Indian Income-tax Act, 1922 (hereinafter called “the Act”), and was assessed as a registered firm.

2. For the assessment year 1960-61, relevant to the previous year ending April 30, 1960, the assessee on July 4, 1960, applied for renewal of the registration of the firm under section 26A of the Act and on October 25, 1960, filed a return showing a nil income. It had already filed on March 15, 1960, an estimate of income declaring the status as a firm and the income for year ending April 30, 1960, at Rs. 40,000. In response to the notice issued by the Income-tax Officer, the assessee produced its account books and other evidence in its possession to substantiate the correctness of the return and an advocate appeared representing the assessee. The documents, books of account, and other evidence produced, disclosed the following facts: On April 25, 1960, the partners of the assessee-firm executed an agreement which is styled as an agreement of dissolution of partnership. After reciting the business of the partnership firm and the rights and liabilities of the partners under the deed of partnership dated August 1, 1948, it proceeded to state that the parties felt that the object with which the parties formed the partnership had been fulfilled and consequently they have “decided to get the said Indian Institute of Engineering Technology registered as a society under the Indian Societies Act and entrust the management, assets and properties of the said Institute to the committee of management which shall be the governing body to conduct and manage the affairs of the said Institute”. It also stated that the parties have agreed accordingly and decided to dissolve the partnership entered into under the deed of partnership dated August 1, 1948. The operative part of this agreement reads as follows:

“Now this agreement witnesseth that in pursuance of the agreement referred to above, the first partner, the second partner and the third partner have agreed that the partnership constituted under the deed of partnership dated 1st August, 1948, do stand dissolved with effect from this date.

2. The parties hereto shall as soon as possible arrange to get the Indian Institute of Engineering Technology registered as a society and shall entrust the management of the affairs and properties of the said institute to a govering body of the said society.

3. The parties hereto shall manage and conduct the affairs of the said Institute till the governing body takes over charge on its registration as a society and the profits that have accrued or accruable up to this date or hereafter shall belong and be applied to the said Institute and shall not belong to the parties hereto.

4. On the completion of the registration of the said Institute as society as aforesaid, the parties hereto shall execute a regular deed of dissolution of partnership.”

3. The rules and regulations of the Indian Institute of Engineering Technology was framed on December 7, 1960, and a governing body was formed of which the three partners of the firm constituted the three founder members. The Institute was registered as a society under the Societies Registration Act, 1860 (21 of 1860), on February 1, 1961. In the meanwhile, on December 12, 1960, a document was executed by the partners styled as the deed of dissolution of partnership. The operative part of this deed reads as follows:

“1. The partnership firm of Indian Institute of Engineering Technology shall be deemed to have been dissolved with effect from the 1st day of May, 1959.

2. The parties hereto have nothing to get from one another or from the partnership.

3. The profits and income of the Indian Institute of Engineering Technology that have accrued, accumulated or arisen up to the 25th day of April, 1960, or thereafter, shall belong absolutely to the said Institute and shall not belong to the partnership or to the parties hereto.

4. The parties hereto hereby release one another and each of them and their respective estate and effects and from all the covenants and provisions of the partnership deed dated 1st August, 1948, and from all claims and demands whatsoever in relation to the affairs of the said firm.”

4. On December 27, 1960, the assessee informed its bankers of the dissolution of the firm with a request to transfer the funds lying with it in a current account to be opened. The governing body of the society held its meeting on June 21, 1962, checked the accounts for the year ending April 30, 1960, and accepted the accounts with a remark that the liability of Rs. 90,000 (Rupees 30,000 for each of the founder members) did not find a place in the balance-sheet.

5. It was contended before the Income-tax Officer that the partnership which was conducting the business had been retrospectively terminated from May 1, 1959, that the profits earned by the assessee up to April 25, 1960, and, thereafter, had been declared as not belonging to the partnership and vested in the contemplated society and that on account of the retrospective dissolution of the partnership from May 1, 1959, and intended diversion of its earnings to an educational society, the firm should be deemed as dissolved and its interim earnings from May 1, 1959, should be construed as income of the educational society. The Income-tax Officer held that the assessee-firm had been continuing right through from May 1, 1959, in running the affairs of the institute, that the mere act of executing an agreement a few days before the close of the account year could not terminate the partnership with retrospective effect, that the liability to tax fastened on the persons who earned the income and that it was immaterial and irrelevant as to how the profits had been utilised. After referring to the date of registration of the society, he held that there had been no change in the ownership of the business during the previous year relevant for the assessment year 1960-61, and that the profits up to April 30, 1960, belonged to the assessee-firm. This view found favour with the Appellate Assistant Commissioner.

