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Sahabuddin Mohammad Raza (Siwan) v. Commissioner Of Income Tax, B. And O. Opposite Party.
Factual and Procedural Background
For the assessment year 1956–1957, the assessee firm sought registration under Section 26-A of the Income-tax Act on the basis of a partnership deed dated 21 March 1953. The Income-tax Officer refused registration, and that decision was affirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. [1]
The Tribunal referred to the High Court the question whether, on the facts and circumstances of the case, registration had been rightly refused. [2][3]
Before the partnership was formed, the business had been carried on by an association consisting of Mohammad Raza and Mohammad Rahamatullah. After Mohammad Raza’s death, a partnership was formed among Mohammad Rahamatullah, Mohammad Raza’s widow and sons, and Mohammad Rahamatullah’s sons. [4]
Legal Issues Presented
- Whether the assessee firm was rightly refused registration under Section 26-A of the Income-tax Act. [3]
- Whether the partnership deed dated 21 March 1953 constituted a valid and genuine partnership despite the absence of separate capital accounts and a prior allocation of shares. [5]
Arguments of the Parties
Assessee's Arguments
- The assessee’s counsel argued that there was no material before the Tribunal to conclude that the partnership deed was invalid or that the partnership was not genuine. [5]
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Uma Charan Shaw and Bros. v. Commissioner of Income-tax, West Bengal, 1959-37 ITR 271 (SC) | The absence of separate capital accounts was not material, and a finding that a firm was not genuine could not rest on surmise and conjecture unsupported by sufficient material. | The Court held that this principle applied to the present case. [6][7] |
| Allauddin Maracair v. Commissioner of Income-tax, Excess Profits-tax, 1952-22 ITR 545 at p. 551: AIR 1953 Mad 824 at p. 825 | The absence of distributed or contributed share capital did not, by itself, establish that a partnership was fictitious rather than genuine. | The Court relied on this principle in rejecting the Tribunal’s reasons for doubting the partnership’s genuineness. [6][7] |
Court's Reasoning and Analysis
The Tribunal relied on the absence of a determination of the predecessor association’s capital, the absence of separate capital accounts, the absence of a definite allocation of shares between Mohammad Raza and Mohammad Rahamatullah, and the distribution of shares in the proportions stated in the partnership deed. [5]
The Court held that these matters did not bear on whether the partnership deed dated 21 March 1953 was valid and genuine. Although the earlier association had no specific allocation of shares, the legal implication was that each participant had an equal share. [5]
The Court further reasoned that Mohammad Rahamatullah could voluntarily relinquish part of his eight-anna share in favour of Mohammad Raza’s family members. The allocation of shares among the new partners was a matter of contract and did not justify doubting the deed’s validity. [5]
The absence of separate capital accounts was likewise held irrelevant to the existence of a genuine partnership. Applying the principles stated in the cited authorities, the Court found no sufficient material supporting the conclusion that the partnership was invalid or fictitious. [5][6][7]
Holding and Implications
The reference was answered in favour of the assessee and against the Income-tax Department. The Court held that the firm constituted under the deed dated 21 March 1953 was genuine and should have been granted registration under Section 26-A of the Income-tax Act. [7][8]
The assessee was awarded the costs of the reference, with a hearing fee of Rs. 250. [7] The direct effect was that the refusal of registration was set aside in favour of the assessee; the opinion does not state any broader implication or that a new precedent was created.
1. In this case the Income-tax Appellate Tribunal has stated a case on the following question of law under Section 66(1) of the income-tax Act:
“Whether on the facts and in the circumstances of the case the applicant firm was rightly refused registration under Sec. 26-A?”
2. For the assessment year 1956-1957 the assesses applied for registration on the strength of a partnership deed dated the 21st of March, 1953. Registration of the firm was refused by the Income-tax Officer and this decision was affirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal in appeal.
