The Judgment of the Court was delivered by

Sheode, J.:— This is a reference made by the Income-Tax Appellate Tribunal, Bombay, under Section 66(1) of the Indian Income-Tax Act, (XI of 1922) at the instance of the assessee, Seth Suwalal Chhogalal of Pulgaon.

2. The question referred to us is:—

“Whether there was any material before the Tribunal for the finding that ‘Suwalal Bansilal’ at Gondia was not a genuine firm.”

3. The material facts which are relevant for the purpose of this reference are these. The assessee was the manager of a joint Hindu family consisting of himself and his eldest son Nemichand by his first wife, and two sons, Bansilal and Ramesh by his second wife. The family owned a cloth shop and a grain shop at Gondia and also a cloth shop at Phulgaon. Nemichand lived at Gondia and managed the cloth shop and grain shop there. The assessee and his other two sons lived at Phulgaon and managed the cloth shop there. There was a disruption of the joint family and Nemichand alone separated from the family, taking among other properties, the cloth shop at Gondia. The deed of partition in this connection is dated 23rd January, 1941. While Nemichand managed the two family concerns at Gondia he was assisted in the conduct of the business by an employee by name Rlohanlal. The assessee's case is that after Nemichand's separation he found it difficult to manage the grain shop at Gondia as he was living with his family at Phulgaon and hence he admitted Mohanlal as a partner in the grain shop with effect from the 31st October, 1940, as evidenced by the registered instrument of partnership dated 5th February, 1941. It was therefore contended by the assessee on the footing of this instrument that the grain shop at Gondia was no longer a family concern but that of a firm consisting of himself and Mohanlal and consequently the grain shop income should be excluded from his assessment and should be assessed separately as the income of the firm. The Income-Tax Officer, the Appellate Assistant Commissioner and also the Appellate Tripunal held that the alleged firm was not a genuine firm and it was at the instance of the assessee that this reference came before us.

4. There is ample positive evidence on record in support of the constitution of the firm. There is a registered instrument of partnership, as mentioned above, which embodies the shares of the two partners and the terms of the partnership. The agreement to share profits and losses of the business has been satisfactorily proved by the entries in the account books regularly maintained by the assessee. In the year 1940-41 the partnership made a profit of Rs. 4,138-9-3, out of which Rs. 2,327-15-3 were credited to Suwalal in proportion to his 9 annas share and Rs. 1,810-10-0 were credited to Mohanlal in his personal account in accordance with his 7 annas share at the end of the accounting year in Diwali (i.e, 20th October, 1941). In the year 1941-42 the firm made a profit of Rs. 7,492-0-3 out of which Rs. 4,214-4-3 were credited to the share of Suwalal and. Rs. 3,277-12-0 were credited to the share of Mohanlal both in the batao khata as well as in his personal khata (i.e, on 8th November, 1942). In the year 1942-43 the total profit amounted to Rs. 8,092-8-6 out of which Rs. 4,552-0-3 were credited to the share of Suwalal and Rs. 3,540-8-3 to the share of Mohanlal both in the batao khata as well as in his personal khata We find that in the year 1940-41 the balance to the credit of Mohanlal on 31st October, 1940, was Rs. 5,349-9-3 and that he had withdrawn from time to time the total amount of Rs. 1,700-13-6. In the year 1941-42, the balance to his credit was Rs. 5,751-0-3 and the total amount of withdrawals was Rs. 2,649-8-0. In the year 1942-43 the balance to his credit was Rs. 6,750-9-9 and the total amount of withdrawals was Rs. 1,854-2-3.

5. In view of this clear state of accounts it is obviously wrong to say that Mohanlal's share of profits was Rs. 2,100 and that it was almost equal to his salary of Rs. 1,800 per year as an employee of the assessee. It is also incorrect to say that Mohanlal did not draw any moneys from the firm during the year of account. The fact that almost the whole of the finance was supplied by the assessee and that Mohanlal contributed only Rs. 3,300 is absolutely immaterial. Even if Mohanlal had not contributed a farthing, he could have been admitted as a partner contributing labour. The fact that no notice of partnership was given to any of the constituents of the shop is equally irrelevant.