6. The Tribunal also held that the society to which the partners agreed to entrust the management, assets and properties of the institute did not come into existence during the accounting year and that, therefore, there was no question of the income being diverted before it reached the assessee-firm. The Tribunal was of the view that the decision to hand over the income which belonged to the assessee-firm was a voluntary act on the part of the assessee. After referring to the other facts, the Tribunal held that the income was earned by the partnership firm and it was liable to be assessed in the hands of the assessee. At the instance of the assessee the following question has been referred:

“Whether, on the facts and in the circumstances of the case, the income for the year ending on April 30, 1960, was assessable in the hands of the assessee-firm?”

7. The learned counsel for the assessee contended that though the governing body of the society (Indian Institute of Engineering Technology) was formed only on December 7, 1960, and the society itself was registered on February 1, 1961, there was a transfer and vesting of the income accrued or accruable up to April 25, 1960, and, thereafter, to the intended society as a charitable trust and the assessee was holding and deriving income only as the trustee of the said society. Though the income was derived by the assessee when it accrued, by reason of the dissolution of the partnership with effect from May 1, 1959, the income accrued right from May 1, 1959, shall be deemed to have been received by the partners not as a firm, but as trustees of the intended society and as such not assessable in their hands. In this connection he relied on the decision in Commissioner Of Income-Tax…(Applicant); v. The Bijli Cotton Mills Limited…(Opposite-Party). [1953] 23 I.T.R 278; 23 Comp. Cas. 114 All.. That related to the liability of a company to tax on its pre-incorporation profits. The facts in that case were these: A partnership firm acquired a cotton mill on behalf of a company which they were going to get incorporated. Possession of the mill was obtained on December 10, 1942, though no formal sale deed was executed by the vendor. On December 11, 1943, the company was duly incorporated and the formal conveyance in favour of the company was executed by the vendor on January 2, 1945. The question for consideration was in whose hands the income derived from the cotton mills for the period from December 11, 1942, to December 10, 1943, should be assessed. The findings in that case were that the partnership entered into an agreement to purchase the cotton mills not for themselves but for a company which they were going to float, and that when they took possession they made it clear that they were taking possession of the mills not in their own account but on behalf of the private limited company which they were going to have incorporated. When it was incorporated the company chose to accept the profits made before its incorporation and treated the promoters as accountable for the profits made during the period December 11, 1942, to December 10, 1943. It was argued on behalf of the department that the company, which was the assessee in that case, cannot be said to have been carrying on business prior to its incorporation and that, therefore, the partnership must be deemed to have been carrying on the business. It was held that it is a settled proposition in company law that if the promoters of a company buy a property or carry on a business on behalf of a company which they intended to float, on the incorporation of the company, the company has a right either to accept what has been done on its behalf by the promoters or repudiate the same. If the company accepts what the promoters have done on its behalf, it has a right to claim from the promoters the entire income of the property since its purchase or the entire income during the period in which the business was carried on for the benefit of the company. Though it cannot be said that a person is a trustee for a beneficiary not in existence, in a series of cases it has been held that the relationship between a promoter and the company that he has floated must be deemed to be a fiduciary relationship from the day the work of floating the company has been started. It is on the legal position of a promoter it was held in that case that the income could be legally assessed in the hands of the company. On the analogy of this judgment, the learned counsel for the assessee contended that the entire income for the accounting year ending April 30, 1960, should be assessed only in the hands of the society. We are unable to accept this contention.