3. Prior to the formation of the Partnership the business of the asssssee was carried on by an Association of persons consisting of Mohammad Raza and Mohammad Rahamatullah. Mohammad Raza died some time before the 1st of April, 1952. After the death of Mohammad Raza there was a partnership formed between Mohammad Rahamatullah, the widow of Mohammad Raza and the sons of Mohammad Raza and Mohammad Rahamatullah. The entire capital, of the association was distributed in the following proportion between the new partners:
As. “1. Mohammad Rahamatullah 4 2. Blbi Hakima 2 3. Mohammad Fasi 2 4. Mohammad Ahmad 2 5. Mohammad Aiyub 2 6. Mohammad Sayeed 2 7. Nazir Ahmad 2”
4. On behalf of the assessae learned Counsel put forward the argument that there was no material before the Income-tax appellate Tribunal for holding that there was no valid and genuine deed of partnership in this case. In our opinion, the argument on behalf of the assesses is well founded and must be accepted as correct. The first ground given by the Appellate Tribunal for refusing registration is that in the account books of the assessee there was no determination of the capital of Mohammad Raza and Mohammad Rahamatullah. It was observed in the next place by the Tribunal that no separate capital accounts stood in the books in the name of Mohammad Raza and Mohammad Rahamtullah and there was no allocation of definite shares between these two brothers. It was also observed by the Tribunal that it could not understand why the undivided shares of the two brothers were distributed among the alleged partners in the ratio mentioned in the partnership deed. In our opinion, none of these reasons has any relevant bearing on the question whether the deed of partnership dated, the 21st of March, 1953, submitted for registration by the assessee is a valid and genuine document. It is not disputed on behalf of the assessee, that there was no specific allocation of shares in the Association of persons. But in the absence of any such definite allocation there is the implication of law that each of these persons has equal share in the business, and if by the deed of partnership dated the 21st of March, 1953, Mohammad Rahmatullah chose to forgo 2 annas out of his eight annas share in favour of the family members of Mohammad Raza there is no reason to doubt the validity of the partnership deed. It is a matter of contract between Mohammad Rahamatullah and the other partners as to how the shares of the new business are to be allocated between the new partners and if Mohammad Rahamatullah voluntarily gave a portion of his assets in favour of the, family members of his brother Mohammad Raza, that is no ground for doubting the validity of the partnership deed. In the second place, the fact that there was no separate capital account of the partners has no relevance, to the question whether there was genuine partnership.
5. In Uma Charan Shaw and Bros. v. Commissioner of Income-tax, West Bengal, 1959-37 ITR 271 (SC) the Supreme Court held in similar circumstances that there was nothing to establish that the partnership was not genuine, and the circumstance that there was no separate capital account of the partners was not very material. It was observed by the Supreme Court in that case that the finding of the Income-tax Officer that the firm was not genuine was a finding based upon surmise and conjecture and was not supported by sufficient material. The same view has been expressed in another case, namely, Allauddin Maracair v. Commissioner of Income-tax, Excass, Profits-tax, 1952-22 ITR 545 at p. 551 : (AIR 1953 Mad 824 at p. 825) wherein it was pointed out by the Madras High Court that merely because no share capital was distributed, nor was it contributed by the sons at the time of the Original Partnership, it cannot be said that the partnership was not a real partnership but merely a make-believe affair.
6. In our opinion the principle laid down in these two authorities applies to the present case. There was no material before the Income-tax authorities in this case to support their conclusion that the partnership constituted under the deed of partnership dated the 21st of March, 1953, was not a valid partnership. We, therefore, hold that there was a genuine partnership firm under the deed of partnership dated the 21st of March, 1953, and hence the firm should have been granted registration under Sac. 26-A of the Income-tax Act. We accordingly answer the question of law referred by the Income-tax Appellate Tribunal in favour of the assessee and against the Income-tax Department. The assessee is entitled to the costs of this reference. Hearing fee Rs. 250/-.
BG/D.R.R
7. Reference answered accordingly.
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