- (1.) THIS is a consolidated case stated under section 66(1) of the Income-tax Act (hereinafter referred to as the Act), in respect of assessment years 1958-59 and 1959-60. The question referred is: "Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to registration under section 26A of the Act?"
(2.) THE material facts are these. The common ancestor was one Chandu Lal who died in the year 1918, leaving only two surviving sons, Radha Kishan and Sita Ram. The Appellate Assistant Commissioner found that he had died insolvent. No contrary finding of fact was given by the Appellate Tribunal. After the demise of Chandu Lal, his two sons, Radha Kishan and Sita Ram, started a business in 1919, in the name and style of Messrs, Radha Kishan Sita Ram. This firm was assessed for the first time in the assessment year 1931-32. The assessment for the assessment year 1931-32 to 1935-36 did not show the status in which the firm was assessed. The next two assessment for years 1936-37 and 1937-38 were made under section 23(4) of the Act in the status of a Hindu undivided family. It is, however, not clears as to how such status came to be determined. Thereafter, the assessee himself showed the status as Hindu undivided family and the assessment were also made in that statue right up to the assessment year 1942-43. In the course of the assessment proceedings for the year 1942-43, the assessee claimed a partition under section 25A of the Act with effect from the 15th April, 1941. The assessee's claim under section 25A was accepted by the Income-tax Officer. The order under section 25A has neither been made a part of the case nor the contents thereof have been mentioned in the statement of the case. It is not clear as to why such an under section 25A was sought and whether it was really a partition between the two brothers as joint owners of the business, or it was a real partition by mates and bounds of all the Hindu undivided family. It is not known whether there were any other assets apart from the business. If the business was the only asset, then no division by mates and bounds was required. Be that as it may, the order under section 25A was passed on the 15th March, 1943. Thereafter, the two brothers, Radha Kishan and Sita Ram, entered into a partnership and continued the business in the same name and style. For the assessment year 1943-44, the very Income-tax Officer who had passed the order under section 25A granted registration to the new firm of Radha Kishan Sita Ram, and, what is more, assessed the share income therefrom in the hands of Radha Kishan and Sita Ram in their statues as individual and not as representing their smaller Hindu undivided families. The share income continued to be so assessed in the hands of Sita Ram from 1943-44 to 1957-58 in his status as an individual. The firm of Radha Kishan Sita Ram was also carrying on an oil crushing business under the name and style of Bharat Oil Industries. This it decided to close down. Sita Ram, it appears, was desirous of carrying on the oil crushing business, and, therefore, on the 11th of June, 1956, he decided to from a new firm by taking in two of his sons as partners and also to admit to the benefits of partnership the two of the minor grandsons of the said Radha Kishan. In order that his two sons should also contribute some capital, Sita Ram withdrew Rs. 10,000 from his capital account and gifted Rs. 5,000 to each of his two sons, Prem Narain and Hridaya Narain, and the three executed a deed of partnership on the 13th of June, 1956, for carrying on the oil mill business in the name and style of Bharat Oil Industries. The said Bharat Oil Industries applied of registration for the assessment year 1958-59 and for renewal for 1959-60. As there was no partition between Sita Ram and his two sons, Prem Narain and Hridaya Narain, the Income-tax Officer issued notice to the assessee to show cause why the application for registration should not be rejected. The assessee submitted before the Income-tax Officer that Radha Kishan and Sita Ram had originally commenced the business styled Radha Kishan Sita Ram with borrowed capital and without the aid of joint family nucleus as Chandu Lal, their father, had become insolvent during his lifetime, which fact was proved by the order passed by the insolvency court adjudging him as an insolvent. It was further contended that the business and that the assets that each one of them held in that business were their own self-acquired properties in which their male issue had no right by birth, and, therefore, the firm was genuine and entitled to registration. The Income-tax Officer negatived these contentions, on the main ground, that for the assessment years 1936-37, to 1942-43, the assessee Radha Kishan and Sita Ram were assessed in the status of a undivided family and that an order under section 25A was passed on the 15th March, 1943, and as such it was no longer open to say after the order under section 25A that the assets were not the assets of him smaller joint family. The Income-tax Officer, therefore, held that the assets in the firm, though standing in the name of Sita Ram belonged in fact to his joint Hindu family and thus he was incompetent to make a gift to his sons or to from a partnership with his sons without first effecting a partition between himself and the sons. The Income-tax Officer, consequently, refused registration to the assessee for both the relevant assessment years.
(3.) ON appeal, the Appellate Assistant Commissioner held that the weight of evidence clearly showed that Sita Ram was a partner in his individual capacity in the firm, Radha Kishan Sita Ram; that no family nucleus had been untilised in the starting of this business as the farther of Sita Ram and Radha Kishan had died an insolvent; that his entire assets and investment in the said from of Radha Kishan Sita Ram were his self-acquired properties out of the which he could validly made gifts to his sons; and that the assessment made from 1936-37 to 1942-43, in the status of a Hindu undivided family, did not operate as estoppel. He considered that the firm was genuine and directed it to be registered. Thereupon, the department went up in appeal to the Tribunal. It was contended, that the finding of the Appellate Assistant Commissioner that the business of Radha Kishan Sita Ram was originally commenced without joint family nucleus and with borrowed capital was unsupported by any evidence. Even assuming that it was so, it was submitted that there was noting in law to prevent the karta of a family and convert his property into joint family property. Further, the conduct of Sita Ram in permitting the business to be assessed in the status of a Hindu undivided family and asking for an order under section 25A indicated that the self acquired property was the joint family property, and, therefore, the share he got under the order under section 25A did not belong to him alone but to the Hindu undivided family consisting of himself and his sons and, therefore, no valid gifts could be made. The Tribunal did not give any finding nor did it say that it reversed the finding given by the Appellate Assistant Commissioner, but disposed of the appeal by saying that it "agreed" with the arguments of the departmental representative. The fact that the department had assessed the share income from the said firm for over 12 years, after the section 25A order was passed, in the hands of Sita Ram in his status as in individual was brushed aside by observing that the department had erred in the past in treating the share income of Sita Ram in the firm Sita Ram Radha Kishan as his individual income. As already observed, agreeing with the arguments of the departmental representative, the Tribunal was of the opinion that the view taken by the Appellate Assistant Commissioner that the share income from the firm Radha Kishan Sita Ram did not belong to the smaller Hindu undivided family of Sita Ram, but sorely to Sita Ram, and, therefore, he could not make a gift to his sons was wrong. If further went on to hold that the members of a Hindu undivided family could not have formed a partnership without first effecting partition of its assets. The Tribunal, therefore, set aside the order of the Appellate Assistant Commissioner and restored the order of the Income-tax Officer refusing registration to the assessee firm.;