BHARGAVA, J. - This is a reference made under section 66 (1) of the Income-tax Act (hereinafter called the Act) by the Income-tax Appellate Tribunal Bombay, Allahabad Bench. The facts as given in the statement of the case are as follows :
The assessee, Pt. Deo Sharma (hereinafter referred to as the assessee), was treated for the purpose of assessment as an individual until December 31, 1945. He was a four-annas partner in the firm, L. N. Gadodia & Co., the sole agent of the Kanpur Cotton Mills. This partnership firm was dissolved as its sole agency with Kanpur Cotton Mills terminated and from January 1, 1946, Sharma & Co. became the sole selling agent. For the accounting year ending with May 2, 1946, the assessee was assessed to an income of Rs. 84,135 made up from the following sources :
Rs. 14,223
Income from Kanpur Cotton Mills retail shop from November 4, 1945, to December 31, 1945.
Rs. 24,233
Income from Kanpur Cotton Mills retail shop from January 1, 1946, to June 2, 1946.
Rs. 6,146
Share income from Gadodia & Co.
Rs. 38,533
Share income from Sharma & Co.
Rs. 84,135
Total.
It is in respect of Rs. 38,533 that the assessee objected. One Sheo Nath Sharma and the assessee are brothers. The assessees case was that he was not a partner in Sharma & Co. which was started on January 1, 1946, for carrying on the sole agency business of the cotton mills and that the partners were Sheonath Sharma and Smt. Chandan Devi, the wife of the assessee, in equal shares. A partnership deed was executed between Sheonath Sharma and Smt. Chandan Devi aforesaid on March 16, 1946. Sharma & Co. applied for being registered under section 26A of the Act. This application was rejected by the Income-tax Officer on the finding that the alleged partnership between Sheonath Sharma and Smt. Chandan Devi was not genuine and the real partners were the assessee and Sheonath Sharma. The Department acting under section 23 (5) (b) read with section 23 (5) (a) of the Act determined the income of the assessee from Sharma & Co. to be Rs. 38,533 and this amount was included in his individual assessment as shown above. An appeal was filed by Sharma & Co. before the Tribunal against the order of the Income-tax Officer refusing to register that firm under section 26A of the Act. The assessee also filed an appeal before the Tribunal in respect of the inclusion of the sum of Rs. 38,533 as income from Sharma and Co. in his individual assessment. The appeal against the order of the Income-tax Officer user section 26A of the Act was dismissed on August 29, 1950, and the one filed by the assessee against the inclusion of the sum of Rs. 38,533 in his individual assessment was dismissed by the Tribunal on August 31, 1950. Before the Tribunal the assessee had made two submissions in the appeal filed against his individual assessment. His first submission was that he was not a partner in the business of Sharma and Co. but was only its employee on a monthly salary of Rs. 2,000, and the second one was that he was not given any opportunity to contest the finding of the Department that he was in fact the partner in the firm, Sharma & Co. The Tribunal rejected both the submissions. The second submission of the assessee was rejected by the Tribunal on the basis of the second proviso to section 30 (1) of the Act and on the finding that the assessee was not competent to raise this objection in the appeal against his individual assessment. The Tribunal also held that under the second proviso to section 30 (1) of the Act if there is any dispute regarding the partners or allocation of the profits it is only the firm which can appeal against it and that matter cannot be agitated in the personal assessment of the partners. It is the admitted case of both the parties that no notice was issued to the assessee calling upon him to show cause as to why he should not be treated as a partner in the firm, Sharma & Co.
An application was, therefore, made to the Tribunal under section 66 (1) of the Act and the Tribunal referred the following question to this court :
'Whether in the circumstances and one the facts stated above the second proviso to section 30 (1) of the Income-tax Act is applicable to this case the assessee is not entitled to contest the finding of the Department in the assessment of Sharma & Co. ?'
In deciding the question referred, the first point to be kept in view is that the words 'firm', 'partner' and 'partnership' are defined in section 2 (6B) of the Income-tax Act as having the same meanings respectively as in the Indian Partnership Act, 1932. The partnership firm, Sharma & Co., was registered under the Indian Partnership Act. No doubt its registration under section 26A of the Income-tax Act was refused on the ground that the real partner was not Srimati Chandan Devi but in fact the assessee, Deo Sharma, the other partner being Sheo Nath Sharma. This may have been a sufficient ground for refusing registration of the firm for purposes of the Income-tax Act under section 26A 26A of that Act but the registration of the firm under the Indian Partnership Act has not been set aside.
