Commissioner of Income-Tax, Ahmadabad
Vs. A. Abdul Rahim & Co., Baroda  INSC 248 (4 November 1964)
04/11/1964 SUBBARAO, K.
CITATION: 1965 AIR 1703 1965 SCR (2) 13
R 1965 SC1708 (1,4) MV 1966 SC1490 (23) F
1967 SC 383 (14) RF 1969 SC 493 (12) RF 1970 SC1343 (22) R 1971 SC 383 (5) D
1986 SC1152 (6,12)
Income Tax Act, 1922, Section 26A
registration of partnership-More than two partners--Otherwise genuine Whether
can be refused registration when one partner is benamidar.
Benamidar-Status of-If trustee of the real
A partnership consisting of three partners
was reconstituted to take in a 4th partner who was a nephew of, and was given a
part out of his own share by, one of the existing partners. The application by
the new partnership firm for registration under s. 26-A of the Income-tax Act,
1922, was rejected by the Income-tax Officer on the ground that as the new
partner was a benamidar, the partnership was not a genuine one. The Appellate
Assistant Commissioner, the Appellate Tribunal and the High Court, all took the
view that the new partnership agreement was valid in law and the fact that one
of the partners was a benamidar of another was not a sufficient ground for
refusing to register the firm.
It was contended on behalf of the Revenue
that apart from the fact that the 4th partner was a dummy and therefore the new
partnership was not a genuine one, the actual share of the old partner was not
what was stated in the agreement but was the total of his apparent share and
that of the benamidar; to this extent the agreement did not contain a correct
specification of the individual shares of partners as required under s. 26-A
and registration was, therefore, rightly rejected.
HELD : (dismissing the appeal) (i) When a
firm makes an application under s. 26-A of the Act for registration, the
Income-tax Officer can reject the application if he comes to the conclusion
that the partnership is not genuine or the instrument of partnership has not
specified correctly the individual shares of the partners. But once he comes to
the conclusion that the partnership is a genuine and valid one, he cannot
refuse registration on the ground that one of the partners is a benamidar of
another. If the partnership is genuine and legal, the share given to the
benamidar will be correct specification of his individual share in the
The beneficial interest in the income
pertaining to the share of the said benamidar -nay have relevance to the matter
of assessment, but non in regard to the question of registration. [21D-F] R. C.
Mitter & Sons v. C.I.T., Calcutta, (1959) Supp. 2 S.C.R. 641; C.I.T. Madras
v., Sivakasi Match Exporting Co., (1964) 53 I.T.R. 204; Sir Sunder Singh
Majithia v. C.I.T.
C.P. & U.P., (1942) 10 I.T.R. 457,
The Central Talkies Circuit, Matunga, (1941)
9 I.T.R. 44, considered.
Hiranand Ramsukh v. C.I.T., Hyderabad, (1963)
47 I.T.R. 598;
P. A. Raju Chettiar v. C.I.T., Madras, (1949)
17 I.T.R. 51, distinguished.
(ii) A benamidar is a mere trustee of the
real owner and has no beneficial interest in the property or the business of
the real owner. As in the case of a trustee, he possesses the legal character
to enter into a 14 partnership with another, and the fact that he is
accountable for his profits to, and has a right to be indemnified for his
losses by, a third party or even by one of the partners does not disgorge him
to the said character.
[19D-E, G-H] Gur Narayan v. Sheo Lal Singh,
(1918), L.R. 46 I.A. 1, Aruna Group of Estates, Bodinayakanur v. State of
Madras, (1962) 2 M.L.J. 264, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 982 of 1963.
Appeal from the judgment and order, dated
April 4, 5, 1961 of the Gujarat High Court in Income-tax Reference No. 8 of
K. N. Rajagopala Sastri and R. N. Sachthey,
for the appellant.
T. A. Ramachandran and O. C. Mathur, for the
The Judgment of the Court was delivered by
Subba Rao, J. This appeal by certificate raises the question whether the
Income-tax Officer can refuse to register a genuine partnership entered into
between more than 2 persons on the ground that one of them is only a benamidar
The relevant facts may briefly be stated.
