JUDGMENT
1. In this case one Gopal Swarup was assessed in the status of a Hindu undivided family for the assessment year 1949-50. For the assessment year 1950-51 a claim was made before the Income-tax Officer that the contract business with the Public Works Department was no longer carried on by the Hindu undivided family but was run by a partnership concern of which the partners were (1) Rajrani — 4 annas share, (2) Gobind Swarup — 4 annas share, (3) Jagmohan Swarup –15) annas share and (4) Tara Bai wife of Gobind Swarup — 3 annas share. In support of the claim an agreement dated 30-3-1949, was produced Paragraph 3 of this document is to the following effect:
“x x x x x
(iii) That the contract business standing in the
name of party No. 1, will, from the commencement
of the next financial year, i. e., from 1-4-1949, be
owned by the following members of the family in
partnership according to the shares specified against
their names and the capital of the business will,
therefore, be allotted among them according to
their shares in the books of the business on the
1st April, 1949.
Sm. Rajrani wife of Sri GopalSwarup
….
4 annas.
Sri Cobind Swarup (2nd party)
….
4 annas.
Sri Jagmohan Swarup (3rd party)
….
5 annas.
Sm. Tarabai, wife of Sri Gobind Swarup
….
3 annas.
16 annas.
(iv) Earnest money and security deposits lying with the Public Works Department, Province of Bihar, in connection with the contract business, will also be shared by the partners as and when received.
(v) That the partnership will not be dissolved without the written consent of all the partners.
(vi) That in case of death of any partner, the partnership will continue among the surviving partners and the heir of the deceased partner.
(vii) That the profits or loss of the contract business will be shared or borne by the partners named in para (iii) above in accordance with their shares, but they will be entitled to draw from the business for their personal expenses every month, subject to the following limits and the same will be adjusted at the end of every financial year against the profit in the personal accounts of the individual partners against their shares:
Rs.
(a)
Sm. Rajrani
100 a month
(b)
Sri Gobind Swaroop
200 a month
(c)
Sri Jagmohan Swaroop
100 a month
(d)
Sm. Tarabai
100 a month.”
The document was signed by Gopal Sarup, Gobind Swarup, Jagmohan Swarup, Rajrani and Tarabai. The Appellate Tribunal by its order dated 23-6-1955, held that the document of 30-3-1949, was a deed of family arrangement and not a deed of partnership and that no firm had been duly constituted by a proper document of partnership and so the application for registration of the partnership under Section 26A must be rejected.
2. At the instance of the assessee the appellate Tribunal has stated the following question of law for the determination of the High Court:
“Whether in the facts and circumstances of this case the petitioner firm is entitled to be registered on the basis of the document, dated 30-3-1949, under Section 26A of the Income-tax Act.”
3. On behalf of the assessee learned counsel submitted that the Tribunal was wrong in holding that there was no document of partnership of which registration could be granted under Section 26A of the Income-tax Act. In our opinion, the argument of learned Counsel is well founded and must be accepted as correct. The view taken by the Tribunal was that there was no instrument of partnership in the case on the basis of which the assessee could apply for registration, and the deed on which reliance was placed was a deed of family arrangement and not a deed of partnership. It was also stated by the Tribunal that the parties to the deed were not the partners of the alleged firm in question. But the document has been signed by all the four partners, namely, Rajrani, Gobind Swarup, Jagamohan Swamp and Tara Bai.
It has also been signed by Gopal Swarup. It is manifest, therefore, that the view taken by the Tribunal that the partners did not execute the document is an erroneous view. The document of 30-3-1949, has been executed by all the partners and, in our opinion, there is a valid instrument of partnership on the basis of which the assessee had applied for registration under Section 26A of the Income-tax Act. It is true that in the preamble of the document the parties mentioned are Gopal Swarup Gobind Swamp and Jagmohan Swarup but as we have already shown, the document has been signed by all the four partners who have been taken into the partnership and these partners have executed the document of partnership and so there is a valid partnership within the meaning of Section 26A of the Income-tax Act.
