JUDGMENT
By the Court
This is an application under section 256(2) of the Income Tax Act, 1961, for referring questions of law said to be arising out of Tribunals order in IT No. 802/Jp/1973-74 for the assessment year 1966-67. On there being difference of opinion between the AM and J.M. of the Tribunal about issue whether any question of law arises out of Tribunals appellate order, it was referred to Vice Chairman, who agreeing with the AM held that no question of law arises out of Tribunals appellate order. This resulted in rejection of application under section 256(1) of the Act of 1961.
2. The question of law which were suggested to the Tribunal for making a reference, six in number, are as under:
(i) Whether any enquiry on the application of registration of firm could be made without giving specific notice to the partners.
(ii) Whether any enquiry in the matter of registration of the firm could be made on the basis of a notice given to erstwhile members of the family in connection with their application for an order under section 171.
(iii) Whether a composite enquiry regarding the partition of family and genuineness of the firm from two separate assessees (i.e., HUF and firm) can be made by recording a statement in connection with proceedings under section 171.
(iv) Whether on the facts and circumstances of the case the procedure adopted by the Income Tax Officer in disposing of the applicants application under section 185 was legal, if not whether the proceedings were vitiated on account of the irregularity.
(v) Whether the Income Tax Officer was bound in law to bring to the notice of the applicant firm discrepancies in the statement of erstwhile co-partners; and giving to the firm an opportunity to rebutt; whether by not doing so, the provisions of natural justice were violated so as to make the order under section 185 invalid.
(vi) Whether, on the facts and circumstances of the case the Tribunal was justified in holding that no genuine firm was in existence during the relevant accounting year and thereby rejecting the claim for partition.
3. The facts and circumstances as emanate from the order of the Tribunal, passed in appeal are as under :
A Hindu undivided family (HUF) in the name and style of M/s Nanulal Sunderlal was carrying on business as an HUF firm. In the previous year, relevant to the assessment year 1966-67, one application was moved under section 171 of the Act on behalf of M/s Nanulal Sunderlal, HUF, claiming that there is a partition of HUR The application was moved for recording a finding about the partition of the HUF and to make an order to that effect Another application was moved by the firm M/s Nanulal Sunderlal, claiming to be a registered partnership firm, for seeking registration under the Income Tax Act. The persons who constituted the firm as partners were members of the HUF M/s Nanulal Sunderlal by the same name.
The assessing officer rejected the application under section 171 of the Income Tax Act by holding that no partition of the HUF has taken place. While considering application by the firm for registration, on the premise that partition of HUF has not been recognised by the Income Tax Officer under section 171 he recorded a finding that no firm exit and refused the registration.
On appeal, the learned Appellate Assistant Commissioner disagreed with the finding recorded by the Income Tax Officer and directed the Income Tax Officer to grant the registration to the firm for the year 1966-67 in question.
On further appeal before the Tribunal there was difference of opinion between the A.M. and J.M. on the question of grant of registration to the firm. A.M. agreed with the Income Tax Officer and was for refusal, J.M. held the contrary view. On reference to Vice Chairman he agreed with the view expressed by A.M.
Thus, the order of Appellate Assistant Commissioner was set aside by upholding the order passed by Income Tax Officer for refusing the registration of the firm.
The only ground that prevailed for reaching this conclusion was that since claim for partition of HUF has not been accepted, the firm is not genuine. In view of the majority opinion, the appeal of the revenue stood allowed by the order of 31-5-1976.
Thereafter, the applicant moved a petition under section 256(1) of the Income Tax Act and required the Tribunal to refer the aforesaid questions to this court for its opinion along with statement of case, Again there was a difference of opinion between the A.M. and J.M. about the conclusion whether a question of law arise out of its appellate order. On being referred to the third member, he agreed with the A.M. that the Tribunal has rightly decided the issue that registration has rightly been refused by the Income Tax Officer, and refused to refer the case and rejected the application.
4. Having heard learned counsel for the parties, we are of the opinion that the order of the Tribunal refusing to make a reference was erroneous inasmuch as in our opinion on the facts stated above questions of law do arise out of the Tribunals order which were required to be referred to this Court.
5. It is well settled that the Tribunal or for that matter this court while considering an application filed under section 256(1) or section 256(2), as the case may be, cannot decide the application by answering the question itself. It is axiomatic for the Tribunal to say that it has rightly decided the case. There is always a presumption that any Tribunal decides proceeding before it in a manner which it considers right. It is not required to be reasserted while considering an application under section 256(1) of the Act. Enquiry in an application under section 256 is not whether the order of Tribunal is erroneous. But the enquiry is whether the facts and circumstances found by it, give rise to a question of law or a mixed question of law and fact, as distinct from question of fact.
6. Under Income Tax Act, an HUF and a firm are two distinct assessable entities. HUF is a status arising out of existing bonds between the members of a Hindu family who are joint in living. Holding of joint property is not an essential requirement of an HUF to exist. However, if any property is held by HUF, its incidence are governed by principles of Hindu law, while formation of HUF is not by agreement or contract and it disrupts on partition of joint property or on severence of joint status as result of voluntary act of members of the family who have right to claim partition. On the other hand, a firm owes its existence only through an agreement between the contracting parties to carry on business, by acting one for all and all for one, on principle of agency. The question, therefore, do arise whether, a factum member of partition of HUF, can have a bearing on existence of an agreement between members of the family as individuals to carry on business as a partnership firm and this enquiry is not an enquiry fact whether an agreement to form a firm exist or not may be a question of fact, but whether partition of joint family property has any relevancy for formation of partnership firm is not a question of fact, but question of law as to what is necessary for formation of a firm. The Tribunal while rejecting the application under section 256(1) has clearly erred in not perceiving this controversy arising from its appellate-order.
However, we are of the opinion that the question of law suggested by the assessee requires to be reframed as under :
1. Whether in the facts and circumstances the Tribunal was justified in not considering the claim of firm for registration solely on the ground that claim to partition by members of an HUF existing by the same name, in an application under section 171 by the HUF has been rejected.
2. Whether in the facts and circumstances of the case while considering the application for registration of the firm and the genuineness of firm, any material and the finding reached in the proceedings under section 171 of the Income Tax Act in the case of HUF, different assessable entity, can automatically be brought into consideration without examining the question of existence of the applicant firm on the basis of requirement of section 185 of the Income Tax Act at all ?
Accordingly the application is allowed. We direct the Tribunal, Jaipur Bench, Jaipur to draw a statement of case and refer the aforesaid two questions of law for the opinion of this court which in our opinion arise out of its appellate order stated above.
There is no order as to costs.