The judgment of the court was delivered by
HIDAYATULLAH J.---This appeal with special leave has been
filed by Messrs. Bhaichand Amolukh & Co. (referred to in this judgment as
the firm) against the judgment and order of the High Court of Bombay, by which
the High Court asked for a reference on a question of law but declined to
include therein a question or questions which, the firm contended, also arose
out of the Tribunal's order.
The facts leading up to the appeal may be stated shortly.
One Bhaichand Amolukh Vora, father of Chhotalal Bhaichand, started a firm in
1910, to work as principal agents for a number of insurance companies. In that
firm, in addition to Bhaichand Vora and Chhotalal Bhaichand, one Nathubhai Patel
was also a partner. Bhaichand Vora died in 1948, and the two surviving partners
continued as the firm. Nathubhai Patel died in 1949, and it is stated that the
firm thereafter consisted of Chhotalal Bhaichand and his wife, Bai Lalitaben. In
the years that followed, the business of the firm was treated as the sole
business of Chhotalal Bhaichand to which no objection was taken, because, as is
now explained, the income of the wife would, in any event, have been included in
the income of Chhotalal Bhaichand under section 16(3) of the Income-tax Act. In
June 1950 the Insurance (Amendment) Act, 1950 (No. 67 of 1950), came into force,
which amended the Insurance Act of 1938 (No. 4 of 1938), by adding a new section
(42B) by which the insurers were prohibited after the expiration of seven years
from the commencement of Act No. 67 of 1950, from appointing, or transacting any
insurance business in India through a principal agent. Contracts between an
insurer and a principal agent were also required to be in writing, and the model
terms contained in Part I of the Sixth Schedule to the Act were to be deemed to
be incorporated in and form part of every such contract.
The case of the firm is that Chhotalal Bhaichand,
realising that the business of principal agents was to come to an end after the
expiry of seven years, looked for other sources of employment and accepted a job
as assistant manager of the New India Assurance Company. He withdrew from the
firm, and the old firm was reconstituted from January 1, 1953, though the deed
of partnership was executed on April 22, 1953. By this deed, the partnership
consisted of three persons, with shares as follows :
(1) Bai Manibai (mother of Chhotalal Bhaichand)---5 annas
in the rupee.
(2) Mr. Khambatta---3 annas in the rupee.
(3) Mr. Premchand D. Parikh---3 annas in the rupee,
(4) Two minor sons of Chhotalal Bhaichand, Jayant and
Harshad, were also admitted to the benefits of the partnership to the extent of
1 1/2 annas in the rupee, each.
The balance of 2 annas in the rupee was earmarked to build
up a reserve fund of Rs. 10,000.
For the assessment year 1954-55, corresponding to the year
of account, calendar year 1953, an application for the registration of this new
firm was made under section 26A of the Indian Income-tax Act. The Income-tax
Officer by his order dated September 30, 1954, declined registration, holding
that the firm belonged solely to Chhotalal Bhaichand, and that there was only a
pretence of a firm. He gave five reasons for coming to this conclusion. They
were that Chhotalal Bhaichand had not made any formal transfer of the business
to the new partners, that the deed stated that neither Khambatta nor Premchand
claimed any interest in the goodwill of the business, that there was no
consideration for which Bai Manibai, the mother of Chhotalal Bhaichand. (the
assessee), and his two minor sons became entitled to the income from the
business, and that the reason that the goodwill was reserved for her because the
business had been started by her late husband was " fallacious ". A
fifth reason was given that a cheque for Rs. 6,400 being Manibai's share of
profits was drawn by the firm " to self ", and in later years the
amount was traced to the account of Chhotalal Bhaichand. The explanation of
Manibai that she received Rs. 5,000 out of that amount and spent it on charities
was not accepted.