6. The only ground that seems to be mainly relied upon by the Income-Tax authorities and the Appellate Tribunal and that was also strenuously pressed by Mr. V.R Sen is that a separate capital account of the firm was not opened and Rs. 3,300 were not debited to the personal khata of Mohanlal for being transferred to that account. It was on this ground that it was held that the partnership of Suwalal and Mohanlal was not a genuine firm.

7. In the first place it should be borne in mind that mere omission to open capital account has per se no positive evidentiary value. It is a circumstance of some negative value which may affect the balance of probabilities in favour of the constitution of the firm provided there was some positive evidence on record to disprove the genuineness of the firm.

8. It is clear from the account books (which have not been discredited by the Income-Tax authorities) that in the year 1940-41, when the partnership came into existence the amount lying in the shop to the credit of Mohanlal in his personal khata was Rs. 5,349-9-8 and in the year 1941-42, it was Rs. 5,751-0-3 and in the year 1942-43 it was Rs. 6,750-9-9 and in spite of several withdrawals each year, the balance to his credit in each year always remained far in excess of his capital contribution of Rs. 3,330 and the said balance was held in his personal account against any losses that the firm might incur.

9. It was merely a fortunate circumstance that the firm, all along in the material years, made a large profit every year and hence the question of sharing losses by the two partners never arose.

10. I do not think that the opening of capital account is an essential pre-requisite for the formation of a partnership, nor do I think that there is something so sacred and sacrosanct about it that if the capital account is not opened, the constitution of the firm stands ipso facto condemned and discredited.

11. I do not feel inclined to make a fetish of this omission to open a capital account, especially when we have ample substantive evidence of an unimpeachable character on record to prove the creation of the firm and its conduct of business with reference to the sharing of profits in accordance with the terms of the partnership deed dated 5th February, 1941. It is certainly incredible to suppose that the assessee would deliberately falsify his account books and manipulate fictitious entries therein with regard to the division of profits and with regard to the large balances to the credit of Mohanlal against his own pecuniary interests and thus arm his employee with an effective weapon of extortion and blackmail. The assessee is a shrewd calculating businessman and is not likely to lay such a trap for himself with open eyes. In our opinion, in the face of such positive material on record, the conclusion is inevitable that the assessee and Mohanlal did constitute a firm on 31st October, 1940.

12. It has been held in Bansi Ram v. Jagan Nath 1935 A.I.R 1935 Lah. 209. that where a person actually works in a partnership firm and shares in the profits and losses in a fixed proportion, a strong presumption is raised in favour of his being a partner and it lies upon him to “explain or get rid of” this presumption. In that case their Lordships of the Lahore High Court relied upon the following observations of Lord Justice Baggallay in Walker v. Hirsch 1884 27 Ch.D 460, at p. 464.:—

“in most cases where there is an agreement with reference to a particular business and the particular parties entering into it that they shall share the profits, and bear the losses, in certain proportions, of carrying on the business, with nothing to explain or get rid of those words, that would certainly be prima facie evidence of an intention to carry on business in partnership.”

13. In the case before us there is a registered deed of partnership which embodies the essential ingredients of partnership and further credible documentary evidence is forthcoming in the shape of the account books of the firm regularly maintained, which proves that profits were actually shared by Suwalal and Mohanlal, in certain proportions, in accordance with the terms of the deed of partnership. In such circumstances, it is not merely a question of the discharge of the burden of proof. There is strong positive evidence on one side and not a little of evidence at all on which the Income-Tax Appellate Tribunal could base its decision. [Vide Muthukaruppan v. Commissioner of Income-Tax, Madras [1939] 7 I.T.R 76, I.L.R 1939 Mad. 397, at p. 403..] It is futile to contend that mere omission to open a separate capital account constitutes any material for the finding that “Suwalal Bansilal” at Gondia was not a genuine firm. The ruling in Hafiz Abdul Gaffoor v. Commissioner of Income-Tax, C.P and U.P, Lucknow [1939] 7 I.T.R 625, I.L.R 1940 Nag. 200., quoted by Mr. Y.R Sen is not at all applicable to the facts of the case before us, for the simple reason that there was evidence in the case on which the finding was based.

