1. At the instance of the assessee, the Income-tax Appellate Tribunal has referred the following question of law to this court for its opinion under Section 256(1) of the Income-tax Act :
'Whether, on the facts and in the circumstances of the case, the order of the Income-tax Appellate Tribunal refusing to grant registration to the firm is valid in law ?'
2. The material facts are as follows ;
The periods under reference are assessment years 1976-77 to 1978-79. Choudhary Kirana Bhandar, Darbhanga, was assessed as a firm consisting of two partners, namely, Hanuman Prasad Choudhary and Murlidhar Choudhary, up to the assessment year 1975-76. On June 30, 1975, Murlidhar Choudhary retired from the business leading to dissolution of the firm. A new partnership allegedly came into existence between Hanuman Prasad Choudhary and Smt. Indu Devi in the name and style
of Choudhary Kirana Bhandar. The returns were filed in the name of the said firm for the assessment years in question along with application for registration of the firm. The Income-tax Officer found that Smt. Indu Devi had neither rendered any service to the partnership nor had contributed any capital ; the alleged capital of Rs. 1,001 shown in her account had been finally surrendered and offered for taxation as income in the hands of the alleged firm, Choudhary Kirana Bhandar. In these premises, the Income-tax Officer rejected the application for registration and made assessment in the status of an association of persons. Aggrieved by the order rejecting the application for registration, the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that as there was a duly executed deed of partnership and the profits had been divided between the partners in accordance with the stipulations in the deed, there was no justification to reject the prayer for registration. He observed in this connection that even if one of the partners was a sleeping partner, the firm was still entitled to the benefit of registration. The fact that the alleged capital of Rs. 1,001 in the account of Smt. Indu Devi had been offered for assessment as income in the hands of the firm was inconsequential and did not adversely affect the genuineness of the firm. The Department took the matter to the Income-tax Appellate Tribunal. The Tribunal agreed with the views of the Income-tax Officer and accordingly reversed the order of the Appellate Assistant Commissioner. It held that in order to avail of the benefits of registration as firm, the assessee has to satisfy the Assessing Officer that the instrument of partnership had been given effect to ; that the agreement was bona fide and not mere pretence with a view to avoid proper taxation.
3. Mr. Pawan Kumar, learned counsel for the assessee, has assailed the correctness of the findings of the Tribunal. According to him, contribution of capital money by every partner is not the requirement of law. It is enough if there is an agreement between two or more persons and the business is carried on by some on behalf of all and the profit is shared between them. According to counsel, once the agreement is produced before the Assessing Officer the onus shifts to the Department to prove that the partnership firm was not genuine. He has placed reliance on K. D. Kamath and Co. v. CIT : [1971]82ITR680(SC) ; Himalaya Engineering Co. v. CIT : [1965]57ITR762(Patna) ; Virendra Kumar Avinash Kumar v. CIT : [1988]171ITR263(All) and United Patel Construction Co. v. CIT : [1966]59ITR424(MP) .
4. The term 'partnership' in the Income-tax Act is used in the same sense as under the Indian Partnership Act. Section 4 of the Partnership Act defines 'partnership' to be a relationship 'between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.' There is no dispute that the income-tax rates being favourable to the firm compared to 'association of persons' or 'individuals', the Assessing Officer is entitled to see whether the claim as to partnership is genuine or the same is a mere pretence to avoid proper taxation. The Income-tax Officer was, therefore, entitled to enquire into the genuineness of the claim. The Tribunal considering this aspect of the matter has held that the capital shown to have been contributed by Smt. Indu Devi, on admission, was found to be the money of the firm itself. The partnership contained stipulation but from the circumstances it appeared that the same had not been given effect to. The Tribunal in this connection has further held that there was no introduction of capital by Smt. Indu Devi and consequently the interest at the rate of nine per cent, shown to have been paid to her was not on account of any contribution of capital by her but on the income of the assessee (firm) itself which had been offered for assessment as part of its total income.
5. The question as to whether the claim as to partnership is genuine or not and the firm does in fact exist, primarily, is a question of fact. According to counsel for the assessee, however, where a finding of fact is recorded on a wrong interpretation of law it becomes a question of law within the scope of Section 256 of the Income-tax Act. It is, thus, to be seen whether the finding of fact referred to above is based on an erroneous interpretation of any law. As noticed above, the Income-tax Officer had come to the conclusion that the money shown to have been contributed by Smt. Indu Devi, on admission, was found to be the money of the firm itself. Interest at the rate of nine per cent, which had allegedly been paid to Smt. Indu Devi on the so called contribution made by her was found to be part of the total income of the firm itself which had been offered for assessment. It was on these basic findings that the ultimate finding as to the genuineness of the claim was recorded.
6. It is true that actual participation in the affairs of the partnership by all the partners is not necessary. But where a specific case is pleaded as to participation by contributing capital money or otherwise, which on enquiry is found to be false, it is not possible to ignore the finding and consider the matter on a clean slate. In the instant case, the further finding is that the partnership deed was not given effect to, that is, it was a paper
transaction. Having regard to the nature of the findings of fact recorded by the Tribunal in agreement with the findings of the Income-tax Officer, we do not find any substance in the criticism of counsel that the same is based on a wrong interpretation of law, There is no substance in the submission as to onus. If the assessee wants to take some advantage on the basis of its alleged status as firm, the onus of proof shall always rest on it to show that the firm does exist in fact and the claim is not a pretence to avoid proper taxation.
7. Mr. Pawan Kumar submitted that the Tribunal was not justified in assigning additional reasons. We do not find any substance in this submission either, The so-called additional reasons emanated from the same evidence which was already on record. What the Tribunal did was to confirm the conclusion of the Income tax Officer by supplying additional reasons on the basis of the same materials and evidence. In the circumstances, the assessee cannot complain of any prejudice.
8. The decisions cited by counsel are distinguishable and in the facts of the present case we do not think it necessary to refer to each of them to point out the distinction. In our opinion, the matter in hand is concluded by findings of fact.
9. In the result, we answer the question in the affirmative, i.e., in favour of the Revenue and against the assessee. There will be no order as to costs.