Bhaichand Amoluk and Co. vs Commissioner Of Income-Tax, Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 7 November, 1960

Coram: J.C. Shah, M. Hidayatullah

On 7 November 1960 the Supreme Court of India, with Bench comprising Justices J C Shah and M Hidayatullah, delivered a judgment authored by Justice Hidayatullah. The judgment recorded that the firm Bhaichand Amolukh & Co. had filed an appeal with special leave against a judgment and order of the High Court of Bombay. The High Court had issued a reference on a question of law but had refused to include within that reference questions that the firm asserted also arose from the order of the Tribunal. In the factual narrative the Court noted that the origins of the firm lay in 1910 when Bhaichand Amolukh Vora, the father of Chhotalal Bhaichand, established a business that acted as principal agents for several insurance companies. At the time the partnership comprised Bhaichand Vora, his son Chhotalal, and a third partner, Nathubhai Patel. After the death of Bhaichand Vora in 1948 the remaining partners continued the business, and following the death of Nathubhai Patel in 1949 the partnership was held to consist of Chhotalal Bhaichand and his wife, Bai Lalitaben. The Court observed that during the subsequent years the business was treated as the sole business of Chhotalal and that this arrangement was not contested because, under section 16 (3) of the Income‑tax Act, the income of the wife would in any event be aggregated with the income of Chhotalal. The Court further explained that in June 1950 the Insurance (Amendment) Act 1950 (No 67 of 1950) became operative, amending the Insurance Act 1938 by inserting a new section 42B. That provision prohibited insurers, after a period of seven years from the commencement of the amendment Act, from appointing or transacting any insurance business in India through a principal agent. The amendment also required that contracts between an insurer and a principal agent be in writing and that the model terms set out in Part I of the Sixth Schedule be deemed incorporated into every such contract. In response to the impending cessation of principal‑agent activity Chhotalal Bhaichand sought alternative employment and accepted a position as assistant manager of the New India Assurance Company. Consequently he withdrew from the original firm, which was reconstituted from 1 January 1953, although the deed of partnership was formally executed on 22 April 1953. By the terms of that deed the partnership included three individuals with specific share allocations: Bai Manibai, the mother of Chhotalal Bhaichand, held five annas per rupee; Mr Khambatta held three annas per rupee; and Mr Premchand D Parikh also held three annas per rupee. Additionally, the two minor sons of Chhotalal, namely Jayant and Harshad, were admitted to the benefits of the partnership to the extent of one and a half annas per rupee each.

The partnership allotted the two minor sons of Chhoul, namely Jayant and Harshad, a share of the profits equal to one and a half annas in the rupee for each child. The remaining two annas in the rupee were set aside to create a reserve fund of ten thousand rupees. For the assessment year 1954‑55, which corresponded to the accounting year 1953, the firm filed an application for registration under section 26A of the Income‑tax Act. The Income‑tax Officer, by an order dated 30 September 1954, refused to register the firm. The officer’s reasons were multiple. First, the officer held that the firm effectively belonged only to Chhoul Bhaichand because there had been no formal transfer of the business to the new partners. Second, the deed of partnership expressly stated that neither Mr Khambatta nor Mr Premchand D. Parikh claimed any interest in the goodwill of the business. Third, the officer found that there was no consideration that justified Bai Manibai, the mother of Chhoul, and his two minor sons becoming entitled to the income of the business. Fourth, the officer rejected the explanation that the goodwill was retained for Bai Manibai because the enterprise had originally been started by her late husband, describing this rationale as fallacious. A fifth reason concerned a cheque of six thousand four hundred rupees drawn by the firm as Bai Manibai’s share of profits; the cheque was said to have been drawn “to self” and later traced to the Commissioner’s account. The officer did not accept Bai Manibai’s statement that she had received five thousand rupees of that amount and had spent it on charitable purposes.