14. I accordingly answer the question referred in the negative.

Pollock, J.:— I regret that I am unable to agree. The question is whether there was a genuine partnership between the assessee and Mohanlal or whether the assessee merely tried to create the impression that there was a partnership in order to deceive the Income-Tax authorities. It was, in my opinion, open to the assessee to enter into partnership, even if his sole motive was to reduce his, assessment thereby but the question is whether he really did so. That is a question of fact to be decided by the Income-Tax authorities. Direct evidence in such a case will seldom be forthcoming, and the decision will ordinarily depend on the surrounding circumstances.

15. There is not much evidence in this case, but I do not think that it can be said that there is no evidence at all. The accounts give no indication that Mohanlal contributed anything towards the capital; he could of course become a partner without contributing anything, but the story was that he contributed Rs. 3,300. It is not clear that Mohanlal's position would be substantially better under the alleged partnership than it would be as an employee drawing Rs. 1,800 per annum, as each partner would be entitled to claim interest on the capital he contributed, and I am unable to gather from the accounts whether this interest was credited to them. The facts on which the Appellate Tribunal relied are set out in the reference, and this Court cannot interfere merely because it thinks that the finding is against the weight of the evidence. There was, in my opinion, some material before the Tribunal, and I would answer the question referred to us “Yes.”

16. As Pollock, J., and Sheode, J., differed, the question was referred to Bose, J., and the learned Judge delivered the following judgment on 8th April, 1948.

17. Bose, J.— Pollock, J., and Sheode, J., have differed on a reference made in under Section 66(1) of the Indian Income-Tax Act, The matter has accordingly been referred to me as the third Judge.

18. The question at bottom is whether there was sufficient material before the Income-Tax authorities and the Income-Tax Tribunal to justify them in reaching the conclusion that there was no genuine partnership in this case. The actual question referred is:—

“Whether there was any material before the Tribunal for the finding that ‘Suwalal Bansilal’ at Gondia was not a genuine firm?”

19. The basic facts have been set out in the judgment of Sheode, J., arid are not disputed before me. Briefly they are as follows: One Suwalal Chhogalal had a son Nemichand, as well as two other sons by another wife. They formed a joint Hindu family and owned a cloth shop and a grain shop at Gondia and a cloth shop at Phulgaon. There was a partition in the family in which Nemichand separated while the others remained joint. Nemichand was allotted the cloth shop at Gondia. Suwalal and the others got a grain shop at Gondia and a cloth shop at Phulgaon. We are concerned here with the grain shop at Gondia which fell to the share of Suwalal and his other sons. This partition was on 23rd January, 1941. While the family was joint the two shops at Gondia were managed by an employee of the family named Mohanlal. Shortly after the partition, namely on 5th February, 1941, Suwalal and Mohanlal entered into what appears to be an agreement of partnership. I say this because the fact is disputed. There is no doubt that a partnership deed was drawn up and that all the other indicia on which a partnership normally rests are to be found present in this case. The Income-Tax authorities, however, contend that this was not a genuine partnership and that it was a sham transaction and that all the other materials placed before them indicating a partnership, such as account books etc., are merely a blind.

20. Now it is admitted that in this case it was open to Suwalal and Mohanlal to enter into a partnership even though before that date there was between them the relationship of master and servant. It is also admitted that it was open to them to do this for the express purpose of enabling Suwalal to evade payment of a higher Income-Tax. It was conceded that it would be within their interests to enter into such an agreement. But what the Income-Tax authorities contend is that in point of fact it was not done. They state that although there appears to have been a partnership, in fact there was no partnership and the transaction was sham.

21. Whether there was in point of fact a partnership or not is a question of fact, but whether there is material on record sufficient to sustain a finding of fact which is based on inferences from other proved facts is a question of law. I must not be understood to say that it is always a question of law whenever a conclusion of fact has to be inferred from other facts. That is not so. The mere fact that a fact is proved by inferences from other facts, or as it is sometimes said by circumstantial evidence, does not necessarily turn the matter into a question of law. (A fact is a fact irrespective of the evidence by which it is proved. The only time a question of law can arise in such a case is When it is alleged that there is no material on which the conclusion can be based or no sufficient material.