The deed of partnership also recited that the partner were Sheo Nath Sharma and Srimati Chandan Devi and made no mention of Deo Sharma. For purposes of the Partnership Act, therefore, the person to be recognised as partner was Srimati Chandan Devi and not Deo Sharma. It has also to be kept in view that, after the registration of the firm had been refused under section 26A, assessment of the income of Sharma & Co. was still made on the basis that it was a firm though the firm was not registered under section 26A. In that assessment, persons, who were partners of the firm, Sharma & Co., had to be determined in the light of provisions of the Indian Partnership Act and, for purposes of that Act, the partner was Srimati Chandan Devi as has already been mentioned above. Even if she be a benami partner, as was held by the Tribunal in the appeals arising out of proceedings for registration under section 26A and out of proceedings for assessment to the firm, it would only mean that, after income came into her hands as a partner, it would be assessed to income-tax in the hands of the real owner of the income, viz., Deo Sharma. That finding would not constitute Deo Sharma as a partner for purposes of the Partnership Act itself. When, therefore, the income of the firm, Sharma & Co., which was not registered under section 26A was assessed in accordance with the provisions of section 23 (5) of the Income-tax Act, the allocation of income could be made only between Srimati Chandan Devi and Sheo Nath Sharma. Under the order of assessment, allocation of the income was also in fact made first between Srimati Chandan Devi and Sheo Nath Sharma but thereafter an order was recorded holding that the income of Srimati Chandan Devi will be assessed as income of Deo Sharma who was the real partner and for whom Srimati Chandan Devi appeared as a benami partner. It appears that this last part of the order made in those assessment proceedings was beyond the scope of the powers conferred by section 23 (5). under that provision of law, allocation of income has to be made between partners and then income allocated to each partner has to be taken into account in the assessment of that partner. In the present case, after allocation was made between Sheo Nath Sharma and Srimati Chandan Devi, the income allotted to the share of each had to be considered in the individual assessment of each of them and it could only be appropriate at that stage that the Income-tax Officer could come to the finding that the income allocated to the share of Srimati Chandan Devi will not be assessed in her hands and will be assessed in the hands of Deo Sharma who was the real owner of that income which was earned. The effect of this view could be given by not assessing the income in the hands of Srimati Chandan Devi but adding the income to the other income of the real owner, Deo Sharma. If this course was adopted and this was the proper course that should have been adopted Deo Sharma would undoubtedly have had an opportunity to show that the income was really of Srimati Chandan Devi and not his income, so that it should be assessed in the hands of Chandan Devi and not in his hands. Deo Sharma not being himself a partner of the firm, Sharma & Co., in accordance with the provisions of the Indian Partnership Act, the allocation of income between Sheo Nath Sharma and Srimati Chandan Devi would not be binding on him and the provisions of the provisions of the proviso to section 30 (1) would not apply. The principle that a person when entering into a partnership for purposes of the Indian Partnership Act must be treated as having joined in his individual capacity though, for purposes of income-tax, the income received by him from the partnership can be taxed as income of the real owner, was laid down by this court in the case of Ram Kumar Ramniwas of Nanpara, In re. This was a where the question arose whether when a karta of an undivided Hindu family joined a partnership with the aid of funds of the Hindu undivided family, that family became a partner in the firm constituted or whether the karta remained the partner, it was held that, for purposes of the Partnership Act, the karta must be deemed to be the partner though the income received by him as partner of the firm may be assessed in the hands of the Hindu undivided family. The Hindu undivided family did not become a partner merely because the person entering into the partnership with the funds of the family so as to earn income for its benefit. On the same principle, in the present case, it must be held that the partner in the firm was Srimati Chandan Devi for purposes of the Indian Partnership Act even though the income received by her could be taxed in the hands of Deo Sharma on the finding that the income really belonged to him and not Srimati Chandan Devi. The order of allocation of the share of income under section 23 (5) in the proceedings for assessment of the firm should, therefore, have stopped at the stage of allocating the income between Srimati Chandan Devi and Sheo Nath Sharma and the further order passed in those very proceedings that the income allocated to the share of Srimati Chandan Devi would be added to the income of Deo Sharma in his personal assessment was beyond the jurisdiction exercisable in those proceedings. That order being beyond jurisdiction, it cannot attract the provisions of the proviso to section 30 (1) and bar Deo Sharma from raising the defence that the income is not to be taxed in his hands.
