P.C. Pandit, J. - (1.) THE Commissioner of Income -Tax, Punjab, made a petition to this Court under Section 66(2) of the Indian Income -Tax Act, 1922, which was accepted and, as a result thereof the following question of law has been referred by the Appellate Income -Tax Tribunal for the opinion of this Court: Whether the assessee was entitled to registration under section 26 -A of the Indian Income -Tax Act? After the partition of the country, there was shortage of cloth all over the country, with the result that its supply and distribution was being controlled by the Civil Supplies Department. This Department had asked the cloth dealers to form Associations in the various districts to import cloth from the mills for onward distribution to the retail dealers. On 22nd July, 1950, 14 whole sale dealers entered into an Organisation and formed ''Messrs. Wholesale Cloth Syndicate" in Karnal District. According to the Income -Tax authorities, it was an association of persons, while, according to the Syndicate, it was a partnership firm. A regular deed of partnership was drawn up, in which the names of these 14 persons and their shares inter se were specifically enumerated -This deed was signed by all of them. This Syndicate was registered under section 26 -A of the Indian Income -Tax Act, during the assessment proceedings for the year 1951 -52. According to the counsel for the Department, this was done under "executive instructions" given by the Central Board of Revenue as a confessional measure because as a matter of fact, the number of the partners in this Syndicate exceeded 20, since every partner was representing his separate firm On 6th September, 1952 when the assessment for the year 1952 -53 was going to be made, the assessee -Syndicate filed an application for the renewal of registration. The Income -Tax Officer, however, rejected this application, because he found that the number of partners in this Syndicate exceeded 20, which rendered the partnership deed invalid. He further found that 11, out of these 14 persons were partners of smaller firms and were not acting in their individual capacity. He also noticed that the share -profits from this Syndicate had been taken to the books of their respective firms and divided among the partners of those smaller firms according to their respective shares. Moreover, the share capital in the Syndicate had also been invested by the firms, which they were representing. He also remarked in his order that the concession given by the Government to this Syndicate with regard to registration during the previous year had been withdrawn.
(2.) THE Syndicate went in appeal to the Appellate Assistant Commissioner, Income -tax Officer. The assesses then filed a second appeal before the Appellate Tribunal, which was accepted on the ground that the deed clearly showed that the contracting parties were only 14 and not more and that there was no merit whatsoever in the objection raised by the Income -tax Authorities. As a result, it directed the Income -Tax Officer to register the Syndicate under section 26 A of the Income -Tax Act.
(3.) THE Appellate Tribunal in arriving at its finding that the contracting parties were only 14 and not more, has solely relied on the partnership deed produced in the case. Undoubtedly, the Income -Tax Officer and the Appellate Assistant Commissioner had based their decisions on various other findings of fact. It is pertinent to mention that the Tribunal had not reversed any of those findings. It is an established proposition of law that Income -Tax Authorities can go behind a partnership -deed to find out the true state of affairs. The procedure adopted by the Tribunal in giving the finding merely on the strength of the partnership -deed and without reversing the other findings of fact given by the Income -Tax Officer and the Appellate Assistant Commissioner is, in my opinion, not correct. The Income -Tax Officer had found: (a) That the assesses -Syndicate was formed under instructions and orders of the Civil Supplies Department and only the firms dealing in cloth could become partners therein. (b) The share -profits from this Syndicate had been taken to the books of the respective firms and divided among all the partners of the smaller firms in the same ratio as other business profits. (c) The share capital in the Syndicate had also been invested on behalf of these smaller firms. (d) In the previous year, this Syndicate was registered, not because it was legally entitled, but because under some executive instructions the assesses was allowed a concession and the defect of the number of partners exceeding 20 was ignored. This concession, however, had been withdrawn this year. The Appellate Assistant Commissioner has also found that: (i) 14 license cloth dealers, 11 out of whom were, admittedly, by themselves separate partnership firms, formed the assessee -Syndicate. (ii) In 1951 -52 registration was granted to the assessee -Syndicate in accordance with the extra -judicial concession allowed by the Central Board of Revenue This concession was later on withdrawn and it was clearly mentioned in the order of revocation that it would apply even to the then pending 1952 -53 assessment proceedings. (iii) It was indirectly admitted by the assessee's counsel that the capital contribution in the Syndicate came from the partners from their separate partnerships and their shares of profit similarly went there and were distributed in the hands of these partnerships according to the share specifications in these partnerships. Learned counsel for the assesses -Syndicate submitted that these findings were not based on evidence and were, consequently, vitiated.;