JUDGMENT
Rajesh Balia, J.
1. A question of law has been referred to this
court at the instance of the Revenue by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, arising out of its order dated August 8, 1978, in ITA No. 982/ JP of 1976-77 for the assessment year 1972-73.
2. The facts as stated in the statement of case are that the assessee, Jai Mewar Wine Contractors, Udaipur, was a firm consisting of nine partners, namely, Birbal Khan, Shiv Narain, Sohan Lal, son of Hira Lal, Both Lal, Badru Khan, Narendra Kumar, Jagdish Lal, Sohan Lal, son of Mohan Lal and Kamal Chand.
3. Before the commencement of the assessment year 1972-73 with effect from April 1, 1972, the assessee filed an application in Form No. 11 on March 30, 1972, for registration of the firm along with the partnership deed dated March 27, 1972. The Income-tax Officer was satisfied about the genuineness of details furnished in the form and therefore by order dated November 30, 1974, granted certificate of registration to the firm.
4. In the partnership deed dated March 27, 1972, it was stated that the firm has commenced its business with effect from April 1, 1971, with the aforesaid nine partners. Out of nine partners, Kamal Chand died on September 25, 1971, and in his place, his wife and legal heir Smt. Tulsi Bai was inducted as partner to the firm. In the deed of partnership, the partners’ share in the profits was defined against the name of each in terms of percentage. The Commissioner of Income-tax, however, while exercising his revisional powers under Section 263 of the Income-tax Act, 1961, by his order dated November 27, 1976, held that the. assessee failed to show that there was any contract or agreement according to which the firm could continue even on death of a partner. Accordingly, he set aside the order dated November 30, 1974, passed by the Income-tax Officer and directed
him to pass another order, afresh, in accordance with law, after making necessary inquiry regarding genuineness and validity of the firm,
5. Aggrieved by the order of the Commissioner dated November 27, 1976, the assessee preferred an appeal before the Income-tax Appellate Tribunal, which came to be allowed by it, holding that the order of the Commissioner could not be sustained in law, particularly when the Income-tax Officer gave clear finding that details furnished in the form were correct and, after considering all facts and genuineness of the firm, the Income-tax Officer granted certificate of registration. The Tribunal found that the learned Commissioner of Income-tax gave no finding as to how the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. As a matter of fact, on the facts of the present case and after hearing the parties, it was necessary for the learned Commissioner to state in what manner he considered the order of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue and what the basis was for such a conclusion. After indicating his reasons for such a conclusion, it would certainly have been open for him to remand the matter to the Income-tax Officer for such other investigation or enquiry as might be necessary. Instead of giving such finding or basis, the learned Commissioner of Income-tax set aside the order of the Income-tax Officer with the direction to make further enquiry. It was thus opined that unless there is such a finding, the order passed by the learned Commissioner of Income-tax under Section 263 of the Act cannot be sustained.
6. It is in the aforesaid circumstances that an application came to be made by the Department of Revenue whereupon the following question of law has been referred for the opinion of this court :
“Whether, on the facts, and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in setting aside the order under Section 263 of the Income-tax Act, 1961, passed by the Commissioner of Income-tax ?”
7. Heard learned counsel for the parties.
8. The undisputed facts of the present case are that the first application for registration of the respondent firm was filed on March 30, 1972, and the original deed of partnership executed on March 27, 1972, was also filed along with the said application. The assessment year, for which registration was sought, was 1972-73. The corresponding previous year of assessment ended on March 31, 1972.