In this connection, notice may also be taken of the fact that Deo Sharma was given no notice and no opportunity at any stage in the proceedings for registration of the firm under section 26A or in the proceedings for assessment of the firm under section 23 (5) to appear and show that he was not the real partner of the firm. Notices were always issued to the firm and the firm, under the deed of partnership, consisted only to Sheo Nath Sharma and Srimati Chandan Devi, who only, therefore, could be deemed to have received proper notice of those proceedings. It appears to be very unfair that a finding should be recorded holding Deo Sharma to be very unfair that a finding should be recorded holding Deo Sharma to be a partner of the firm when he does not appear as such in the deed of partnership without giving him any opportunity to put forward his case and then to bar him from raising the defence that the income should not be taxed in his own personal assessment on the basis of the proviso to section 30 (1). It is true that, in this particular case, Srimati Chandan Devi happened to be the wife of the assessee, Deo Sharma, but that relationship by itself cannot take away the right of Deo Sharma to be heard and to be proceeded against in accordance with the principle applicable to such cases.
In this connection, it has to be kept in view that the very fact that the income of Sharma & Co. was actually assessed under section 23 (5) itself means that the existence of this firm as a firm was recognised because, under that provision of law, only a firm can be assessed. If that provision of law is applied, there must be in existence a firm as defined in the Income-tax Act, which means a firm constituted under the Indian Partnership Act and once it was held that Sharma & Co. did exist as a firm constituted under the Partnership Act, the only persons who could be treated as partners were those who were partners for purposes of the Indian Partnership Act. Deo Sharma, who was not a partner for purposes of the Partnership Act, could not, therefore, be treated as a partner and the orders passed in the proceedings for assessment of the firm could not be binding on him so as to shut out his right to claim that the provisions of the proviso to section 30 (1).
In this connection, notice may also be taken of the proper course that could have been adopted by the Income-tax Department in the proceedings for assessment of the firm if the finding really was that the firm, Sharma & Co. constituted under the partnership deed with Sheo Nath Sharma and Srimati Chandan Devi as partners, was not a genuine firm. If it was not a genuine firm at all, there could be no assessment of the income of Sharma & Co. as a firm and the provisions of section 23 (5) could not have been applied at all. In such a case Sharma & Co. should have been treated as an association of persons and assessment could have been made on that basis. In that case, the income could have been either assessed in the hands of the association itself after giving notice to the proper person authorised to receive notice on behalf of the association or, in the alternative, assessment could have been made of the tax on the income of that association on the individual members of the association. If assessment had been made on the individual members of the association, the income now sought to be taxed in the hands of Deo Sharma would have been taxed in his hands after notice to him personally. The Department, on the other hand, proceeded on his basis that assessment was permissible under section 23 (5) of the Income-tax Act which means that the existence of a genuine firm was accepted. Once the existence of a genuine firm was accepted, the partners of that firm had to be determined only with reference to the deed of partnership and, consequently, in the assessment of the firm, the allocation of income had to be only between Sheo Nath Sharma and Srimati Chandan Devi who were partners under the deed of partnership. Thereafter, the income allocated to the share of Srimati Chandan Devi could be assessed in the hands of Deo Sharma on the principle indicated above by adding it to the income of Deo Sharma and, in that case, clearly, Deo Sharma not having been a partner, could not be stopped from challenging the assessment of the income in his hands because of the proviso to section 30 (1) of the Income-tax Act.
The question referred to us is, therefore, answered in the negative. The assessee will be entitled to the costs of the reference which we fix at Rs. 200 and the same shall be the amount to be computed as fee of learned counsel for the Department.
Question answered in the negative.