Cit Vs. Jai Mewar Wine Contractors - Court Judgment

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counsels: sandeep bhandawat, for the revenue rajendra mehta, a.k rajvanshy & vineet kothari, for the assessee in the rajasthan high court rajesh balia & khem chand sharma, jj. - - 11 on 30-3-1972, for registration of the firm along with partnership deed dated 27-3-1972. the income tax officer was satisfied about genuineness of details furnished in the form and therefore, by order, dated 30-11-1974, granted certificate of registration to the firm. the commissioner, however, while exercising its revisional powers under section 263 of the income tax act by his order, dated 27-11-1976, held that the assessee failed to show that there was any contract or agreement according to which the firm could continue even on death of a partner. the income tax officer after receipt of the application is enjoined to enquire into genuineness of the firm and its constitution as specified and if it is found that during previous year existing partners also existed and he is satisfied with the genuineness of the constitution of the firm so specified, he is enjoined to pass an order in writing, registering the firm for the assessment year. the power of commissioner under section 263 of the act, however, is limited and has two conditions precedent, namely, such power is exercisable only on his being satisfied firstly, that the order sought to be revised is erronous and secondly, that because of such erroneousness, order is prejudicial to the interests of the revenue .8. the very fact that commissioner is required to make an order after affording an opportunity of hearing to the assessee ingrains in the process the requirement of recording reasons for its conclusion, as is necessary for any quasi judicial order required to be made by a quasi judicial authority. so far as position of law concerning dissolution of partnership in the context of section 42 of the partnership act is well settled. 11. the well settled principle for gathering whether there is any contract to the contrary can be stated in substance as follow. continuance of partnership with the heir or heirs of the deceased partner by the remaining original partners may well evidence the conduct of parties through which a contract to the contrary may be inferred.rajesh balia, j.a question of law has been referred to this court at the instance of revenue by tribunal, jaipur bench, jaipur, arising out of its order, dated 8-8-1978, in ita no. 982/jp/1976-77 for assessment year 1972-73.2. the facts as stated in the statement of case are that assessee m/s jai mewar wine contractors, udaipur, was a firm consisting of 9 partners, namely, birbal khan, shiv narain, sohan lal s/o hira lal, both lal, badru khan, narendra kumar, jagdish lal, sohan lal s/o mohan lal and kamal chand.before commencement of assessment year 1972-73 with effect from 1-4-1972, the assessee filed an application in form no. 11 on 30-3-1972, for registration of the firm along with partnership deed dated 27-3-1972. the income tax officer was satisfied about genuineness of details furnished in the form and therefore, by order, dated 30-11-1974, granted certificate of registration to the firm.in the partnership deed, dated 27-3-1972, it was stated that the firm has commenced its business with effect from 1-4-1971, with aforesaid 9 partners. out of 9 partners, kamal chand died on 25-9-1971, and in his place, his wife and legal heir smt. tulsi bai was inducted as partner to the firm. in the deed of partnership, partners share in profit was defined against name of each in terms of percentage. the commissioner, however, while exercising its revisional powers under section 263 of the income tax act by his order, dated 27-11-1976, held that the assessee failed to show that there was any contract or agreement according to which the firm could continue even on death of a partner. accordingly, he set aside the order, dated 30-11-1974, passed by the income tax officer and directed him to pass another order, afresh, in accordance with law, after making necessary inquiry regarding genuineness and validity of the firm.3. aggrieved with the order of commissioner dated 27-11-1976, assessee preferred an appeal before the tribunal, which came to be allowed by it, holding that order of the commissioner could not be sustained in law, particularly when the income tax officer gave clear finding that details furnished in the form were correct and, after considering all facts and genuineness of the firm, the income tax officer granted certificate of registration. the tribunal found that learned commissioner gave no finding as to how the order passed by the income tax officer was erroneous insofar as it is prejudicial to the interests of the revenue . as a matter of fact, on the facts of the present case and after hearing the parties, it was necessary for the learned commissioner to state in what manner he considered the order of income tax officer was erroneous and prejudicial to interests of the revenue and what basis was for such a conclusion. after indicating his reasons for such a conclusion, it would certainly have been open for him to remand the matter to the income tax officer for such other investigation or enquiry as might be necessary. instead of giving such finding or basis, learned commissioner set aside the order of income tax officer with the direction to make further enquiry. it was thus opined that unless there is such a finding, the order passed by the learned commissioner under section 263 of the act cannot be sustained.it is in aforesaid circumstances that an application came to be made by the department of revenue whereupon following question of law has been referred for opinion of this court'whether, on the facts, and