9. In the deed, the historical background of its execution had been stated in detail, pointing out that the firm was engaged in the business of liquor by taking contracts from Government for vending. It has been granted a vending contract for the financial year 1971-72, i.e. to say, operative with effect from April 1, 1971, to March 31, 1972. It was also stated in the part-
nership deed that the firm consisted of the aforesaid nine persons including Kamal Chand husband of the present ninth partner, Smt. Tulsi Bai, in whose favour the contract for vending liquor was granted and the partnership firm was doing business with effect from April 1, 1971. The said Kamal Chand died on September 27, 1971. All the remaining partners decided to continue with the same firm by inducting the widow of the said deceased partner, Kamal Chand Khatik. All other conditions of partnership have been sustained, as has been agreed to between the partners at the commencement of the partnership business. According to the conditions of the partnership, the partnership shall be at will. In case anything happens to any of the partners, any alteration in the terms of the partnership shall be by majority and shall be binding on other partners. Thus, the partnership deed contained an agreement contrary to Section 42 of the Partnership Act. The relevant portion of the partnership deed,
annexure-A, to the statement of case, is reproduced hereinbelow :
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10. The requirement for registration of a firm, as per Section 184 of the Income-tax Act, is that the partnership is evidenced by an instrument and exact shares of the partners are specified in the said instrument. The application for registration under the Act may be made after constitution of the firm or after its dissolution and that, the application shall be made before the end of the previous year for the assessment year in respect of which registration is sought.
11. It is further required that the application shall be accompanied by the original documents required for the partnership along with the evidence thereto and an additional copy thereof. The learned Commissioner in his order has not questioned that any of these conditions has not been fulfilled by the assessee, required of him while making the application for registration, namely, the firm seeking registration was evidenced by an instrument, the individual share of each of the partners was specified and the application has been made before the end of the previous year relevant to the assessment year in which registration is sought. It was annexed with the original documents evidencing partnership together with copy thereof.
12. Here, pausing for a while, it may also be noticed that the application may be made even after dissolution of the firm and the law permits that in the event a firm is dissolved on account of death of a partner, the application may be signed by all the remaining partners and by the legal representatives of any partner who is deceased. The Income-tax Officer after receipt of the application is enjoined to enquire into the genuineness of the firm and its constitution as specified and if it is found that during the previous year the existing partners also existed and he is satisfied with the
genuineness of the constitution of the firm so specified, he is enjoined to pass an order in writing, registering the firm for the assessment year. The power of the Commissioner of Income-tax under Section 263 of the Act, however, is limited and has two conditions precedent, namely, such power is exercisable only on his being satisfied firstly, that the order sought to be revised is erroneous and, secondly, that because of such erroneousness, the order is prejudicial to the interests of the Revenue.
13. The very fact that the Commissioner is required to make an order after affording an opportunity of hearing to the assessee ingrains in the process the requirement of recording reasons for his conclusion, as is necessary for any quasi-judicial order required to be made by a quasi-judicial authority. It cannot be doubted nor it has been questioned that orders under Section 263 bear the stamp of quasi-judicial nature and require to be supported by reasons for their conclusion. The necessary consequence is that while passing the order revising an order passed by a subordinate officer of the rank of the Income-tax Officer or Assistant Commissioner of Income-tax, the Commissioner must record reasons in support of his conclusion that the order is revised being erroneous and that it would be prejudicial to the interests of the Revenue due to such erroneousness.
14. If the order is tested on the aforesaid anvil, it is apparent that the Commissioner has recorded his satisfaction before issuance of notice to the assessee, that having believed that the order is erroneous and prejudicial to the interests of the Revenue, he issued to the assessee notice for giving an opportunity of hearing but the order is unequivocally silent after notice was given to the assessee and he was heard, to record any finding as a result of such hearing whether the order of the Income-tax Officer holding the firm to be genuine is erroneous in any manner or it is prejudicial to the interests of the Revenue. When no finding has been recorded, it is very difficult to assume that the Commissioner must have arrived at a finding as to the erroneous nature of the order sought to be revised, or if such order is allowed to stand, it would be prejudicial to the interests of the Revenue.
15. The principal premise of the Commissioner was that there is no evidence that there was any contract, contrary to Section 42 of the Partnership Act which provided that in the absence of any contract to the contrary, the partnership will be dissolved on the death of one or more of the partners and hence, after the death of Kamal Chand on September 23, 1971, the firm originally constituted dissolved and could not exist on the date the application was made.
