Y.S.TAMBE, J. - (1.) THIS is a reference under Sub -S. (1) of S. 66 of the Indian IT Act. The assessee before us is an HUF known as "Shri Shankarlal Dhondiram". We are here concerned with the asst. year 1952 -53, the previous year being Samvat year 2007. Facts giving rise to this reference, in brief, are as under. It is not in dispute that the aforesaid HUF is the owner of an oil mill, namely, Shankarlal Ratanlal Oil Mills. The said oil mill was, prior to the year of assessment, given on lease to a partnership firm of which the partners were Shankarlal Dhondiram, Ratanlal Dhondiram and one Bansilal Chunilal. Shankarlal and Ratanlal are brothers and are also members of the aforesaid HUF. The terms on which the aforesaid three partners were carrying on the partnership business are incorporated in a deed of partnership dt. the 17th Jan., 1961, which is annexure "D" to the statement of case. The said deed discloses that Shankarlal and Ratanlal have 6 1/2 annas share each and the share of Bansilal Chunilal is 3 annas. As already stated, the aforesaid HUF (hereinafter referred to as "the assessee") has leased out its oil mill to the aforesaid partnership firm (hereinafter referred to as "the firm").
(2.) THE assessee filed its return on 13th Jan., 1954. In its return the assessee stated that it was the owner of M/s Shankarlal Ratanlal Oil Mills, Malegaon, that it had leased the oil mill to the firm and that two of its members, namely, Shankarlal Dhondiram and Ratanlal Dhondiram, were partners in the firm in their individual capacity. It further stated that it had no interest in the business of the firm. The assessee's assessment was completed by the ITO on the 28th Feb., 1956, and the assessee's income was determined at a certain figure which later on in appeal was reduced. For the purpose of this case it need only be stated that the share of income, profits and gains of the aforesaid two partners, namely, Shankarlal and Ratanlal, was not included in the total income of the assessee. Turning to the assessment of the firm, it filed an application on the 23rd Feb., 1953, under S. 26A of the Indian INCOME TAX ACT, 1922 (XI of 1922) (hereinafter referred to as "the Act"), for its registration. It filed its return on 19th Oct., 1953, and later on filed a revised return on 25th May, 1954. The aforesaid application under S. 26A as well as the assessment of the firm were dealt with together and the assessment was completed on the 28th March, 1957. The firm was assessed to tax as an unregistered firm. The ITO refused registration of the firm. He further held that the assessee family and the two partners in the firm, namely, Shankarlal and Ratanlal, have no separate existence. For all practical purposes, the share of the two partners, namely, Shankarlal Dhondiram and Ratanlal Dhondiram, be treated as income of the HUF of Shankarlal Dhondiram of which the above two partners are only coparceners. Thereafter, the ITO, after obtaining the necessary permission from the CIT, issued a notice under S. 34(1)(a) calling upon the assessee -family to show cause why the assessment should not be reopened under the said provisions.
(3.) NOW , in the meantime, the firm had appealed, against the order of the ITO refusing registration, to the AAC. The AAC by his order dt. the 5th Dec., 1957, affirmed the order of the ITO holding that the firm was not entitled to registration under the Act and also affirmed the finding of the ITO, and the AAC further held that the business of the firm was, in fact, proprietary concern of the HUF of which Shankarlal and Ratanlal were members. Bansilal Chunilal was never a genuine partner with rights and liabilities of a genuine partner in the business of the firm. The reasons given by the AAC for his conclusions in paragraphs 5 to 10 of his order have been incorporated in the supplemental statement of the case. Against the aforesaid order of the AAC the firm preferred an appeal to the Tribunal. The Tribunal by its order dt. 1st Aug., 1958, held that the business done in the name of Shankarlal Ratanlal Oil Mills belonged to the firm which consisted of three partners, namely, Shankarlal, Ratanlal and Bansilal, and that the registration of the firm for the assessment year ought to have been granted. The Tribunal therefore set aside the order of the ITO and the AAC and directed that the firm be registered under the Act and assessed on that basis. It is, however, necessary to note that the Tribunal expressly kept open the question whether thirteen annas share belonged to Shankarlal and Ratanlal in their individual capacity as partners, or the share belonged to the assessee -HUF, Shankarlal and Ratanlal only representing the family in the partnership. Turning to the notice that has been issued to the assessee under S. 34(1)(a), the assessee in response to the notice filed a return under protest. The assessee raised two -fold objections. In the first instance, the assessee contended that the notice under S. 34(1)(a) was illegal and the second contention raised by the assessee was that, even assuming that the issue of notice was legal, in fact the share income of Shankarlal and Ratanlal in the partnership firm belonged to them in their individual capacity and it was not the income of the assessee -family. The ITO rejected both these contentions. Further in view of the aforesaid decision of the AAC holding that the firm was the concern of the HUF, Bansilal being only a nominal partner, the ITO included the entire income of the firm in the total income of the assessee - family. A reassessment order on the aforesaid basis was made on the 13th Dec., 1957. Against the said reassessment order of the ITO, the assessee preferred an appeal. Both these contentions were again reiterated before the AAC by the assessee.;