in the circumstances of the case, the tribunal was justified in setting aside the order under section 263 of the income tax act, 1961, passed by the commissioner ?'4. heard learned counsel for the parties.5. the undisputed facts of the present case are that first application for registration of the respondent-firm was filed on 30-3-1972, and original deed of partnership executed on 27-3-1972, was also filed along with said application. the assessment year, for which registration was sought, was 1972-73. the corresponding previous year of assessment ended on 31-3-1972.in the deed, historical background of its execution had been stated in detail, pointing out that the firm was engaged in the business of liquor by taking contracts from government for vending. it has been granted a vending contract for the financial year 1971-72 i.e., to say, operative with effect from 1-4-1971, to 31-3-1972. it was also stated in the partnership deed that the firm consisted of aforesaid 9 persons including kamal chand husband of present 9th partner smt. tulsi bai, in whose favour the contract for vending liquor was granted and the partnership firm was doing business with effect from 1-4-1971. said kamal chand died on 27-9-1971. all the remaining partners decided to continue with the same firm by inducting widow of said deceased partner kamal chand khatik. all other conditions of partnership have been sustained, as has been agreed to between the partners at the commencement of partnership business. according to conditions of partnership, partnership shall be at will. in case anything happens to any of the partners, any alteration in the terms of partnership shall be by majority and shall be binding on other partners. thus, the partnership deed consisted an agreement contrary to section 42 of the partnership act. the relevant portion of partnership deed, annexure a to the statement of case, is reproduced hereinbelow :^^tks fd jh deypan [kvhd dk nsgkur fnukad 23&9&1971 dks gks pqdk fkk a vksj vu; mijksdr vkb gh i{kdkjk us ;g r; fd;k fd /ka/kk tslk gs oslk gh pyrk jgs rfkk jh deypan ds ctk; mudh iruh jherh rqylh ckbz bl hkkxhnkjh e fgllsnkj ekuh tkosxh rfkk vu; lhkh rsza lhkh i{kdjk ds chp hkkxhnkjh izkjehk djus ds fnu r; ikbz mue fdlh izdkj jn~nkscny ug gksxk a ikvzujhi mlh fnu ls q# ekuh tkosxh a7 lk>snkjh qez dh vof/k ,fk foy gksxh a8 hkfo'; dh vfuf-prrk dks dksbz ug ekurk a fdlh fnu dqn hkh gks ldrk gs ,slh volfkk e lelr ikvzuj tks hkh loz leefr ls r; djxs ml vuqlkj ikvzujfi qez dh fdlh hkh rz e fyf[kr jn~nkscny djus ij lhkh dks ,slh rz ekuuh gksxh a6. the requirement for registration of a firm, as per section 184 of the income tax act, is that the partnership is evidenced by an instrument and exact shares of the partners are specified in the said instrument. the application for registration under the act may be made after constitution of the firm or after its dissolution and that, the application shall be made before end of previous year for the assessment year in respect of which registration is sought.it is further required that application shall be accompanied by original documents required for the partnership along with evidence thereto and an additional copy thereof. learned commissioner in its order has not questioned that any of these conditions has not been fulfilled by the assessee, required of him while making the application for registration, namely, the firm seeking registration was evidenced by an instrument, individual share of each of the partners were specified and the application has been made before end of previous year relevant to the assessment year in which registration is sought. it was annexed with original documents evidencing partnership together with copy thereof.7. here, pausing for a while, it may also be noticed that the application may be made even after dissolution of the firm and law permits that in the event a firm is dissolved on account of death of a partner, application may be signed by all the remaining partners and by legal representatives of any partner who is deceased. the income tax officer after receipt of the application is enjoined to enquire into genuineness of the firm and its constitution as specified and if it is found that during previous year existing partners also existed and he is satisfied with the genuineness of the constitution of the firm so specified, he is enjoined to pass an order in writing, registering the firm for the assessment year. the power of commissioner under section 263 of the act, however, is limited and has two conditions precedent, namely, such power is exercisable only on his being satisfied firstly, that the order sought to be revised is erronous and secondly, that because of such erroneousness, order is prejudicial to the interests of the revenue .8. the very fact that commissioner is required to make an order after affording an opportunity of hearing to the assessee ingrains in the process the requirement of recording reasons for its conclusion, as is necessary for any quasi judicial order required to be made by a quasi judicial authority. it cannot be doubted nor it has been questioned that orders under section 263 bears stamps of quasi judicial nature and require to be supported by reasons for its conclusion. necessary consequence is that while passing the order revising an order passed by subordinate officer of the rank of income tax officer or assistant commissioner, the commissioner must record reasons in support of his conclusion that the order is revised being erroneous and that it would be prejudicial to interests of revenue due to such erroneousness.9. if the order is. tested on aforesaid anvil, it is apparent that the commissioner has recorded his satisfaction before issuance of notice to the assessee, that having believed that the order