P L D 1967 Karachi 551 (PLP)

WAHIDUDDIN AHMED, J.-This is an application under section 66(2) of the Income-tax Act to which the applicants have prayed that the Appellate Tribunal of the Karachi Bench tie called upon to refer the following ques ion of law arising out of its order dated 1st August 1961, by which the appeal filed by them was dismissed. `Whether there was any evidence before the Tribunal to hold that the partnership stated to be in existence under the Deed of Partnership dated 6-5-1954 was not a genuine partnership." The necessary facts for the disposal of this application may shortly be stated. Mr. Rahimbux Khan, one of the partners was up to the assessment year 1933-54 the sole proprietor of Messrs Buxlay Paints Works, Karachi, the applicant. On 6th May 1953, he entered into a partnership with his wife, three major sons, two married daughters and four minor children under a partnership deed. It appears from balance-sheet that the wife and grown-up sons have invested some capital but the main investment in the partnership business is that of Rahimbux Khan. The above firm was duly registered under the Partnership Act on 12th August L

953. On 2nd October 1954, the partners applied for the registration of the above firm under section 26-A of the Income-tax Act to the Income-tax Officer who refused registration holding that the partnership was a bogus transaction and no partnership existed in law by order dated 30th June 1959. Thereupon the partners challenged this order in appeal before the Income-tax Appellate Tribunal, Karachi which was also dismissed on 1st August 1961. The main ground on which the appeal was rejected is that Mst Farook Sultana Begum and Mst. Kesar Sultana Begum neither bad any funds nor invested any money in the business of the above firm, nor they engaged themselves in any manner to run that business and that the firm was constituted only with a view to evade the incidence of tax.

2. Being aggrieved by this order the applicant made an application under section 66(1) of the Income-tax Act calling upon the Income-tax Appellate Tribunal to refer the above question of law to this Court for its decision. The learned Tribunal by order dated Ist May 1962, held that the question as formulated by the applicants when construed in the light of the facts and circumstances of the case cannot be said to be a question of law and refused to make reference as prayed for. The applicants have now come to this Court under section 66(2) of the Income-tax Act for the reference of the above question in accordance with law.

3. In support of his contention Mr. Dingomal, the learned counsel for the applicants, has contended that the grounds on which the Income-tax Appellate Tribunal has dismissed the appeal and upheld the order of the Income-tax Officer are erroneous in law and cannot be taken into consideration for rejecting an application for the registration of a firm under section 26-A of the Income-tax Act. In support of his contention the learned counsel has placed reliance on certain decisions of the Indian Court. In S. S. K. Haja Allauddin Maracair v. Commissioner of Income-tax Madras ((1952) 22 I T R 545) one H, a Muhammadan carrying on business in Ceylon as sole proprietor formed a partnership with his three sons by his first wife and also admitted his minor sons by his second wife as partners. Later on the partnership firm was sought to be registered but the Income-tax? Authorities and the Appellate Tribunal held that the partnership was not genuine on the ground that there was no explanation as to why the capital of the father was not distributed between the children and that the terms of the partnership was such which militated against the notion of a partnership. It was held in that case that the Income-tax Authorities should have taken into consideration the cumulative effect of all the circumstances in arriving at the conclusion whether the partnership was real or not. It was not proper for them to take each circumstance by itself and then reject it on the ground that each by itself was not conclusive. In re : Ambalal Sarabhal (25 B L R 1225), a person who owned the business of agents and treasures of a limited company, admitted his wife as a partner in the business and fixed her share at one anna in the rupee of commission earned. He kept to himself the sole right of foregoing the whole or any part of the commission in any year. He could take other partners in the business without his wife's consent and could even determine her share at any time. The Income-tax Authorities refused to recognise it as a genuine partnership. In such circumstances the Bombay Court held that, the partnership in question wax a partnership within the meaning of section 223 of the Indian Contract Act. It was further held that it was also a firm within the meaning of section 12(1) of the Indian Income-tax Act. In re: Central Talkies Circuit, Matunga (A I R 1941 Bom. 205), it was held that the alteration of a partnership with the object of avoiding the effect of section 16(3) is by itself no ground, for refusing registration under section 26-A inasmuch as anyone is entitled to so conduct, his affairs within the law as to avoid incidence of taxation.

4. Mr. Dingomal further referred us to a decision of the Nagpur High Court in Sunralal Chhogalal v. Commissioner of Income-tax, U. P., C. P. and Berar (A I R 1949 Nag. 249), in which it was held that whether there was in point of fact a partnership or not is a question of fact, but whether there is material on the record Sufficient to sustain ; finding of fact which is based on inferences from other proved facts is a question of law. Reliance was also placed on a decision of the Supreme Court of Pakistan in the case of Commissioner of Income-tax, Punjab, N.-W F. P. and Bahawalpur v. Messrs Maula Dad-Muhammad Saeed of Sheikhupura (P L D 1956 S C (Pak.) 314), in which it was held that according to section 26-A, Income-tax Act and the Rules made thereunder the Income-tax Officer is bound to register a firm if he is satisfied that the firm as set out in the instrument of partnership exists land that the application has been properly made. The learned counsel for the appellant contended that the partnership came into existence on 1st April 1953 and is evidenced by a written document dated 6th May 1953. It was registered under the Partnership Act on 12th August 1953 and it cannot be said that it does not exist or is not a genuine partnership. Mr. Dingomal referred us to the balance-sheets of the above partnership to satisfy us that, after the partnership came into existence, it had carried on business in that capacity and various partners have earned profit and withdrawn amounts in terms bf the partnership deed. We were also referred to section 4 of the Partnership Act which defines the partnership as the relation between persons who have agreed to share the profits of a business, carried on by all or any of them acting for all. He, therefore, contended that the ground on which the registration of the firm has been refused, namely, that Mst. Farook Sultana Begum and Mst. Kesar Sultana Begum, the married daughters of Mr. Rahim Bux Khan, had no funds of their own and bad not invested any money in the business of the firm and were not participating or engaging themselves in any manner to run. that business are circumstances which show that the firm was constituted only with a view to evade the incidence of tax, is not tenable in law.

