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Income‑tax Reference No. 18 of 1968, decided on 20th May 1975.

‑‑ S. 26‑A‑Registration of firm‑Tribunal holding applicant firm bogus by mere reference to terms of partnership deed‑No extrinsic evidence on record to show firm not genuine‑Balance‑sheet showing . credit of profits to account of partners‑Shares of two married daughters allegedly spurious and shown in order to evade tax being only 1 /24 each‑Shares of such daughters being nominal no incidence of evasion of tax‑Major partner holding 16 shares out of 24 being those of his wife and four minor children liable to pay tax on entire profits as an individual‑Circumstance, held, negatived any impression of partnership deed being not genuine‑Income‑tax Act (XI of 1922) S. 66(2).

There is no dispute in the instant case that the firm is not in existence nor is there any plea that the application was not properly filed. In this view of the matter, the question that the firm was not genuine could not have been decided by a mere reference to the terms of the partnership deed without there being any extrinsic evidence to show that the firm was not genuine.

What is of further significance is that in the order of the High Court, it is stated that in the balance‑sheet the profits were credited to the account of the partners which they had drawn, which fact was not disputed by the Department. This by itself shows that the terms of the deed were fully acted upon. Again, the share of the two married daughters was 1/24th each being thus nominal and, therefore, in the circumstances it is not understood how by assigning to them such nominal shares there would be an incidence of evasion of tax. Besides, the principal partner held 16 shares out of 24 being those of his wife and four minor children. In terms of section 16(3) of the Income tax Act he was liable to pay tax on the entire profits as an individual. This circumstance also negatives any impression of the deed not being genuine for if this partner wanted to evade tax he could as well have adopted some better method rather than to choose his own wife and minor children as partners and thus make himself liable to pay tax as aforestated.

This is no substance in the order of the tribunal that the deed was not genuine. In fact, such a conclusion was drawn on a bare consideration of the deed itself without any evidence to show that the two ladies were in fact dummies and had no share in the partnership.

Haji Ghulam Rasool Khuda Bux v. Commissioner of Income‑tax, Punjab 5 I T R 506 distinguished.

Himalaya Engineering Co. v. Commissioner of Income‑tax, Bihar & Orissa (1965) 57 I T R 762 and Commissioner of Income‑tax, Punjab, N.‑W. F. P. and Bahawalpur v. Messrs Mouladad Muhammad Saeed of Shaikhupura P L D 1956 S C (Pak.) 316 ref.

Iqbal Naeem Pasha for Applicant.

S. A. Nusrat for Respondent.

Date of hearing : 20th May 1975.

.‑The tribunal pursuant to an order dated 16th November 1966 of this Court in I. T. Case No. 454 of 1962 referred to following question under section 66 (2) of the Income‑tax Act for decision:‑

"Whether there was any evidence before the tribunal to hold that the partnership stated to be in existence under the Deed of Partnership dated 6‑5‑1953 was not a genuine partnership "

2. The facts, out of which this reference has arisen, are these: Rahim Bux was the sole proprietor of the business concern run in the name and style of "Buxlay Paints Works" uptill the assessment year 1953‑54. On 6th May 1953, he constituted a firm by document dated 6th May 1953 which was duly registered under the Partnership Act on 12th August 1953, of which the partners were besides him, his wife, Razia Sultana Begum, three major sons, namely Bashir Alam Khan, Nasim Alam Khan and Shamim Alam Khan, two married daughters, namely, Farukh Sultana Begum and Qaiser Sultana Begum, and four minor children. Their shares appear in the partnership deed at page 11 of the printed paper book. Thereafter on 2nd October 1954 an application was filed. for the registration of the firm under section 26‑A of the Income‑tax Act, but the I. T. O. vide order dated 30th June 1959 held the partnership deed as bogus'. On appeal, the Income‑tax Appellate Tribunal, Karachi, while dismissing the appeal on 1st August 1961 merely relied on the circumstance that the two married daughters, namely Qaiser Sultana and Farukh Sultana, had not contributed any capital nor did they associate themselves with the partnership business and, therefore, their inclusion showed that the firm was constituted only to evade the incidence of tax. It may here be mentioned that the I. T. O. gave different reasons for holding the partnership to be spurious but the tribunal adopted the aforestated reasoning for upholding the order. The assessee thereupon applied under section 66 (1) of the Income‑tax Act for referring the aforestated question for decision to the High Court. The tribunal refused to refer the question on the ground that the finding was a conclusion of fact vide order dated 1st May 1962. The assessee thereupon moved the High Court under section 66 (2) of the Income‑tax Act for directing the tribunal to refer the question and by judgment dated 16th November 1966 the tribunal was directed to state the case for decision, which it has done.