is erroneous and prejudicial to interest of the revenue , he issued to assessee notice for giving an opportunity of hearing but the order is unequivocally silent after notice was given to the assessee and he was heard, to record any finding as a result of such hearing whether order of the income tax officer holding the firm to be genuine is erroneous in any manner or it is prejudicial to the interests of the revenue . when no finding has been recorded, it is very difficult to assume that commissioner must have arrived at finding as to erroneous nature of the order sought to be revised, or if such order is allowed to stand would be prejudicial to interests of the revenue .the principle premise of the commissioner was that there is no evidence that there was any contract, contrary to section 42 of the partnership act which provided that in absence of any contract to the contrary, partnership will dissolve on death of one or more of the partners and hence, after death of kamal chand on 23-9-1971, the firm originally constituted dissolved and could not exist on the date application was made.10. on the other hand, the tribunal from the conduct of the partners of the firm and a wholesome reading of the documents inferred as a fact that there was such a contract to contrary. so far as position of law concerning dissolution of partnership in the context of section 42 of the partnership act is well settled. it is not the issue that arise out of the tribunal whether on the death of a partner the firm dissolved or not. the common premises is that unless there is a contract to the contrary a partnership stands dissolved on death of any partner as per section 42 of the act. thus, the only question that remained for consideration is whether there was a contract to contrary or not or, whether there was any evidence of terms to the contrary. the commissioner was of the view that there is no term in the deed. the tribunal inferred such a term by conduct of partners and reading of the deed.11. the well settled principle for gathering whether there is any contract to the contrary can be stated in substance as follow.the contract between the partners may not be express. it may be implied from the conduct of the partners. continuance of partnership with the heir or heirs of the deceased partner by the remaining original partners may well evidence the conduct of parties through which a contract to the contrary may be inferred. the plea of continued partnership in spite of intervening death of a partner, the legal representatives of the deceased partners stepping into his shoes sufficiently raises a plea of existence of an agreement between the partners to the effect that the death of a partner shall not cause dissolution of the partnership.the only exception to the rule is that there cannot be a contract to the contrary in case where original partnership consisted only of two partners. in such event, the partnership dissolves on happening of any event envisaged in section 42 of the partnership act. this exception was approved by the supreme court in cit v. g. s. mills air 1966 sc 24. approving and quoting the view of allahabad high court in mt. sughra v. babu air 1952 all 502, agrawala, j. neatly stated the principle thus :'in the case of a partnership consisting of only two partners, no partnership can remain on the death of one of them and, therefore, it is a contradiction in terms to say that there can be a contract between two partners, to the effect that on the death of one of them the partnership will not be dissolved but will continue .............. partnership is not a matter of status, it is a matter of contract. no heir can be said to be a partner with another person without his own consent, express or implied'.subha rao, j said :'section 42(c) of the partnership act can appropriately be applied to a partnership, where there are more than two partners. if one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm'.12. we are afraid, in his order, learned commissioner has not at all looked into peculiar conditions in the instrument of partnership, which unequivocally recorded in clauses (1) to (8) of the deed of contract, to the contrary as envisaged under section 42 of the partnership act. moreover, the commissioner has totally ignored provisions of section 184 of the act of 1961 which envisaged that application can be given by even of a dissolved firm. it was not even finding of the commissioner that kamal chand was not a person in whose name liquor contract of 1971-72 was granted. what he recorded was that wrong fact was mentioned and in the earlier contract name of smt. tulsi devi was not there. in referring to that, learned commissioner ignored that the contract was entered into in march, 1971, but obviously, at that time in the letter of grant of contract name of smt. tulsi devi did not appear for the reason that kamal chand was alive and she stepped in his shoes only on death of kamal chand. therefore, in letter of grant issued in favour of the firm prior to 1-4-1971, name of tulsi devi could not find place. the consideration was wholly irrelevant. it is not the case of the assessee that smt. tulsi devi was partner from the inception. there is no link even to draw a reasonable inference that name of smt. tulsi devi was inducted later on as additional partner and not in place of kamal chand.13. we are, therefore, of the opinion that in the facts and circumstances of present case, learned tribunal was justified in holding that the order dated 27-11-1976, passed by learned commissioner under section 263 of the act cannot be sustained.accordingly, we answer the question referred to us in affirmative i.e., to say, in favour of the assessee and against the revenue department. in the circumstances, no order as to costs.