The firm appealed to the Appellate Assistant Commissioner, who ordered that the firm be registered. The matter was subsequently taken to the Tribunal, which set aside the Appellate Assistant Commissioner’s order. The Tribunal concluded that Bai Manibai and the two minor sons were not the true partners of the newly constituted firm; rather, the partnership comprised Chhoul Bhaichand together with Mr Khambatta and Mr Premchand D. Parikh. Despite this finding, the Tribunal restored the Income‑tax Officer’s original order of refusal to register. The firm then sought a reference of the questions arising from the Tribunal’s decision, proposing as many as eighteen questions. The Tribunal declined to make a reference, issuing an order that listed the grounds for its decision and adding reasons that had not been previously stated; these additional reasons will be examined later. Thereafter, the firm applied to the High Court under section 66(2) of the Act, presenting the eighteen questions but summarising them into two principal questions. The first asked whether the Tribunal’s finding that the partnership was, in reality, a partnership among Chhoul, Premchand and Khambatta was supported by any material on record or whether it was based on conjecture, suspicion, incorrect assumptions or irrelevant material, thereby constituting an error or misdirection in law. The second question, contingent on a negative answer to the first, inquired whether, given the Tribunal’s finding of a partnership among those three persons, the Tribunal ought to have directed an assessment of the firm as an unregistered firm and whether the Tribunal’s action in setting aside the Appellate Assistant Commissioner’s order and restoring the Income‑tax Officer’s order was valid. The High Court declined to consider the first question and elected to refer only the second question, recasting it as follows: “In view of the Tribunal’s finding that there was a partnership between Chhoul, 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 appeal before this Court does not concern the question referred by the High Court; it is limited to the refusal to raise and refer the first question.

The Court observed that the first of the two questions framed by the petitioner concerned whether the Tribunal’s action of setting aside the order of the Appellate Assistant Commissioner and restoring the order of the Income‑Tax Officer was valid. The High Court, however, refused to refer that question and elected to consider only the second question, which it re‑phrased to ask, in view of the Tribunal’s finding of a partnership among Chhotalal, Premchand and Khambatta, whether the Tribunal should have directed an assessment on that firm as an unregistered partnership and whether the Tribunal’s act of overturning the Appellate Assistant Commissioner’s order and reinstating the Income‑Tax Officer’s order was proper. The present appeal did not concern the matter that the High Court chose to refer; that issue was left for a later determination. The appeal was limited to the refusal to refer the first question, the validity of which the Court set out for consideration.

In examining the factual background, the Court noted that the Income‑Tax Officer had taken statements from Chhotalal Bhaichand, Manibai, Premchand and Khambatta. The Tribunal, in its order, described the alleged partnership that included Manibai and the admittance of Jayant and Harshad to the partnership profits as “nothing short of a farce.” The Tribunal’s reasoning rested on several observations. First, after Chhotalal’s exit, no adjustment entries were made in the business books, although the business continued to operate as before under the partnership. Second, an employee and an agent of the firm were treated as partners but were denied any right to the goodwill of the business, which the partnership deed declared to belong solely to the assessee’s mother. Third, the monthly drawings of Premchand and Khambatta were limited to Rs 300, an amount that was essentially equivalent to their remuneration or commission in the preceding period. Fourth, the old business maintained three bank accounts that continued unchanged; one account was operated by Chhotalal himself while the other two were operated by the new partners under a power‑of‑attorney that had not been withdrawn. Fifth, the three insurance companies for which the old firm had acted as principal agents did not issue any new letters of appointment, nor was any written communication provided to them.

Further, the Tribunal concluded that Chhotalal likely intended to retain the business that had been built by the family and therefore devised a scheme to transfer the business to a sham partnership comprising his mother, an employee and an agent of the firm, with the benefits of the partnership accruing to his two minor sons. The Tribunal also observed that the New Indian Assurance Company supported a practice whereby insurance business was conducted in addition to the employee’s duties with the company. It found that Manibai, the mother of Chhotalal, was not capable of taking any part in the business and had signed documents merely as directed by Chhotalal. These findings formed the basis of the Tribunal’s conclusion that the partnership was fictitious and that the taxpayer’s actions were aimed at evading tax liability.