Three persons by name Abdul Rahim Valibhai, Abdulla Rehman and Abdul Rahim
Malanghbhai, constituted a partnership having 9 annas, 5 annas and 2 annas
share respectively. The said partnership was carrying on business in goat and
sheep skins. From the beginning of Samvat year 2012 (15-11-1955 to 2-11-1956)
there was a change in the constitution of the said firm. A 4th partner by name
Abdul Rehman Kalubhai was inducted into the partnership with 2 annas share
carved out of the 9 annas share of Abdul Rahim Valibhai. The said Abdul Rehman
Kalubhai is a nephew of Abdul Rahim Valibhai. On March 6, 1956, a partnership
deed was executed between the said 4 persons. Under the said partnership, Abdul
Rahim Valibhai, Abdulla Rehman, Abdul Rahim Malanghbhai and Abdul Rehman
Kalubhai had 7 annas, 5 annas, 2 annas and 2 annas share respectively. On May
8, 1956, the said firm presented an application to the Income-tax Officer for
its registration under s. 26A of the Indian Income-tax Act, 1922, hereinafter
called the Act. The Income-tax Officer held that the partnership was a bogus
one and, on that finding, refused to register it. The assessee took up the
matter on appeal to the Appellate Assistant Commissioner, who held that the
partnership agreement was valid in law and that the fact that one of the
partners was a benamidar of another was not a ground for refusing to register
the firm, though 15 it might entitle the Income-tax Officer to consider the
income pertaining to the share of the benamidar as part of the income of the
real owner in assessing the latter's income to tax. The Income-tax Officer
questioned the correctness of the decision by preferring an appeal to the
Appellate Tribunal, Bombay Bench. The Tribunal also held that the partnership
was a genuine one and that the fact that one of the partners gave away a small
part of his share to his nephew would not disqualify the partnership from being
registered under s. 26A of the Act. At the instance of the Revenue the
following question was referred to the High Court "Whether a partnership
in which one partner is the benamidar of another partner could be registered
under s. 26A of the Indian Income- tax Act." The learned Judges of the
High Court thought that the question as framed did not really bring out the
true matter in controversy between the parties and, therefore, they reframed
the question as follows :
"Whether on the facts and in the
circumstances of the case, the partnership constituted under the instrument of
partnership, dated 6th March 1956 could be registered under Section 26A of the
Indian Income-tax Act." The learned Judges answered the question in the
They held that as the partnership was a
genuine one the fact that one of the partners had no beneficial interest in his
share by reason of some arrangement between him and another partner would not
disentitle the firm from being registered under the Act. Hence the appeal.
Mr. Rajagopala Sastri, learned counsel for
the Revenue, raised before us the following two points : (1) Abdul Rehman
Kalubhai is only a dummy and therefore, the partnership is not a genuine one;
(2) even if Abdul Rehman Kalubhai is a benamidar of Abdul Rahim Valibhai in
respect of the 2 annas share in the partnership, Abdul Rahim Valibhai has in
fact 9 annas share in the partnership; as the partnership deed shows that he
has only 7 annas share instead of 9 annas share, there is no correct
specification of his individual share within the meaning of s. 26A of the Act
and, therefore, the Income-tax Officer rightly rejected the firm's application
for registration under s. 26A of the Act.
Learned counsel for the respondent, on the
other hand, argued that the question whether the partnership was genuine or not
is one of fact and indeed presumably for that reason the question 16 of
genuineness was not referred to the High Court by the Tribunal and that the
learned counsel for the Revenue cannot now raise that question before this
Court. He further argued that, as the partnership is genuine, the circumstance
that under some internal arrangement one of the partners is a benamidar of
another partner will not detract from its validity or disqualify it from being
registered under the Act.
To appreciate the contentions it will be
convenient at the outset to read the relevant part of S. 26A of the Act and
also the rules made thereunder.
Section 26A. (1) Application may be made to
the Income-tax Officer on behalf of any firm, constituted under an instrument
of partnership specifying the individual shares of the partners, for
registration for the purposes of this Act and of any other enactment for the
time being in force relating to income-tax or super-tax.
(2) The application shall be made by such
person or persons, and at such times and shall contain such particulars and
shall be in such form, and be verified in such manner, as may be prescribed;
and it shall be dealt with by the Income-tax Officer in such manner as may be
Rules 2 to 6B of the Rules made under s. 59
of the Act deal with the registration of firms.
Rule 2. Any firm constituted under an
Instrument of Partnership specifying the individual shares of the partners may,
under the provisions of section 26A of the Indian Income Act, 1922 (hereinafter
in these rules referred to as the Act), register with the Income-tax Officer,
the particulars contained in the said Instrument on application made in this
Such application shall be signed by all the
Rule 4. If, on receipt of the application
referred to in Rule 3, the Income-tax Officer is satisfied that there is or was
a firm in existence constituted as shown in the instrument of partnership and
that the application has been properly made, he shall enter in writing at the
foot of the instrument or certified copy, as the case may be, a certificate in
the following form ........
17 Rule 6B. In the event of the Income-tax
Officer being satisfied that the certificate granted under Rule 4, or under
Rule 6A, has been obtained without there being a genuine firm in existence, he
may cancel the certificate so granted.