5. On the other hand, Mr. S. A. Nusrat, the learned counsel appearing for the Department has contended that the question whether a partnership business is genuine or not genuine is purely a question of fact, and therefore, supported the conclusions of the Appellate Tribunal that such a question cannot be referred to this Court under section 66(1) of the Income-tax Act. In support of his contention the learned counsel relied on the following cases:- (1) Kalachand Deumal and another v. Commissioner of Income-tax, Bombay (1942) 10 I T R 501; (2) Bhagavandas Harikishandas v. Commissioner of Income-?tax, C. P. and U. P. (1938) 6 I T I: 1716; and (3) In re: The Central Talkies Circuit, Matunga (1941) 9 ITR

44. The first case, which is of the Chief Court of Sind was a case of renewal of the registration of the firm which wets refused on the ground that the distribution of income was not made in accordance with the shares shown in the partnership deed and therefore the partnership deed did not represent the true state of affairs; and the Income-tax Authorities were justified in refusing to re-new the registration of the firm. We have however noticed that in arriving at these conclusions the learned Judges while referring to the questions of law pointed out that they were so obviously untenable or without application to the facts of the case that they agreed that they could find noticing upon which a reference under section 66(3) of the Income-tax Act could be recorded.- This case is distinguishable. The second case, which is of the Nagpur High Court, was in respect of a partnership which was entered into between members of three joint Hindu families. The number of partners was increased by eleven members one being the wife of one of the partners and the other ten, the wives of the sons of the other partners. The Income-tux Authorities took the view that these persons were merely included to increase the number of shares with a view to evade income?-tax and that the firm as constituted was fictitious and refused to register it. This firm then transferred its right and assets to another firm of Bombay alleged to consist of the three managing members of the joint Hindu family and the husband of the ten ladies. The Income-tax Officer refused to recognise the transfer holding it to be fictitious. It was in these circumstances that it was held that the findings were findings of fact and being based on evidence, there was no ground for directing a reference tinder section 66(3). This case also is clearly distinguishable because the subsequent transfer made in favour of the Bombay firm was clearly a device to get rid of the consequences of the refusal of the registration of the firm under section 26-A. The third case has already been referred by us earlier as In re: Central Talkies Circuit, Matunga. In this case a reference was made by the Commissioner of Income-tax under section 66(1). In that context the learned Judges observed that it is open to the Income?-tax Officer to show that the shares which appeared in the partnership are not the true shares of the partners and there is no proper application by the requisite firm. It was further held that where one of the partners is found to be only a nominee of a share allotted to him for another partner the deed cannot be said to specify the individual shares correctly and therefore refusal to register it would be justified. The learned Income-tax Tribunal while refusing to refer the question vas further relied on the decision of the Patna Court in P. Banerjee v. Commissioner of Income-tax, Bihar and Orissa ((1956) 30 I T R 423). It was held in that case that a finding of the Appellate Tribunal that a partnership deed which has been produced under section 26-A is a bogus transaction and that the alleged partnership did not really exist is a question of fact and the High Court will not interfere with such a finding unless it is based on no material or the Tribunal has committed an error of law in arriving at such finding, e.g., applied a wrong principle of law or wrongly applied or misconstrued any statutory provision.

6. It seems to us that die question whether a question of law arises out of the order of the Income-tax Appellate Tribunal depends on the facts of each case. In the present case, the learned Income-tax Appellate Tribunal has dismissed the appeal of the applicants merely on the grounds that the two major daughters of Mr. Rahimbux Khan had not invested any capital and had no independent fund for investment and had not engaged themselves in the running of the said firm. The firm was constituted only with a view to evade the incidence of tax. In our opinion the above circumstances which the learned Income?-tax Tribunal have taken into consideration for rejecting the application of the applicants for the registration of their firm under section 26-A poses a question whether they are such on which the registration of the firm could be refused. It is thus clear that a question of law does arise in the present case, namely, whether there is material on the record sufficient to sustain a finding of fact which is based on inferences from other proved facts We would, therefore, hold that the learned Tribunal bad fallen into tan error in not referring the above question to this Court for its decision under section 66(1) of the Income-tax Act. We would, therefore, direct the Income-tax Appellate Tribunal to refer the following question of law for the decision of this Court-in accordance with law: "Whether there was any material before the Tribunal for holding that Messrs Buxlay Paints Works, Karachi was not a genuine firm." The Department is further directed to submit the above question in accordance with law after stating the case of the parties and referring all the documents which are necessary for its disposal.

7. In the result, subject to the above remarks, the application is allowed with no order as to costs. S. Q. ?? Application allowed.