Satish Chandra, J. - (1.) THIS is a consolidated reference for four assessment years 1948-49 to 1951-52. The Tribunal has submitted this statement of the case to this court for its opinion on the following questions of law : "(1) Whether, in all the facts and circumstances of the case, and having regard to the proper legal effect of the various documents, the assessee-firm consisted of Jagerhwar Prasad Agarwal and Sir Padampat Singhania, L. Lakshmipat Singhania and L. Kailashpat Singhania or it consisted of the said Jageshwar Prasad Agarwal and the three trustees of the Kamla Town Trust ? (2) Whether the finding of the Tribunal to the effect that the assessee was not entitled to the deduction of lease money paid to Sir Padampat Singhania, L. Kailashpat Singhania and L. Lakshmipat Singhania as business expenditure was correct in law ? (3) Whether the finding of the Tribunal refusing exemption to the assessee from business profits tax on the 25 annas share of the trustees of the Kamla Town Trust is correct in law ? (4) Whether, under the provisions of Section 10(2)(vi), proviso (b), of the Income-tax Act, the unabsorbed depreciation of the unregistered firm in 1949-50 can be allowed as a deduction in the assessments of the partners of the registered firm in the assessment year 1950-51? (5) Whether the Tribunal was legally justified in disallowing interest to the Kamla Town Trust during the assessment year in question ? "
(2.) MESSRS. J. K. Hosiery Factory, Kanpur, the assessee, originally consisted of Sir Padampat Singhania, L. Lakshmipat Singhania, L. Kailashpat Singhania and one J. P. Agarwal as partners. In January, 1946, the three Singhania brothers appear to have retired from this firm and in their place the Kamla Town Trust is alleged to have become a partner. The department challenged this alleged reconstitution of the firm. According to it the Singhania brothers never retired and the trust never became a partner. This question, which is covered by question No. 1 referred to us, also arose for the assessment of J. K. Hosiery Factory for the assessment year 1947-48. In that case the Tribunal upheld the department's plea. This court confirmed that finding. It was held that no genuine partnership came into existence by which the Kamla Town Trust became a partner. This court observed J.K. Hosiery Factory v. Commissioner of Income-tax, 1971 81 ITR 557 : " Even if it be assumed that the trust deed dated 27th October, 1941, survived even after its rectification in August, 1945, it will be seen that after considering various aspects of the case, the Income-tax Appellate Tribunal recorded a finding that the three Singhania brothers exploited their dual capacity and made an arrangement by which it was made to appear that the trust was doing business, although, in fact, the same was conducted by the three Singhania brothers in their individual capacity. In other words, the finding recorded by the Tribunal was that, although on paper it was the trust which was doing the business, in fact, it was the three Singhania Brothers who were doing business for themselves. For this purpose, the Tribunal relied upon a number of circumstances. The Tribunal noticed that the three Singhania brothers, who were the three trustees, were in a position to manage the affairs of the trust in any manner that they liked. They made the trust to retire from a firm called J. K. Bankers in Samvat 2002, and gave a donation of Rs. 50,000 to the trust. This donation was not given in cash, but was effected by making certain book entries in the account books of the assessee's firm. While giving this donation, the three Singhania brothers did not leave it to the trustees to utilise this fund in any manner, but the money was given to the trust as a conditional gift, the condition being that the trust was to carry on the business of running J. K. Hosiery firm. There was nothing on the record to show that in withdrawing from the firm, J. K. Bankers, and in becoming a partner in the assessee's firm, the trustees took any steps to satisfy themselves-about the desirability of taking such a step. The Tribunal also did not appear to be satisfied that the three Singhania brothers suddenly retired from such a prosperous business of J. K. Hosiery in favour of the trust as they wanted to do charity. As a matter of fact, about three years later, the three Singhania brothers again made the trust to retire from the business of J. K. Hosiery and became partners in their individual capacity. This also showed that the three Singhania brothers were utilising the name of the trust at their sweet will. The Tribunal attached inportance to the fact that when the trust entered into partnership with J. P. Agarwal it was agreed that the goodwill of the firm would always remain with the trust, but when the trust retired from this business and the three Singhania brothers became partners in their individual capacity, the goodwill was again got re-vested in the original partners. According to the Tribunal, all these facts indicated that the transaction of partnership between the trust and J. P. Agarwal was a mere camouflage and the business of the firm was, in fact, being conducted by the original partners and not by the Kamla Town Trust. The Tribunal also noticed that, according to the release deed dated 15th January, 1946, by which the three Singhania brothers retired from the firm, it was mentioned that a balance-sheet as on 31st December, 1945, had been prepared and that the same had been accepted by the parties concerned. The record showed that the assessee filed its return for the year in question on 4th November, 1946, that is about 10 months after the release deed. During this long interval, the assessee obtained adjournments from time to time for filing the return, saying that the accounts were not ready. One such application was dated 3rd June, 1946, wherein it was stated that the accounts were still not ready. It was followed by another application of 31st July, 1946, wherein it was stated that the accounts were not completely audited. The last application saying that the accounts were not ready was sent on 2nd September, 1946. The Tribunal reasoned that if the accounts were not ready and complete on September 2, 1946, it was difficult to believe that the balance-sheet could have been prepared and accepted as early as 15th January, 1946. It, therefore, came to the conclusion that the release deed dated 15th January, 1946, must have been prepared some time after September 2, 1946, and before the return was actually filed. In the circumstances, the Tribunal found it difficult to hold that the release deed could have genuinely come into existence on 15th January, 1946. It observed that, if the document was not genuine, the deed of partnership dated 5th February, 1946, would also become equally unreliable. " The same position obtains in the present case. The Tribunal has drawn certain inferences from the material and circumstances appearing on the record and we cannot hold that the Tribunal committed any error of law in doing so. Question No. 1 has thus to be answered by saying that the assessee-firm consisted of J. P. Agarwal and the three Singhania brothers and the three trustees of the Kamla Town Trust were not. partners in this firm. Learned counsel for both the parties are agreed that in view of our answer to the first question, questions Nos. 2 and 3 are merely consequential and have to be answered in the affirmative and against the assessee.
(3.) QUESTION No. 4 is relevant only for the assessment year 1950-51. For the previous assessment year 1949-50, the firm had been allowed an unabsorbed depreciation loss of Rs. 43,963. The assessee-firm claimed a set-off thereof in the assessment year 1950-51. The Tribunal refused to grant this set-off on the view that in the year 1949-50, the assessee-firm was an unregistered firm while it had been registered under the Income-tax Act for the year 1950-51. The loss on account of depreciation of an unregistered firm cannot be carried forward to the succeeding year in case the firm gets registered in that year. This view it took on a plain reading of Section 10(2)(vi) and Clause (b) of the proviso to Section 24(2) of the Act. Section 10 provides: "10. (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely : -- . . . (vi) in respect of depreciation .... Provided that-- . . . (b) where, in the assessment of the assessee or if the assessee is a registered firm, in the assessment of its partners, full effect cannot be given to any such allowance in any year not being a year which ended prior to the 1st day of April, 1939, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of Clause (b) of the proviso to Sub-section (2) of Section 24, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for the next year, and so on for succeeding years." ;