In the proceedings, it was observed that the assessee may have attended to the business personally outside regular office hours. The Tribunal further pronounced that there was no justification for assigning the goodwill of the firm to Manibai, whose sole qualification was that she was the mother of Chhotalal. When the Tribunal dismissed the application for a reference, it reiterated some of the same reasons and added that Manibai had been examined, thereby implying that her testimony was unsatisfactory. Subsequently, the High Court ordered a reference and apparently took into consideration the Tribunal’s finding, which was recorded as follows: “In order to overcome 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 times amounted to the approximate remuneration earned by them in the preceding year. In reality the partnership is between the assessee, Premchand and Khambatta. Manibai and the two minor sons are bogus parties…” Relying on this finding, the High Court raised the question of whether the order of the Income‑Tax Officer could be restored in its entirety, because the Officer had included the whole income of the firm in Chhotalal’s individual assessment.

The appeal contended that the High Court erred in not calling for a reference for two reasons. First, it was argued that no material existed on which the finding that the firm seeking registration was a pretense could be based. Second, it was maintained that the Tribunal, having acted on suspicions, conjecture and surmises, rendered a decision contrary to the principles laid down in earlier decisions of this Court, namely 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, with additional reference to Umacharan Shaw & Bros. v. Commissioner of Income‑Tax. The respondent, in turn, relied upon a recent pronouncement of this Court in Homi Jehangir Gheesta v. Commissioner of Income‑Tax. Addressing the first ground, the Court observed that material readily existed to support the Tribunal’s finding. If Chhotalal had withdrawn from the business, his wife Lalitabai would have become the sole proprietor; yet the subsequent deed made no mention of her interest and she appears to have vanished from the records. On the termination of the old firm and the formation of the new partnership, one would expect adjustment entries in the books of account, but such entries were conspicuously absent. Likewise, one would anticipate written communications from the new agents to the various insurance companies indicating the change of principal agents and an appointment letter in the name of the new firm, yet no such documents were produced. The bank accounts, which should have been transferred to the new partnership, remained unchanged, and the power of attorney in favour of Premchand and Khambatta was never cancelled, leaving the new firm unauthorized to deal with the accounts. In the absence of these actions, the decision of the Tribunal that the firm applying for registration was not a real firm cannot be said to lack material support.

The Court observed that the Tribunal’s conclusion that the partnership seeking registration was not a genuine firm could not be said to rest on an absence of material. Regarding the additional reasons that the Tribunal had characterised as surmises, conjectures and suspicions, the Court referred to its earlier pronouncement in Gheeta’s case. It explained that the entire order of the Tribunal must be read as a whole to determine whether every material fact, both for and against the assessee, had been considered fairly and with due care, whether the evidence on either side had been fully examined in reaching the final conclusion, and whether the Tribunal’s conclusion had been influenced by any irrelevant consideration or prejudice. The Court noted that counsel for the appellant had guided it through the complete order of the Tribunal together with the relevant materials upon which it was based. After reviewing those materials, the Court stated that it could not agree with the appellant’s counsel that the Tribunal’s order was tainted by any of the defects identified in Dhirajlal Girdharilal v. Commissioner of Income‑tax or Omar Salay Mohamed Sait v. Commissioner of Income‑tax. The Court further clarified that those earlier decisions did not require a microscopic, sentence‑by‑sentence dissection of the Tribunal’s order in order to detect a minor lapse or an incautious opinion to be used as a peg for a legal issue. In light of the arguments presented, the Court added that, when proper probabilities are considered on the basis of the facts alleged or proved, the Tribunal does not indulge in conjectures, surmises or suspicions.

The Court further observed that the Tribunal had attempted to infer a motive for forming the new partnership that involved an elderly woman and two minor sons in place of Chhotalal, and that the Tribunal’s observations were based on a motive that suggested itself rather than on any substantive material. Even though the Tribunal mentioned certain suspects, the Court did not consider that those mentions entered into the resolution of the matter. While suspicious speculation and surmises are best avoided, the Court held that in the present case the Tribunal’s order rested on solid facts and that the speculation concerning Chhotalal’s motive did not materially affect the finding, although it might have been advisable for the Tribunal to omit such speculation entirely. The Court concluded that the present case falls within the ruling articulated in Gheeta’s case. Consequently, the appeal was dismissed with costs, and the appeal was formally dismissed.