S.P. GRAMOPHONE COMPANY versus C.I.T PATIALA

Citation: [1986] 1 S.C.R. 164 · Decided: 29-01-1986 · Supreme Court of India · Bench: V.D. TULZAPURKAR · Disposal: Dismissed

Judgment (excerpt)

A 
B 
c. 
D 
E 
F 
G 
R 
164 
S.P. GRAMOPHONE C<llPANY 
v. 
C.I.T., PATIALA 
JANUARY 29, 1986 
[V.D. TULZAPURKAR AND SA8YASACHI MUKHARJI,.JJ.] 
Indian Income Tax Act, 1922 & Income Tax Act, 1961: 
Section 26A/Sections 184 & 185 - Firm - Registration of 
-
Refusal by Tax Authorities -
When valid -
Instrument of 
partnership - Not militating against firm's validity in law -
But pointer against factual genuineness. 
Prior to the Assessment Year 1961-62 the appellant-firm 
was a partnership concern consisting of .two partners, each 
having 50% share in the profits and losses of the firm and it 
was granted registration. Both the partners met with an 
accident on 19.10.1958 in which they suffered serious injuries 
and became invalid. On 1.4.1960 a fresh Deed of Partnership 
was executed by virtue of which the two original partners 
retained 25% share each while the four new incoming partners 
were given 12.1/2% share each. Prior to April 1,1960 two of 
the new incoming partners were already working as employees in 
the original firm. The fresh Partnership Deed, inter alia, 
provided that the partnership was at will determinable by one 
month's notice in writing. 
For the Assessment Year 1961-62 an application duly 
signed by all the partners seeking registration of the firm 
under s. 26A of the Income Tax Act 1922 on the strength of the 
fresh Partnership Deed was 
made on 
15th September 1960 
annexing therewith the original Partnership Deed. The four new 
incoming partners were examined by.the Income Tax Officer and 
their statements were recorded, which, the ITO felt, clearly 
suggested that they were not real partners but dummies brought 
in to avoid the higher tax incidence. After considering the 
Partnership Deed, the statement of the four new incoming 
partners and the fact that profits had not been shown to have 
been distributed in the books and no entries made in the year 
of account, the ITO rejected the application . and refused 
registration. 
The view taken by the Income Tax Officer was confirmed 
by the Appellate Assistant Commissioner and by the Tribunal. 
1
S.P.GRAMOPHONE CO. v. C.I.T. 
165 
The Tribunal, however, was of the view that four new il)coming 
>-
partners were benamidars of the two original partners. 
On Reference made to the High Court, the High Court felt 
that the first question referred· to it did not bring into 
A 
focus the real issue and, therefore, recast the same. The High 
B 
Court upholding the refusal of registration held: (1) that no 
genuine partnership >had Come into existence and that the 
finding of the lower authorities in that behalf was based on 
ample material on record; (2) that the assessee is not enti-
~. tled to the registration under s.26A of the Income Tax Act, 
_, 
1922 read with Rule 6 of the Income Tax Rules, 1922; and (3) 
that the mere fact that the four new incoming partners were 
C 
found to be benamidars of the two original partners could not 
be a proper ground for refusing registration. 
In the appeal to this Court on behalf of the appellant 
it was contended: (i) that refusal to grant registration to 
the extent that it was based on the ground that no valid 
partnership . in law had come. into existence was unsustainable; 
I) 
, 
(ii) that there was no evidence to justify the finding on the 
'"' 
genuineness of the appellant firm, and (iii) that the High 
Court having held that registration could not be refused 
merely on the ground that some of the partners were benami-
dars, registration ought to have been granted. 
On behalf of the Revenue it was contended: (1) that even 
E 
if a valid partnership in law came into existence by executing 
the Deed registration could be refused on the ground that 
factually no genuine firm had come into existence; (2) that it 
is open to _the High Court to reframe or recast a question 
formulated by the Tribunal before answering it so as to bring 
out a real issue between the parties; (3) that the High Court 
F 
-- ,, 
had rightly affirmed the view of the Tribunal that the 
"· appellant-firm had not genuinely come into existence; (4) that 
though under the 1922 Act no provision similar to the Explana-
tion to Sec.185 of 1961 Act obtained and the fact that some 
members were benamidars of others in a firm could be no bar to 
the grant of registration, if the taxing authorities were to 
G 
record an adverse finding on the factual genuineness of the 
firm registration could be refused; and (5) that so far as the 
actual divis

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