H.N. Seth, J. - (1.) AT the instance of the CWT, the Income-tax Appellate Tribunal, Allahabad, has in the cases of the assessees, Sri Padampat Singhania (HUF), Kailashpat Singhania (HUF) and Sri Laxmipat Singhania (HUF), for the assessment years 1965-66 and 1966-67, stated these three cases and has referred the following questions for the opinion of this court : " 1. Whether, on the facts and in the circumstances of the case, the liability to the Kamla Town Trust for payment of Rs. 13,53,005.57 undertaken by J. P. Agarwal by virtue of the dissolution deed dated 10th January, 1949, became the liability of the firm on its reconstitution under the partnership deed dated 25th February, 1949, and, subsequently, the liability of the three Singhania Brothers to the extent of one-third share each and was deductible from the total wealth of the assessee in its wealth-tax assessments for the assessment years 1965-66 and 1966-67 ? 2. Whether the aforesaid liability as held by the Appellate Tribunal was a legal and enforceable liability ? "
(2.) THE three assessees, hereinafter referred to as the three Singhania Brothers, representing their respective HUFs, are partners in a firm known as M/s. J. K. Hosiery Factory and the controversy in these references relates to their claim that an amount of Rs. 4,51,002 standing to the debit of each of them in the books of the firm should be accounted for and deducted in computing their respective wealth for the assessment years 1965-66 and 1966-67. Briefly stated, the facts giving rise to the aforesaid controversy are that the three Singhania Brothers along with one Sri J. P. Agar-wal had been carrying on a partnership business under the name and style of M/s. J. K. Hosiery Factory, By means of a deed dated 27th October, 1941, a company known as M/s. J. K. Cotton Spinning and Weaving Mills Ltd., created a trust known as Kamla Town Trust which purported to be a public charitable trust. THE three Singhania brothers were designated as its trustees. Subsequently, the company filed Suit No. 40 of 1945, in the Court of the Civil Judge, Kanpur, praying for the rectification of the trust deed. THE aforesaid suit was decreed on 18th August, 1945. On 15th January, 1946, the three Singhania brothers withdrew from the firm, M/s. J. K. Hosiery Factory, and assigned a sum of Rs. 1,50,000 each, the amounts standing to their credit in the books of the firm, to Kamla Town Trust. THEreafter, on 5th February, 1946, a partnership agreement was entered into between J. P. Agarwal and the trust for running the business in the name and style of M/s. J. K. Hosiery Factory with effect from 1st January, 1946. THE trust contributed a sum of Rs. 4,50,000, the amount which had been assigned to it by the three Singhania brothers, towards the capital of the partnership. The new firm as set up under the partnership deed dated 5th February, 1946, was refused registration under Section 26A of the I.T. Act and it continued to be treated as an unregistered firm for purposes of the I.T. Act. During the income-tax assessment of this firm for the assessment year 1947-48, a question arose as to who were its partners. The ITO held that as the amended trust deed contained certain objects which were charitable and others which were not charitable, no public charitable trust came into existence and the trust deed was invalid. After considering various circumstances of the case, he came to the conclusion that the real partners of the firm, constituted by the deed dated 5th February, 1946, were the three Singhania brothers and J. P. Agarwal. In appeal, the AAC affirmed the findings of the ITO and concluded that the deed dated 5th February, 1946, did not bring into existence any change in the original firm of which the three Singhania brothers and J. P. Agarwal were partners and that as a result of that deed no genuine change in the constitution of that firm took place. When the matter was taken up before the Income-tax Appellate Tribunal, the Tribunal agreed with the authorities below that having regard to the objects of the trust, Kamla Town Trust could not be considered to be a valid trust and that the agreement dated 5th February, 1946, was invalid. It also concluded that it were the three Singhania brothers and not the Kamla Town Trust, who had continued to be the partners of the firm, M/s. J. K. Hosiery Factory along with Sri J. P. Agarwal. Subsequently, the Tribunal referred certain questions of law arising out of its appellate order for the opinion of the High Court which answered the same, vide its judgment dated 4th December, 1970 (since reported in[l971] 81 ITR 557--J. K. Hosiery Factory v. CIT). This court held that the objects underlying the rectified trust deed could not be described as public charitable objects and that at any rate they were a mixture of charitable and non-charitable objects. Accordingly, the trust created by the document dated 27th October, 1941, and