22. The expression “no sufficient material” requires explanation. In my opinion, the law regarding proof of a fact is to be found in Section 3(2) of the Indian Evidence Act which states that:—

“A fact is said to be proved when, after considering the matters (before it, the Court either believes it to exist or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.”

23. It will be observed that if the Court believes it to exist, that concludes the matter provided of course there is evidence on which such a belief can be founded. If the Court had believed that there was a partnership in this case, that would have concluded the matter. If it does not believe it to exist, then it has to determine whether, in its opinion, its existence is so probable that “a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.”

24. Now the burden of proof here in the first instance was on the assessee. He undoubtedly had to prove the partnership. It is evident that the Income-Tax authorities did not believe the partnership to exist; therefore, under this definition, they had to consider, whether they considered its existence so probable that a prudent man ought, under circumstances of this case, to act upon the supposition that it exists.

25. Now what is the evidence adduced of the partnership here? First, we have the partnership deed. It is registered. Next, we have the accounts. They fulfil on the face of them all that one would normally expect in partnership cases unless one is dealing with a firm of chartered acccount-ants in London and New York. Of course these accounts do not come up to their standard but for the ordinary petty businessmen in this country these accounts undoubtedly are the type which one would find in many genuine partnership cases. Accordingly, it is abundantly evident that a prudent man ought, under the circumstances of this case, to act upon the supposition that the partnership exists, unless of course it can be said that the fact is disproved. But in that case the burden shifts to the other side. The Income-Tax Tribunal has quite rightly appreciated that fact and has thrown the burden of proof upon the Income-Tax authorities. The question referred is not whether there is sufficient material on which the existence of a partnership can be assumed but whether there is material on which it can be found that there is no genuine firm.

26. Now it may be difficult in given cases to draw a dividing line between what is purely a question of fact and what is a question of law in so far as the question is whether there is present in the case the necessary scintilla of evidence on which a given fact can be based or a fact can be said to be disproved. I use the expression “necessary scintilla of evidence” because, in my opinion, that embodies what is meant in Section 3(1) of the Indian Evidence Act. The question in this case is whether, assuming the burden of proof is on the Income-Tax authorities to prove that no genuine partnership exists, there is evidence which can be left to a jury to determine that fact. Now though it may be difficult in given cases to draw the line, nevertheless the law directs that a line must be drawn and their Lordships of the Privy Council have stated on several occasions that suspicion cannot take the place of proof. Accordingly, we have to see whether there are facts here from which an inference that this was not a genuine transaction, but a sham one can be drawn.

27. If this was not a genuine transaction, then clearly there was some motive or reason for entering into a sham one. The only motive here which can be suggested is that the reason was to defraud the Income-Tax department, that is to say, although it was perfectly legitimate to evade Income-Tax in this way, nevertheless the parties were not prepared to share their profits and losses in the mariner suggested but only pretended to do so. But that means that there was fraud, and what I have to see here is whether the material on which the Tribunal has acted can justify an inference of fraud.

28. The grounds on which the Tribunal states that an inference of what, in effect amounts to fraud can be drawn are these. They are set out in the order of reference. First, it is said that Mohanlal was an employee managing the grain business at Gondia and that his salary of Rs. 1,800 a year as an employee was almost equal to the share of profits of Rs. 2,100 which he received in the account year. That standing by itself is not a proper objection, it is not unusual for owners of a business to take an old and faithful employee into the business as a partner. Even if the share of profits which that partner is to receive is to be more or less equal to the salary which he would get there will be nothing to prevent that, but in actual fact we find here that Mohanlal was not being given his usual salary. The sum credited to his share year by year is almost exactly equal to the share which he was to have received in the partnership, namely 7 annas. The mere fact that it is a little more than his ordinary salary does not matter. In given years it might be much more. In others much less.

29. Next it is stated that the whole of the finance was supplied by the assessee and only Rs. 3,300 was contributed by Mohanlal. There seems to be some misapprehension there. As far as I can gather from the partnership deed, and no other evidence was placed before me, Mohanlal was to contribute nothing. What the deed says in paragraph 2 is this:—

“Before the formation of this partnership the entire property of the shop was valued at Rs. 4,735, the amount due from others to the shop was Rs. 26,236-5-9 and the cash balance in hand on the Diwali day was Rs. 698-10-3. The entire property was held to be of Rs. 31,672 which shall be considered to be the property of the shop styled as “Suwalal Bansilal.”