On appeal to the Appellate Assistant Commissioner,
registration of the firm was ordered. On further appeal to the Tribunal, the
order of the Appellate Assistant Commissioner was, in its turn, set aside, and
the Tribunal reached the conclusion that Manibai and the two minor sons were not
the real partners of the new firm, but that the partnership consisted of
Chhotalal Bhaichand and two others. The Tribunal, in spite of this finding,
restored the order of the Income-tax Officer. The firm then applied for a
reference of the questions arising from the Tribunal's order, and suggested as
many as 18 questions. The Tribunal declined the reference by an order, which set
out the grounds on which its decision in the appeal proceeded, adding reasons
which had not been given before. To those reasons we shall refer later.
The firm then applied to the High Court under section
66(2), and set out the 18 questions which it alternatively summarised into two,
as follows :
" 1. Whether the finding of the Tribunal that the
partnership but is in reality a partnership between Chhotalal, is not genuine
Premchand and Khambatta is supported by any material on record and/or is based
wholly or partly on conjectures, suspicions, surmises, incorrect assumptions or
irrelevant materials, and/or amounts to an error or misdirection in law ?
2. If the above question is answered against the
applicant, then, in view of the Tribunal's finding that there was a partnership
between Chhotalal, Premchand and Khambatta whether the Tribunal ought to have
directed an assessment to be made on that firm as an unregistered firm and
whether the action of the Tribunal in setting aside the order of the Appellate
Assistant Commissioner and restoring that of the Income-tax Officer is valid ?
"
The High Court declined to raise the first question, and
asked for a reference only on the second question, which it recast as follows :
" In view of the Tribunal's finding that there was a
partnership between Chhotalal, Premchand and Khambatta, whether the Tribunal
ought to have directed an assessment to be made on that firm as an unregistered
firm and whether the action of the Tribunal in setting aside the order of the
Appellate Assistant Commissioner and restoring that of the Income-tax Officer is
valid ? "
We are not concerned in this appeal with the question on
which the High Court has called for a reference. That is a matter which, we
presume, will be decided hereafter. We are concerned only with the refusal to
raise and call for a reference on the first question, which we have set out
above.
In dealing with the matter, the Income-tax Officer had
taken statements from Chhotalal Bhaichand, Manibai, Premchand and Khambatta. The
Tribunal in its order stated that the alleged partnership with Manibai and
admitting Jayant and Harshad to the profits of the partnership was "
nothing short of a farce ". In its reasons, the Tribunal referred to
various matters. It observed that with the exit of Chhotalal, no adjustment
entries were made in the books of the business, which was carried on as before
by the new partnership, that an employee and an agent of the firm were taken as
partners but had no right to the goodwill of the business, which was stated in
the deed to belong solely to the assessee's old mother, that the monthly
drawings of Premchand and Khambatta were limited to Rs. 300 which was almost
equal to their remuneration or commission in the past, that the old business had
three bank accounts which continued as before, one of them being operated by
Chhotalal himself and the other two, by the new partners under a
power-of-attorney which was not withdrawn, that no new letter of appointment was
issued by the three insurance companies for whom the old firm was acting as
principal agents, and that no written communication was given to them, In
disposing of the matter, the Tribunal stated that Chhotalal probably wished to
retain the business which had been built up by the family, and devised a scheme
to transfer the business to a sham partnership consisting of his mother, an
employee and an agent of the firm, with the benefits of the partnership to his
two minor sons, that the New India Assurance Company lent its support to a
practice by which insurance business was being done, in addition to being an
employee of the company, that Manibai, mother of Chhotalal, was not capable of
taking any part in the business and had signed documents as desired by
Chhotalal, and that the assessee perhaps attended to the business personally
outside office hours. The Tribunal also stated that there was no reason why the
goodwill of the firm was assigned to Manibai, whose only qualification was that
she was Chhotalal's mother. When the Tribunal rejected the application for a
reference, it again adverted to some of these reasons, adding that Manibai was
examined, hinting thereby that her statement was not satisfactory. When the High
Court called for a reference, it presumably considered the finding of the
Tribunal, which was recorded in the following words :
" In order to get over the legal difficulty, the
assessee converted the old business into a partnership concern by taking the two
employees as working partners. These employees were given only three annas share
which perhaps at the material time was the approximate remuneration earned by
them in a preceding year. It is in reality a partnership between the assessee,
Premchand and Khambatta. Manibai and the two minor sons are bogus
parties...."