as rectified by the decree of the civil judge dated 18th August, 1945, was invalid. It also held that the finding recorded by the I.T. authorities that the three Singhania brothers along with Sri J. P. Agarwal were the partners of the firm was borne out by the material on the record and that the said finding was not vitiated in any manner. It appears that while the aforementioned proceedings for the assessment of the firm, M/s. J. K. Hosiery Factory for the assessment year 1947-48, were going on, the company, M/s. J. K. Cotton Spinning and Weaving Mills Ltd. took proceedings to enable it to amend its memorandum of association so as to expressly authorise it to create a public charitable trust. This amendment was sanctioned by the High Court under the provisions of Section 12 of the Indian Companies Act on 26th March, 1955. Thereafter the company on 10th May, 1955, filed Suit No. 163 of 1955, in the Court of Civil Judge at Kanpur seeking further rectification of the trust deed with a view to bring its objects entirely in consonance with public charity. The suit was decreed on 18th August, 1955, and the deed was rectified accordingly. As the trust had throughout been claiming that it was a public charitable trust exempt from paying income-tax, it did not file the returns of the income derived by it in various years. The ItO, however, took action against the trust under Section 34(1) of the Indian I.T. Act, 1922, and Section 148 of the I.T. Act, 1961. He held that the trust was not a public charitable trust and that its income was liable to be taxed. The view taken by the ItO was affirmed by the AAC. The Income-tax Appellate Tribunal, however, held that as a result of rectification made in the trust deed, as a result of the decree of the civil judge dated 18th August, 1955, the trust became a valid public charitable trust with effect from the date of the decree. In the result, it held that the assessments made under Section 34(1) of the Indian I.T. Act, 1922, Section 148 of the I.T. Act, 1961, for the years 1949-50 to 1956-57, were in order and dismissed the appeals by the trust. It, however, held that after the decree passed by the civil judge on 18th August, 1955, the assessee, namely, Kamla Town Trust, became a valid public charitable trust and that its income was not liable to be taxed. It, accordingly, allowed the appeals filed by the trust for the years 1956-57 to 1964-65. The matter was again referred to this court for opinion. This court decided the reference on 20th February, 1975, and its decision has since been reported in [1975] UPTC 195 (Kamla Town Trust v. CIt) (see p. 632 infra). This court held that the decree dated 18th August, 1955, had the effect of rectifying the trust deed with effect from 27th October, 1971, the date on which the trust deed was originally executed. The objects of the trust, as mentioned in the rectified trust deed, were public and charitable objects and that the trust so created was quite valid in law. In the result, the assessee, Kamla Town Trust, was entitled to relief not only for the assessment years 1956-57 to 1964-65, but also for the years 1949-50 to 1955-56, and answered the questions referred to it accordingly. Reverting to the conduct of business that was being carried on in the name and style of M/s. J. K. Hosiery Factory of which the Kamla Town Trust and J. P. Agarwal were the ostensible partners (real partners being the three Singhania brothers and J. P. Agarwal), a deed of dissolution dated 10th January, 1949, was drawn up and it was signed by the three Singhania brothers as trustees of Kamla Town Trust of the first part and J. P. Agarwal of the second part. According to this deed the firm J. K. Hosiery Factory was to stand dissolved with effect from 1st January, 1949, and the Kamla Town Trust was to get a sum of Rs. 21,98,828 as reduced by certain tax liability from Sri J. P. Agarwal and that all assets, credits and effects of the firm were to be held by Sri J. P. Agarwal. Subsequently, the three Singhania brothers and J. P. Agarwal again executed a fresh partnership deed on 25th February, 1949, and agreed to carry on the business in the name of M/s. J. K. Hosiery Factory with effect from 1st January, 1949. Sri J. P. Agarwal brought the entire assets of the firm which were received by him under the deed of dissolution dated 10th January, 1949, into the new firm as part of the capital contributed by him. According to the assessees, the new firm also undertook to pay Sri J. P. Agarwal's liability to Kamla Town Trust created under the deed dated 10th January, 1949. At a later stage Sri J. P. Agarwal retired from the firm leaving the three Singhania brothers alone as partners of the firm. In the books of the firm as also in the balance-sheet prepared up to 30th December, 1964, the liability to the trust still outstanding was shown as Rs. 13,53,995.57 and the accounts of the three partners were debited accordingly.
