Krishna Flour Mills vs Commissioner Of Income-Tax, Bangalore

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 1 November, 1960

Coram: J.C. Shah, M. Hidayatullah, S.K. Das

In this case the Supreme Court considered three applications for special leave to appeal from a decision of the High Court of Mysore dated 8 October 1958. The High Court had dismissed three petitions filed by Krishna Flour Mills, which was the assessee before the income‑tax authorities and the appellant before this Court, under section 66(2) of the Indian Income‑Tax Act 1922. The High Court held that no question of law arose from the order dated 24 March 1956 issued by the Income‑Tax Appellate Tribunal, Madras, in Income‑Tax Appeals numbered 2358, 2359 and 2360 of the fiscal year 1955‑56, and therefore the petitions could not proceed.

The facts begin with M. Kasturi Ranga Setty, hereinafter referred to as K. R. Setty, who was a member of a joint Hindu family. Following a partition between him and his two brothers, two flour mills that previously belonged to the family were allotted to him as separate property effective from 1 June 1948. The two mills were identified as Krishna Flour Mills and Elgin Electric Flour Mills, the latter of which K. R. Setty possessed only a lessee’s interest. Up to the assessment year 1949‑50, K. R. Setty was assessed under the Mysore Income‑Tax Act in the capacity of karta of the joint Hindu family, which was the situation before the Indian Income‑Tax Act 1922 became operative in Mysore on and from 1 April 1950.

Even before the joint family was formally divided, the business of the two mills was administered by Venkataramana Setty, hereinafter called V. Setty, who was the brother‑in‑law of K. R. Setty. V. Setty received a salary of approximately Rs 6,000 per annum, and this amount was raised in the account year 1948‑49 to Rs 10,000 per annum. The salary payments were entered in the mills’ accounts in V. Setty’s name. As the prospect of a petition by the joint family loomed, K. R. Setty proposed that V. Setty become a partner in the enterprise. Consequently, on 16 November 1949 a partnership deed was executed, with the partnership arrangement being given effect from 1 July 1949.

The partnership deed specified that the business of the partnership would be limited to the operation of Krishna Flour Mills and identified three partners: K. R. Setty, his wife Nagaratnamma, and his brother‑in‑law V. Setty. The original term of the partnership was five years, but it was subsequently extended to 31 March 1955. Regarding capital contributions, Nagaratnamma supplied Rs 50,000, which was recorded in the books of Krishna Flour Mills as her share of capital; this amount derived from her stridhanam and was credited to her account as sums given to her by her husband. V. Setty contributed Rs 40,000, which represented amounts standing to his credit in the mills’ books as his accumulated past salary. The partnership deed further…

In the partnership, each partner held an equal share in both profits and losses, and the firm’s operations were to be managed by the first partner, K. R. Setty, with assistance from the third partner, V. Setty. The partnership was duly entered in the register of firms on 23 November 1949. The appellant then filed an application under section 26A of the Income‑Tax Act seeking registration of the firm for the assessment years 1950‑51 and 1951‑52. The Income‑Tax Officer in Bangalore rejected this application on 18 March 1954, concluding that the partnership was not genuine. The appellant’s appeal against that rejection was dismissed by the Appellate Assistant Commissioner, and the decision of the Income‑Tax Appellate Tribunal likewise upheld the finding of non‑genuineness. The appellant subsequently renewed his applications for the assessment years 1952‑53, 1953‑54 and 1954‑55, and these three applications were heard together. By an order dated 26 February 1955, the applications were again rejected. The appellant appealed to the Appellate Assistant Commissioner, who on 30 June 1955 confirmed the Income‑Tax Officer’s denial of registration under section 26A. The matter then proceeded before the Income‑Tax Appellate Tribunal in three separate appeals, and on 24 March 1956 the Tribunal also found that the firm was not genuine and dismissed the appeals. The appellant thereafter moved the Tribunal for a reference to the High Court under section 66(1) of the Act, but the Tribunal held that its order gave rise to no question of law and therefore dismissed the reference. The appellant then invoked section 66(2) of the Act before the High Court, requesting that the Tribunal be directed to state a case on the legal question: whether, based on the facts and circumstances of the case, the Tribunal’s decision that the firm was not genuine and therefore not registerable under section 26A of the Income‑Tax Act was correct in law. Before the High Court, the appellant argued that the assessing authorities had no material on which to base the inference that the firm was not genuine, and that the Tribunal’s conclusion rested solely on suspicion, conjecture and surmise. The High Court rejected this contention, observing that even if it were called upon to decide the issue it might reach a different conclusion on the evidence, such a possibility would not transform the dispute into a question of law. Consequently, the High Court dismissed the appellant’s applications. The appellant then obtained special leave to appeal to this Court, and the present appeals were filed. Counsel for the appellant maintained that a question of law does arise, contending that, apart from mere suspicion and conjecture, the Tribunal’s inference was not reasonably supported by the facts it had found, and that the material pointed only in one direction, which should preclude the Tribunal’s conclusion.