30. This sets out the total assets of this business before Mohanlal was taken as a partner. The deed then goes on to provide:—

“Suwalal Chhogalal… shall be the owner of Rs. 28,372 out of that and Mohanlal Narayandas shall be the owner of Rs. 3,300.”

31. On the fane of it, it would appear that Mohanlal was to contribute nothing but was being given a certain amount out of the existing assets of the shop. There would be nothing unusual in an arrangement of that kind in a case where an employee is being taken into partnership.

32. Next it is stated that Mohanlal's capital contribution was not credited to any capital account in his name but was held in his personal account against any losses that the firm may incur. Now, as I have said these books are not kept in the same way as the books of some large firms in London or New York would be kept. They are kept in a much simpler way, but it is abundantly evident from the partnership deed and from the account books that it will be possible to find out exactly how much each partner has to receive. In the circumstances, I agree with Sheode, J., that there is no need to open a capital account and enter in it Mohanlal's capital contribution. The deed sets out the matter with sufficient clarity. But, as a matter of fact, here again there seems to be some confusion. I find in the judgment of the Appellate Assistant Commissioner of Income-Tax, towards the end of paragraph 3, the following sentence:—

“The transfer entries in books relating to the creation of capital account cannot be held as sufficient to prove the existence of a genuine firm.”

33. It would appear from this that there were some entries in the books relating to a capital account. However, the books are not before me and there is no other material on which I can reach a sure conclusion, but, as I say, that fact is immaterial because it is clear from the accounts and from the partnership deed exactly how much Mohanlal has to receive.

34. The next reason given is that no notice of partnership was given to any of the shop's constituents. Here again, I agree with Sheode, J., that that is unnecessary and that it would be unusual in a petty concern of this kind. It would not much matter to the constituents of this firm whether Mohanlal was dealing with them as a partner or as an agent as heretofore.

35. Next it is stated that Mohanlal did not draw any moneys from the firm during the year of account. That is not correct. The accounts show that money was withdrawn every year. Sheode, J., has given the details. I need not repeat them.

36. Those are the grounds on which the Tribunal has reached its conclusion. Before me another ground was urged, and that seems to have been urged before Pollock and Sheode, JJ., also, that Mohanlal has not been given interest on the Rs. 3,300 which was assigned to him as his share in the capital under the deed of partnership. The deed states that Mohanlal is to receive 8 annas per cent per mensem on that sum. This point was not taken before any of the Income-Tax authorities, nor was it taken before the Income-Tax Tribunal. I agree that the extracts of accounts placed before me do not show that interest was given in so many words, but each year there is an item just before the total which is shown as Mohanlal's share of profits and which, in my opinion, can be nothing but interest. I do not think it will be proper to take that into consideration at this stage. First, because it was not raised before, and secondly, because the accounts do not appear to justify that. It is possible that if the full accounts were before us, the matter would be cleared up. I have only extracts before me.

37. In my opinion, these points which have been raised do not furnish the necessary scintilla of evidence on which a conclusion of fraud can be based. They may throw a certain amount of suspicion though even that is doubtful, but, in my opinion, these facts can certainly do no more than raise a certain element of suspicion. I am clear they are not enough for a finding of fraud. It has been repeatedly stressed in the Courts that fraud must be established by strong and cogent proof. Each of these facts standing by itself is explainable, and even when viewed as a whole, they do not, in my opinion, justify a prudent man in considering that fraud is established, or, to put it in another way, that the partnership is disproved. As I have said before, the question which the Courts have to decide in a case of this type is whether there is sufficient material on which a prudent man ought, under the circumstances of the particular case, to act. Prudent men may draw this conclusion or that on certain facts but there are some facts on which no prudent man would be allowed in a Court of law to reach a particular conclusion. That, in my opinion, is the case here. I agree with Sheode, J., and answer the question referred in the negative, that is to say, I hold that the necessary scintilla of evidence required for a finding that there was no genuine firm is wanting in this case.

Pollock and Sheode, JJ.:— In accordance with the opinion of Bose, J., the answer to the question referred to us will be “No.”

Reference answered in the negative.