Reg. application declined by ITO as firm belonged to 1 partner only, right, SC

1.  One ‘B’, father of ‘C’, started a firm to work as principal agents for a number of insurance companies. In that firm, in addition to ‘B’ and ‘C’, one ‘N’, was also a partner. 

2.  B’ died in 1948, and the two surviving partners continued as the firm. ‘N’ died in 1949. There after the firm consisted of ‘C’ and his wife but the business of the firm was treated as the sole business of ‘C’ because the income of the wife would, in any event, have been included in the income of ‘C’ under section 16(3) of the 1922 Act. 

3.  C’ realizing that the business of principal agents was to come to an end after the expiry of seven years, looked for other sources of employment and accepted a job as assistant manager of the insurance company. 

4.  He withdrew from the firm, and the old firm was reconstituted, consisted of three partners ‘M’, mother of ‘C’, ‘P’, ‘K’, and two minors sons of ‘C’ were also admitted to benefits of the firm.

5.  For the assessment year, an application for the registration of this new firm was made under section 26A of the 1922 Act. 

6.  The ITO by his order declined registration, holding that the firm belonged solely to ‘C’, and that there was only a pretence of a firm. On appeal to the AAC, the registration of the firm was ordered. 

7.  On appeal, Tribunal set it aside, holding that ‘M’ and the two minor sons were not the real partners of the new firm, but that the partnership consisted of ‘C’ and two others. 

8.  The Tribunal, however, in spite of this finding, restored the order of the ITO. The reference application to Tribunal as also to the High Court were rejected.

On appeal to Supreme Court held as under:

9.  Regarding the first finding of the Tribunal, it could be said that there was material on which the finding could be based. If ‘C’ withdrew from the business, his wife would be left as the sole proprietor. No mention of her interest whatever was made in the subsequent deed, and she seemed to have disappeared completely. 

10.  On the termination of the old firm and the setting up of the new firm, one would expect some adjustment entries in the books of account, and these were singularly lacking. One would also expect a communication by the new agents to the various insurance companies in writing about the change of principal agents and an appointment letter in the name of the new firm by them. 

11.  The bank accounts would have been transferred to the new partnership firm, and the power-of-attorney in favour of ‘P’ and ‘K’ would have been cancelled and the new firm would have been authorised to deal with the accounts. Without any such action, the decision of the Tribunal, that the firm which asked for registration was not a real firm, could not be said to be founded on no material.

12.  The Tribunal was trying to unravel the motive for the formation of the new firm with an old lady and two minor sons in place of ‘C’, and what was observed by the Tribunal was in connection with the motive which suggested itself to it, and was not based on any material.

13.  Even if the Tribunal mentioned those suspicions, they had not entered into the solution of the problem before it. Suspicions and surmises were best avoided ; but in the instant case, the order of the Tribunal proceeded on such solid facts that the speculation about the motive of ‘C’ did not make any material difference to the finding reached, though Court could not help saying that the Tribunal would have been well-advised to leave speculation out altogether. 

14.  In the result the appeal failed and was to be dismissed.