3. It would be pertinent to refer to the view of the tribunal while dismissing the appeal:

"What really weighed with the tribunal was that the two married daughters of Mr. Rahim Bux Khan neither contributed any capital towards the funds of the firm, nor they were in any manner associated with the management of the alleged firm."

Ex facie, no material is referred which, could show that the partnership deed was spurious and executed to avoid the incidence of tax.

4. Mr. S. A. Nusrat for the Department vehemently relied on the case of Haji Ghulam Rasool Khudabux v. Commissioner of Income‑tax, Punjab (5 1 T R 506 ) to contend that the opinion of the tribunal that a document was not genuine, is a conclusion of fact which cannot be disturbed. A close reading of the judgment shows that in that case what was observed was that there should be evidence direct or substantial showing the bogus nature of so called instrument of partnership and when we confronted this observation to Mr. Nusrat, he had to concede that there was no evidence to infer that the partnership was not genuine but the tribunal merely replied upon a term of the deed itself as a circumstance to lead to the conclusion that it was not a genuine transaction. This is, however, not the ratio of the case cited by him.. The learned counsel for the assessee has relied on the case of Himalaya Engineering Co v. Commissioner of Income‑tax, Bihar and Orissa ((1965) 57 1 T R 762) in which, after reviewing the case‑law on the subject, it has been held that the mere non‑contribution of the share capital would not lead to the conclusion that the partnership was not genuine. In another case, which would be of much help, is published as Commissioner of Income‑tax, Punjab, N.‑W. F. P. and Bahawalpur v. Messrs Mouladad Muhammad Saeed of Sheikhupura (P L D 1956 S C (Pak.) 316), in which the application for the registration of the firm was in order except that the statement in it that the amounts of profits had been divided among the partners was not correct, for the books did not show that any profits, had been divided among, or credited to the personal accounts of, the partners constituting the firm. It may also be mentioned here that the I. T. O. had also recovered from assessee's possession another set of books, in which. the profits shown were far in excess of those shown in the profit and loss account and declared in the return. The I. T. O., therefore refused to register the partnershio under section 26‑A of the Act. Muhammad Munir, C. J , who spoke for the Court, observed:‑

"It is clear from the statutory provisions and the rules mentioned above that the Income‑tax officer is bound to register a firm if he is satisfied, that the firm as set out in the instrument of partnership exists and that the application has been properly made. It is not the appellant's case that the Income‑tax Officer was not satisfied as to the existence of the firm and the shares of the partners therein, but what is con tended is that if the application states that the profits of the previous year as per profit and loss account were divided or credited and that statement is false, together with the statement in the schedule regarding:. the share in the balance of profits and the amount credited to the partners' accounts, the application cannot be said to have been properly made. We cannot accept this reasoning because the words properly made in rule 4 must be given their ordinary meaning in the context in which they have been used and that context shows that these words refer back to the particulars which are prescribed by rules 2 and 3, namely, that the application has been made by the persons who are required to make it; that it has been signed by the persons who are required to sign it: and that it has been made in the prescribed form and is accompanied by the prescribed documents. If these requirements are fulfilled, then the only question that the, income‑tax Officer has to decide is whether a firm as set out in the instrument of partnership exists or not. If he is satisfied that the firm exists, he is bound to register the firm. If he is not so satisfied, he must reject the application."

5. There is no dispute in the instant case that the firm is not in existence nor is there any plea that the application was not properly filed. In this view of the matter, the question that the firm was not genuine could not have been decided by a mere reference to the terms of the partnership deed without there being any extrinsic evidence to show that firm was not ' genuine. What is of further significance is that in the order of the High Court, it is stated that in the balance‑sheet the profits were credited to the account of the partners which they had drawn, which fact was not disputed by the Department. This by itself shows that the terms of the deed were fully acted upon. Again, the share of the two married daughters was 1/24^th each being thus nominal and, therefore, in the circumstances we fail to see how by assigning to them such nominal shares there would bean I incidence of evasion of tax. Besides, Rahim Bux held 16 shares out of 241 being those of his wife and four minor children. In terms of section 16 (3) of the Income‑tax Act he was liable to pay tax on the entire profits as an individual. This circumstance also negatives any impression of the deed not being genuine for if Rahim Bux wanted to evade tax he could as well have adopted some better method rather than to choose his own wife and minor children as partners and thus make himself liable to pay tax as afore‑stated.

6. In the result, we see no substance in the order of the tribunal that the deed was not genuine. In fact, such a conclusion was drawn on a bare consideration of the deed itself without any evidence to show that the two, ladies were in fact dummies and had no share in the partnership. We would accordingly answer the question in the negative. The reference is returned duly answered, but in the circumstances of the case there would be no order as to costs.

Reference answered accordingly..

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