4. It was then submitted by the learned Standing Counsel that even though there was a valid document of partnership the assessee could not claim registration under Section 26A unless there is material to show that the partnership had been acted upon. The material portion of the order of the appellate Tribunal on this point is quoted below:
“Further the contract business was acquired by Govind Swarup, the Karta of the Hindu undivided family and run as a business of the Hindu undivided family under the name and style of Messrs. Gopal Swamp and sons. The very same name was retained even after the coming into existence of the alleged partnership. No evidence has been led in to show that anything was done which would indicate the change that was alleged to have come in the ownership of the business. Even the Bank account continued to be in the name of Gopal Swarup and sons and receipts from the P. W. D. in respect of the contract business were continued to be credited to his account. No evidence has been placed before us that there was even an intimation to the P. W. D. about the change in status pleaded now. In the circumstances, we see no reason to differ from the Income-tax authorities in their finding that no genuine firm had actually come into existence.”
On behalf of the Assessee Mr. S. N. Dutta pointed out that the Tribunal was wrong in saying that no evidence was led to show that anything was done which would indicate the change that had come in the ownership of the business. This part of the reasoning of the Tribunal is wrong because paragraph 5 of the statement of the case shows that the current account with the Allahabad Bank Limited was closed on 29-3-1949, and a new account was opened in the name of Gopal Swarup and sons on 18-4-1949.
It also appears from the statement of the case that entries were made in the account books of the partnership, dividing the capital and crediting Rajrani with Rs. 7,000/-, Gobind Swarup with Rs. 7000/-, Jagmohan Swarup with Rs. 8,750/- and Tarabai with Rs. 5,250/- on 1-4-1949. The relevant ledger is printed as exhibit A (1) on page 3 of the paper book. These entries undoubtedly support the argument advanced on behalf of the assessee that the partnership was acted upon and there was a division of the assets of the business in the books of the partnership from 1-1-1949.
In our opinion, the finding of the Appellate Tribunal on this point is vitiated by an error of law, as it has not taken into account these entries in the account books of the partnership as on 1-4-1949. In this connection we should refer to the decision of this High Court in Bhimraj Bansidhar v. Commr. of Income-tax, B. and O., 1954-24 ITR 185: ((S) AIR 1955 Pat 172), where it was pointed out that the only method by which a business can be divided as a going concern is by dividing the book balances in the names of persons to whom the shares of the business have been allotted and it is not necessary that there should be a physical division of the assets of the business.
We should also refer to another case, Ramlal Murlidhar v. Commissioner of Income-tax, Bengal, 5 ITC 150: (AIR 1931 Cal 682), where it was pointed out by the Full Bench of the Calcutta High Court that Section 2 (14) of the Act and the Rules thereunder do not imply that a complete instrument only is valid for registration, that is, an instrument not requiring supplementation by other evidence but solely operating and containing in itself the complete agreement constituting the partnership.
In that case a deed of instrument of partnership was signed by three persons who executed a document stating that they together with the mother of one of them were carrying on a business in partnership and agreed that the partnership business should continue, the profits or loss be divided in certain shares, the lady to bave one-twentieth share. An application for registering this partnership was made under Section 2 (14) of the Income-tax Act, but ft was refused by the authorities on the ground that the instrument not having been executed by the lady was not one contemplated under that section. This view of the Income-tax authorities was not accepted by the Calcutta High Court and it was held that as the instrument had been assented to by the lady and had been put forward by her along with the other partners for registration, it was admissible for being registered under Section 2 (14) of the Income-tax Act.
5. In our opinion, the view taken by the Income-tax Appellate Tribunal in this case is erroneous and we bold that in the facts and circumstances of this case the assessee firm is entitled to be registered on the basis of the document dated 50-3-1949, under Section 26A 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 Income-tax Department must pay the cost of this reference. Hearing fee Rs. 250/-.