Ranganath Misra, J. - (1.) These are assessee's appeals by special leave from the common decision of the Madhya Pradesh High Court on the three references made to it under Section 66 of the Income-tax Act, 1922 ('Act' for short). The year of assessment is 1958-59 corresponding to the accounting year ending with August 28, 1957, One Muralidhar had two sons, Ratanchand and Darbarilal. Ratanchand had two sons, Jaykumar and Abhaykumar, while Darbarilal had one son by name Dhanyakumar. Dhanyakumar in his turn had four sons, namely, Keshavkumar, Prasannakumar, Sunilkumar and Sudhirkumar. Branches of Ratanchand and Darbarilal had long separated. On March 1, 1943, a firm by name M/s. Ratanchand Darbarilal was constituted at Katni with Dhanyakumar and Jaykumar as its partners and these two represented their respective families. The firm carried on business in textile goods and in due course acquired substantial properties out of contributions made by the two Hindu Undivided Families. In 1950, a separate retail shop by name Premier Cloth Stores was opened at Katni by the firm. Similarly, in 1953-54, a branch was opened at Satna for handling cloth business. On November 1, 1956, under a partnership deed, the Satna business was taken over by a firm consisting of three partners, namely, Dhanyakumar, Jaykumar and Abhaykumar and the partnership was deemed to have begun from September 9, 1956. Prasannakumar was admitted to the benefits of the partnership as he was then a minor and the firm business at Satna was run in the, name of Savai Singhai Ratanchand Darbarilal. On April 1, 1957, under, a separate deed the business at Katni both the main as also the branch - was taken over by a firm of four partners, viz., Dhanyakumar, Jaykumar, Abhaykumar and Keshav Kumar. In the partnership deeds of Satna and Katni there was no reference to the business at the other place.
(2.) Separate applications for registration of the two firms in the assessment year 1958-59 were made. The Income Tax Officer rejected both. In rejecting the application of the firm at Satna with which we are concerned in these appeals, he took the view that the business at Satna was only a branch of the main business at Katni. Against the order of the Income Tax Officer under S. 26A of the Act, the Assessee appealed to the Appellate Assistant Commissioner he upheld the refusal by the Income Tax Officer by holding that some of the members of the two Hindu Undivided Families had been introduced as partners without effecting partial partition of the two families. He also made reference to the capital account which stood in the name of the Hindu Undivided Family and had not been divided. He found that there was a capital account in the name of the Hindu Undivided Family and there were no relevant entries showing partial partition. In regard to the Katni business he also found a similar set of facts. According to him since the members of the firm had previously been assessed in the status of Hindu Undivided Family without effecting a partition some of the members of such Family could not form themselves into partnership firms. The assessee appealed to the Tribunal and maintained that the firm at Satna was genuine and the Satna business was totally separate from the business run at Katni from before; there was no need in law for partial partition of the family before some of the members of the family constituted themselves into a partnership firm. The Tribunal examined the rival contentions at length and came to hold that the Satna business had separate entity and there was sustainable objection against the claim for registration. The tribunal found, inter alia: "The assessees have effectively separated the business of Stana from the business of Katni and there is no justification whatsoever for treating the two businesses as one single whole. The aspects emphasized by the Income Tax authorities are not such as to justify the clubbing of the two units. There was nothing to stop the Stana Branch from purchasing a small portion of its requirement from the Katni business without impairing its separate individuality. The financial arrangement made by the two businesses also did not establish the merging of the two units. If the Katni business transferred some of its borrowed moneys to Satna business without charging interest, that might justify disallowance of a part of the interest on borrowed moneys claimed by Katni business. But that could not convert the Satna business into a branch of the Katni business. Similarly, intimation to the banks was not decisive in the matter especially when the existing intimation did not run counter to the constitution of the Satna firm as claimed. The name of Satna business was not changed and the partner who had authority to operate continued to be a partner in that business. The only remaining consideration was about the introduction of capital. Assuming that it was done in a clumsy manner, we do not see how it can jeopardise the claim of Satna business to be independent. The new entrants, namely, Dhanyakumar (perhaps Keshavkumar) and Prasannakumar could well have been partners admitted to the benefits of partnership without introducing any capital at all. We are, therefore, of the view that the objections raised by the Income Tax authorities to the Satna business being converted into an independent entity are not strong or sufficient to justify the rejection of the assessees claim. The Stana business has therefore, to be taken as an independent unit with its own constitution. The firm running that business has been constituted under a partnership deed with well defined terms and conditions. The constitution is clearly different from the constitution of the firm controlling Katni business. We would, therefore, treat the Satna business as separate and distinct from the Katni business. We do not find any valid objection against the registration of the firm owning the Satna business. The profits have been divided in accordance with the provision of the partnership deed and the entries in the books of accounts of the business were also substantially correct. We would, therefore, direct that the firm owning the Satna business should be registered." The Revenue asked for a reference of certain questions said to be of law under S. 66(1) of the Act. The tribunal referred the following question only to the High Court: "Whether, on the facts and in the circumstances of the case, M/s. Ratanchand Darbarilal, Satna, was entitled to registration under S. 26A of the Income-tax Act, 1922, for the assessment year 1958-59 -
(3.) Thereupon the Commissioner respondent before us applied to the High Court under S. 66(2) for a direction to the Tribunal to state a case and refer the questions as proposed by the Department and the High Court by order dated July 2, 1971, directed the following three further questions also to be referred, namely: "(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in so interpreting the. evidence on record as to come to a finding that the Satna business has to be taken as independent unit with its own constitution and that it is separate and distinct from the Katni business (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in directing that the firm owning the Satna business should be ,registered in spite of the fact that the members of the two HUFs entered as partners inter se without their effecting in the first instance a severance of joint status by partitioning either partially or totally, the assets of the respective HUFs - (3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the profits from the business run in the name and style of M/s. Ratanchand Darbarilal, Satna, shall be excluded from the total income of M/s. Ratanchand Darbarilal, Katni -;