(3.) REGARDING assessees' claim that each one of them was, while computing his wealth for the assessment years 1965-66 to 1966-67, entitled to the deduction of a sum of Rs. 4,51,002, the WTO observed that as the credit balance of Kamla Town Trust, shown as partner in J, K. Hosiery Factory, in the earlier years have been treated as belonging to the three Singhania brothers themselves, the said liability had to be taken to be a fictitious liability and could not be allowed. The AAC also affirmed the decision of the WTO and repelled the claim of the assessees. The Income-tax Appellate Tribunal, however, accepted the assessees' case by making the following observations : " We have carefully considered the respective submissions. We have stated the facts in detail. After the recent decision of the High Court in the Trust case (1975 UPTC 195), [1982] 133 ITR 632 (infra), it is established that the trust is a valid independent entity. It is correct that the trust, as evidenced by the instrument dated 27th October, 1941, and as rectified by the decree dated 18th August, 1945, was a mixed trust and could not be treated as a public charitable trust, but after the second rectification decree dated 18th August, 1955, it became a public charitable trust. Since this rectification would date back to the date of the original execution of the deed, the trust was for public charitable purposes. Therefore, it is evident that the trust is an independent and valid legal entity. It may be that during the calendar years 1946 to 1948 the three Singhania brothers continued as partners of the firm and the trust was not a partner, but by virtue of the dissolution deed dated 10th January, 1949, J. P. Agarwal undertook upon himself certain liabilities to the trust. After the reconstitution of the firm with effect from 1st January, 1949, as evidenced by the instrument dated 21st February, 1949, the entire assets and liabilities of the old business were taken over by the new firm. It would mean that the liability of J. P. Agarwal to the trust became the liability of the firm. It is certainly an enforceable liability. The trust has been showing it as its assets while the assessee has been showing it as its liability. J. P. Agarwal is no longer a partner in the firm. Only the three Singhania brothers are partners having one-third share each and there are debits in that proportion, in their accounts, of its liability. In our opinion, therefore, it was legal liability of the assessee which was clearly deductible from the total wealth in its wealth-tax assessment and we direct accordingly." A perusal of the aforementioned observations made by the Tribunal shows that in its opinion after the decision of this court in Kamla. Town Trust case [1975] UPTC 195 (see p. 632 infra), it could not but be held that Kamla Town Trust was a valid public charitable trust right from its inception on 27th October, 1941. While the partnership deed between Kamla Town Trust and J. P. Agarwal was being dissolved on 10th January, 1949, J. P. Agarwal undertook to pay a sum of Rs. 21,98,828 minus taxes, etc., to Kamla Town Trust. This liability was a real one which had been under the deed, dated 25 February, 1949, taken over by the firm consisting of the three Singhania brothers and J. P. Agarwal and it became a liability of that firm. Since each of the three Singhania brothers were liable to discharge this liability to the extent of one-third, they were, while computing their wealth for the year in question, entitled to claim proportionate deduction in respect thereof. As the liability of the trust stood at Rs. 13,53,005.57 each one of them was entitled to a deduction of Rs. 4,51,002 in computing his wealth.;