16. On the other hand, the Tribunal from the conduct of the partners of the firm and a wholesome reading of the documents inferred as a fact that there was such a contract to the contrary, So far as the position of law concerning dissolution of partnerships in the context of Section 42 of the Partnership Act is concerned, it is well settled. It is not an issue that arises out of the order of the Tribunal whether on the death of a partner the firm dissolved or not. The common premise is that unless there is a “contract to the contrary” a partnership stands dissolved on the death of any partner as per Section 42 of the Act. Thus, the only question that remained for consideration is whether there was a contract to the contrary or not or, whether there was any evidence of a term to the contrary. The Commissioner was of the view that there is no term in the deed. The Tribunal inferred such a term by conduct of the partners and reading of the deed.
17. The well settled principle for gathering whether there is “any contract to the contrary” can be stated in substance as follows.
18. The contract between the partners may not be express. It may be implied from the conduct of the partners. Continuance of partnership with the heir or heirs of the deceased partner by the remaining original partners may well be evidenced by the conduct of parties through which a contract to the contrary may be inferred. The plea of continued partnership in spite of the invervening death of a partner, the legal representatives of the deceased partner stepping into his shoes sufficiently raises a plea of existence of an agreement between the partners to the effect that the death of a partner shall not cause dissolution of the partnership.
19. The only exception to the rule is that there cannot be a contract to the contrary in a case where the original partnership consisted only of two partners. In such event, the partnership dissolves on the happening of any event envisaged in Section 42 of the Partnership Act. This exception was approved by the Supreme Court in CIT v. Seth Govindram Sugar Mills [1965] 57 ITR 510 ; AIR 1966 SC 24. Approving and quoting the view of the Allahabad High Court in Mt. Sughra v. Babu, AIR 1952 All 506, 507, Agarwala J. neatly stated the principle thus (page 516) :
“In the case of a partnership consisting of only two partners, no partnership remains on the death of one of them and, therefore, it is a contradiction in terms to say that there can be a contract between two partners to the effect that on the death of one of them the partnership will not be dissolved but will continue…. Partnership is not a matter of status, it is a matter of contract. No heir can be said to become a partner with another person without his own consent, express or implied.”
20. Subbha Rao J. said (page 515 of 57 ITR) :
“Section 42(c) of the Partnership Act can appropriately be applied to a partnership where there are more than two partners. If one of them dies, the firm is dissolved ; but if there is a contract to the contrary, the surviving partners will continue the firm.”
21. We are afraid, in his order, the learned Commissioner has not at all looked into the peculiar conditions in the instrument of partnership, which unequivocally recorded in Clauses (1) to (8) of the deed of contract,
to the contrary as envisaged under Section 42 of the Partnership Act. Moreover, the Commissioner has totally ignored the provisions of Section 184 of the Act of 1961 which envisage that an application can be given by even of a dissolved firm. It was not even the finding of the Commissioner that Kamal Chand was not a person in whose name the liquor contract of 1971-72 was granted. What he recorded was that a wrong fact was mentioned and in the earlier contract the name of Smt. Tulsi Devi was not there. In referring to that, the learned Commissioner ignored that the contract was entered into in March, 1971, but obviously, at that time in the letter of grant of contract the name of Smt. Tulsi Devi did not appear for the reason that Kamal Chand was alive and she stepped into his shoes only on the death of Kamal Chand. Therefore, in the letter of grant issued in favour of the firm prior to April 1, 1971, the name of Tulsi Devi could not find place. The consideration was wholly irrelevant. It is not the case of the assessee that Smt. Tulsi Devi was a partner from the inception. There is no link even to draw a reasonable inference that the name of Smt. Tulsi Devi was inducted later on as additional partner and not in the place of Kamal Chand.
22. We are, therefore, of the opinion that in the facts and circumstances of present case, the learned Tribunal was justified in holding that the order dated November 27, 1976, passed by the learned Commissioner under Section 263 of the Act cannot be sustained.
23. Accordingly, we answer the question referred to us in the affirmative, i.e. to say, in favour of the assessee and against the Revenue Department. In the circumstances, no order as to costs.