The High Court, therefore, raised the question whether the
order of the Income-tax Officer could be restored in toto in view of this
finding, because the Income-tax Officer had taken the whole of the income of the
firm into Chhotalal's individual assessment.
In this appeal, it is contended that the High Court was in
error in not calling for a reference, because (a) there were no materials on
which the finding that the firm seeking registration was a pretence, could be
rested, and (b) in any event, the Tribunal having acted on suspicions,
conjectures and surmises, its decision is erroneous, in view of the decisions of
this court reported in Dhirajlal Girdharilal v. Commissioner of Income-tax, Omar
Salay Mohamed Sait v. Commissioner of Income-tax, and Lalchand Bhagat Ambica Ram
v. Commissioner of Income-tax. Reference was also made to Umacharan Shaw &
Bros. v. Commissioner of Income-tax. The respondent relied upon a recent
pronouncement of this court in Homi Jehangir Gheesta v. Commissioner of
Income-tax.
Regarding the first ground, it is quite obvious that there
was material on which the finding could be based. If Chhotalal withdrew from the
business, his wife, Lalitabai, would be left as the sole proprietor. No mention
of her interest whatever was made in the subsequent deed, and she seems to have
disappeared completely. On the termination of the old firm and the setting up of
the new firm, one would expect some adjustment entries in the books of account,
and these were singularly lacking. One would also expect a communication by the
new agents to the various insurance companies in writing about the change of
principal agents and an appointment letter in the name of the new firm by them.
The bank accounts would have been transferred to the new partnership firm, and
the power-of-attorney in favour of Premchand and Khambatta would have been
cancelled and the new firm would have been authorised to deal with the accounts.
Without any such action, the decision of the Tribunal, that the firm which asked
for registration was not a real firm, cannot be said to be founded on no
material.
In so far as the addition of certain other reasons, which
are characterised as surmises, conjectures and suspicions, is concerned, this
court has observed in Gheesta's case as follows :
" We must read the order of the Tribunal as a whole
to determine whether every material fact, for and against the assessee has been
considered fairly and with due care ; whether the evidence pro and con has been
considered in reaching the final conclusion ; and whether the conclusion reached
by the Tribunal has been coloured by irrelevant considerations or matters of
prejudice. Learned counsel for the appellant has taken us through the entire
order of the Tribunal as also the relevant materials on which it is based.
Having examined the order of the Tribunal and those materials, we are unable to
agree with learned counsel for the appellant that the order of the Tribunal is
vitiated by any of the defects adverted to in Dhirajlal Girdharilal v.
Commissioner of Income-tax, or Omar Salay Mohamed Sait v. Commissioner of
Income-tax. We must make it clear that we do not think that those decisions
require that the order of the Tribunal must be examined sentence by sentence,
through a microscope as it were, so as to discover a minor lapse here or an
incautious opinion there to be used as a peg on which to hang an issue of law.
In view of the arguments advanced before us it is perhaps necessary to add that
in considering probabilities properly arising from the facts alleged or proved,
the Tribunal does not indulge in conjectures, surmises or suspicions. "
The Tribunal was trying to unravel the motive for the
formation of the new firm with an old lady and two minor sons in place of
Chhotalal, and what was observed by the Tribunal was in connection with the
motive which suggested itself to it, and was not based on any material. Even if
the Tribunal mentioned those suspicions, we do not think that they entered into
the solution of the problem before it. Suspicions and surmises are best avoided
; but in the present case, the order of the Tribunal proceeded on such solid
facts that the speculation about the motive of Chhotalal did not make any
material difference to the finding reached, though we cannot help saying that
the Tribunal would have been well-advised to leave speculation out altogether.
We are of opinion that this case falls within the ruling in Gheesta's case.
In the result, the appeal fails, and will be dismissed
with costs.
Appeal dismissed