The Tribunal was held to have reached a conclusion that no individual acting in a judicial capacity and properly instructed on the applicable law could have arrived at the finding on which it relied. Counsel for the respondent challenged the position advanced by the appellant’s counsel and observed that the matter which the appellant had raised before the High Court under section 66 (2) differed from the issue now being presented for consideration. He noted that merely appending the expression “right in law” to a question that is essentially one of fact does not transform it into a question of law. He further observed that the determination of whether a partnership is genuine is ordinarily a factual enquiry. Nevertheless, the appellant’s grievance was that the factual findings recorded by the Tribunal did not logically support the conclusion that it had drawn, and that the conclusion was founded on mere suspicion and conjecture.

The factual findings recorded by the Tribunal were set out in a sequential manner. First, the Tribunal found that the two new partners, namely Nagaratnamma and V. Setty, had contributed their respective shares of capital in accordance with the terms specified in the deed of partnership. Second, the capital account of V. Setty, as reflected in the partnership’s books, showed that over the six‑year period from 1948 to 1954 he had accumulated profits amounting to approximately two lakh rupees and that he had withdrawn approximately three thousand rupees in each of the years 1950 and 1951, and subsequently withdrawn fifteen thousand three hundred sixty‑six rupees in 1952, twelve thousand eight hundred sixty‑four rupees in 1953, and twelve thousand fifty‑eight rupees in 1954. Third, the Tribunal held that the withdrawals made in 1950 and 1951 represented household expenses that were debited to his account, on the basis that V. Setty at that time resided with his brother‑in‑law. Fourth, the Tribunal observed that the withdrawals made in 1952, 1953 and 1954 covered similar household expenses as well as expenses incurred for the improvement of a house that V. Setty had purchased in 1945. Fifth, the appellant had not supplied complete information regarding the manner in which the amounts withdrawn during those years had been spent. Sixth, the account of Nagaratnamma showed that she had not withdrawn any portion of her share of profits, which were recorded separately in her account. Seventh, the Tribunal described Nagaratnamma as an ordinary Hindu house‑wife. In addition, the Tribunal referred to the fact that K. R. Setty had corresponded with the income‑tax authorities claiming to be the proprietor of the business even after the partnership had commenced; however, those correspondences were not placed on record and the Tribunal made no further comment on the content or circumstances of those letters. On the basis of these findings, the Tribunal concluded in these words: “On the above facts, we do not find it difficult to reach a conclusion that the partnership claimed on the basis of the deed dated November 16, 1949, is not genuine and that the deed is …”

In its decision, the Tribunal had described the partnership deed dated 16 November 1949 as a document that was not intended to be acted upon. It observed that, although the three individuals involved might have presented themselves to the outside world as partners, such outward representation did not automatically establish the genuineness of the partnership. The Tribunal emphasized that the actual conduct of the parties among themselves was the essential factor to consider. Relying on those facts, the Tribunal concluded that the firm was not genuine and therefore could not be registered under section 26‑A. The Court noted, however, that aside from the undisputed relationship between the parties, the Tribunal had not referred to any specific conduct among the parties that would indicate the partnership’s insincerity. The Tribunal appeared to assume that a partnership comprising a wife and her brother‑in‑law was inherently suspect, and that if the wife retained her share of the profits while the brother‑in‑law did not fully expend his share, an inference of a bogus partnership could be drawn. The Court found such an inference to be unreasonable and not supported by partnership law or ordinary experience. The partnership accounts were not held to be false, nor was it suggested that there were no valid reasons for including the wife and brother‑in‑law as partners. Both parties had contributed capital, the brother‑in‑law managed the business, and at the relevant time he lived with K. R. Setty. Counsel for the respondent argued that the Rs 50,000 contributed by Nagaratnamma might not constitute stridhanam under the law, but the Tribunal had never made such a finding; on the contrary, it had affirmed her capital contribution as stated in the deed. Consequently, the Court identified a legal question arising from the Tribunal’s order: whether the facts and circumstances found by the Tribunal provided sufficient material to conclude that the partnership created by the deed of 16 November 1949 was not genuine. The Court accordingly allowed the appeals, set aside the Mysore High Court order dated 8 October 1958, and directed the Tribunal to state a case on the identified question and refer it back to the High Court. The appellant was awarded costs of both the High Court and this Court, with a single set of costs for the appeals. The appellant had also filed three petitions for special leave under article 136 of the Constitution against the Tribunal’s order dated 24 March 1956, together with applications for condonation of delay. Those petitions were ordered to be joined with the three appeals, but no notice was given to the respondent; in view of the appellate decision, the petitions became infructuous and were dismissed.

The Court noted that the petitions for special leave under article one hundred thirty‑six of the Constitution had been filed against the respondent. In accordance with the earlier order, those petitions were to be heard together with the appeals that were pending before this Court. The Court further observed that, because the appeals had now been decided in favour of the appellant, the purpose of the petitions had been exhausted. Consequently, the Court held that the petitions had become infructuous, meaning they no longer presented any operative issue for adjudication. As a result, the Court dismissed the petitions as moot and of no further legal effect. The Court then recorded that the appeals were allowed, thereby granting the relief sought by the appellant and setting aside the earlier adverse orders that had been challenged. This dismissal of the petitions and the allowance of the appeals constituted the final disposition of the matters before the Court.