8. There is absolutely no evidence that at any time prior to April 25, 1960, when the agreement was executed there was any idea of forming a society or making the partnership accountable to such a society. Neither the assets of the partnership were acquired nor the income derived from the business on behalf of and for purposes of the society which they intended to bring into existence. The business was carried on by the partnership on its own account and deriving profits and gains. The partnership was carrying on business in the earlier years also and was deriving income. The partnership could not, therefore, be likened to or treated as promoters of a company. Even under the agreement dated April 25, 1960, there was no divestiture of the title of the partnership to the assets and other properties of the partnership. It only stated that the parties shall as soon as possible arrange to get the Indian Institute of Engineering Technology registered as a society and shall entrust the management of the affairs and properties of the said Institute to a governing body of the said society. It is not stated that as and from that date they have divested the title and they are holding the properties on behalf of and for the benefit of the society to be formed. Clause 3 of the agreement also did not say that the management and conduct of the affairs of the institute till the governing body takes over charge on its registration as a society shall be for and on behalf of the proposed, society. The later portion of clause 3 only evidences an agreement to give away the income earned by the firm to the society as and when it comes into existence.

9. The agreement at best is evidence that towards the end of the accounting period the partners had an idea of forming a society and giving the income earned by the firm to that society. Though clause 1 of the agreement stated that the partnership do stand dissolved with effect from April 25, 1960, clause 4 made it clear that only on completion of the registration of the institute as a society a regular deed of dissolution of partnership shall have to be executed. The deed of dissolution was actually executed on December 12, 1960. This deed provided that the partnership shall be deemed to have been dissolved with effect from May 1, 1959, whereas the agreement dated April 25, 1960, stated that the partners have agreed that the partnership constituted under the deed dated August 1, 1948, shall stand dissolved from April 25, 1960. These conflicting intentions as disclosed by the documents show that there was no definite intention during the accounting year relating to the dissolution of the partnership.

10. A return was filed for the year ending April 30, 1960, by the partnership firm on October 25, 1960, signed and verified by the principal partner. This return was submitted not as a dissolved firm but as a continuing partnership firm. The firm also applied for renewal of registration under section 26A of the Indian Income-tax Act, 1922, on July 4, 1960, and this application was signed by the three partners in their capacity as partners. As late as March 15, 1960, the assessee-firm filed an estimate of income declaring the status as a firm. These facts clearly show that the partnership continued throughout the accounting year and there was no dissolution of partnership during the accounting year. The partnership was deriving the income, therefore, on its own behalf and not on behalf of any intended society.

11. We are also of opinion that there was no divestiture of the income earned to the society during the accounting year. The bank account of the business was in the name of the partnership right through the accounting year till December 27, 1960, and it was only on that day the transfer of the funds to the accounts of the society was effected. If really the vesting of the accrued income had taken place on April 25, 1960, the transfer of the funds should have been effected even on that date. If the transfer had been effected from the partnership accounts to the individual account on April 25, 1960, it might have been contended that there was a divestiture of the title to the funds by the partnership and the partners were holding the income for the benefit of a society that is to come into existence in future. It is seen from the finding of the Tribunal that in fact the three partners had been drawing substantial part of the income by way of salary and drawings right up to the date of transfer of funds and the minutes of the governing body showed that the three partners had been credited with a sum of Rs. 90,000. It is clear, therefore, that profits and gains did accrue and arise to the partnership right through the accounting year and the liability of being taxed on such income is fastened on the partnership. It is immaterial how these profits have been utilised or diverted by the partnership after it had earned it. By retrospective dissolution of the partnership, the operation of the provisions of the Income-tax Act could not be affected, whatever may be the rights of the parties thereto and whether such retrospective dissolution was valid in law or otherwise.

12. In this connection it is useful to refer to the decision of this court in M.S Subbulakshmi…Applicant; v. Commissioner Of Income-Tax, Madras…., where the court posed the question:

“The whole case rests on whether it is open to an assessee to say in regard to an income which has accrued to her from an asset which was hers on the date of the accrual of the income, that the asset shall belong to another as from an anterior date and so convert the income which had accrued to her as the income of another for purposes of assessment to income-tax.”

and answered in the negative by stating that: “the assessee cannot after its accrual dispose of the income so as to rid herself of tax liability.”

13. It follows that the income was received by the assessee-firm during the accounting year and it was not diverted before it reached the assessee. If that position is reached, then even if the amount had been given to the society later, it amounts to only an application of the income earned and does not affect the liability to tax in the hands of the assessee. We, accordingly, answer the reference in the affirmative and against the assessee with costs. Counsel's fee Rs. 250.

14. Reference answered in the affirmative.