On a consideration of the said provisions,
among others, this Court in R. C. Mitter & Sons. v. Commissioner of
Income-tax, Calcutta(1), speaking through Sinha, J., as he then was, held that
in order a firm may be entitled to registration under s. 26A of the Act, the
following essential conditions must be satisfied, viz., (i) the firm should be
constituted under an instrument of partnership, specifying the individual
shares of the partners; (ii) an application on behalf of, and signed by, all
the partners and containing all the particulars as set out in the Rules must be
made; (iii) the application should be made before the assessment of the firm
under section 23, for that particular year; (iv) the profits or losses if any
of the business relating to the accounting year should have been divided or
credited, as the case may be, in accordance with the terms of the instrument;
and (v) the partnership must be genuine and must actually have existed in
conformity with the terms and conditions of the instrument of partnership, in
the accounting year. This Court again in Commissioner of Income-tax, Madras v.
Sivakasi Match Exporting Co. (2) held :
"The jurisdiction of the Income-tax
Officer is, therefore, confined to the ascertaining of two facts, namely, (i)
whether the application for registration is in conformity with the rules made
under the Act, and (ii) whether the firm shown in the document presented for
registration is a bogus one or has no legal existence." It is, therefore,
settled law that if a partnership is a genuine and valid one, the Income-tax
Officer has no power to reject its registration if the other provisions of s.
26A of the Act and the rules made thereunder are complied with.
In the present case the partnership was found
to be a genuine one. All the formalities prescribed by the rules have been
complied with. The individual shares of the partners as shown in the Instrument
of Partnership have been specified in the application. Therefore, unless there
is some legal impediment in the way of a benamidar of one of the partners being
a partner of the firm, the Income-tax Officer would not be exercising his
jurisdiction if he rejected the application for registration.
(1) 1959] Supp. 2 S.C.R. 641.
(2)(1964) 53 I.T.R. 204,209.
18 The first question, therefore, is whether
the benamidar of a person can be a partner of a firm. Under S. 2(6B) of the
Act, "firm", "partner" and "partnership" have the
same meanings respectively as in the Indian Partnership Act, 1932 (IX of 1932)
: provided that the expression "partner" includes any person who
being a minor has been admitted to the benefits of partnership. Under S. 4 of
the Indian Partnership Act, "Partnership" is the relation between
persons who have agreed to share the profits of a business carried on by all or
any of them acting for all. If the partnership is genuine, as it is held in the
present case, it follows that the 4 partners mentioned in the partnership deed
must be held to have agreed to share the profits of the business carried on by
them in the manner specified in the document. Indeed, in the present case the
Instrument of Partnership and the application for registration contain clear
recitals that the 4 partners have clear and definite shares in the profits of
The Judicial Committee in Sir Sundar Singh
Majithia v. Commissioner of income-tax, C.P. & U.P. (1) posed the question
that arises for consideration of the Income-tax Officer under s. 26A of the
Act. Sir George Rankin, speaking for the Board, said :
"When a document purporting to be an
instrument of partnership is tendered under Section 26-A on behalf of a firm
and application is made for registration of the firm as constituted under such
instrument, a question may arise whether the instrument is intended by the
parties to have real effect as governing their rights and liabilities inter se
in relation to the business or whether it has been executed by way of pretence
in order to escape liability for tax and without intention that its provisions
should in truth have effect as defining the rights of the parties as between
themselves. To decide that an instrument is in this sense not genuine is to
come to a finding of fact :................
In view of the finding given by the Tribunal
that the Instrument of Partnership was genuine, it follows that it was not
executed as a pretence in order to escape liability for tax, but in truth it
defined the rights and liabilities of the parties between themselves.
This leads us to the question whether the
benamidar can be in law a partner of a firm. In the context of the right of a
benamidar to sue in his own name to recover immoveable property, the (1) (1942)
10 I.T.R. 457,461-462.
19 Judicial Committee in Gur Narayan v. Sheo
Lal Singh(1) defined the status of a benamidar in law thus :
"As already observed, the benamidar has
no beneficial interest in the property or business that stands in his name; he
represents, in fact, the real owner, and so far as their relative legal
position as concerned he is a mere trustee for him............. The bulk of
judicial opinion in India is in favour of the proposition that in a proceeding
by or against the benamidar, the person beneficially entitled is fully affected
by the rules of res judicata." In Aruna Group of Estates, Bodinayakanur v.
State of Madras(2) a Division Bench of the Madras High Court, on the basis of
the said legal position, rightly held that the benami character did not affect
the benamidar's capacity as partner or his final relationship with the other
members of the partnership. It pointed out that "if any partner is only a
benamidar for another, it can only mean that he is accountable to the real
owner for the profits earned by him from and out of the partnership."
Therefore, a benamidar is a mere trustee of the real owner and he has no
beneficial interest in the property or the business of the real owner.
But in law, just as in the case of a trustee,
he can also enter into a partnership with others.
If so, what is the principle of law which
prohibits the benamidar of a partner from being also a partner along with the
said partner with others ? Qua the other partners, he has separate and real
existence; he is governed by the terms of the partnership deed; his rights and
liabilities are governed by the terms of the contract and by the provisions of
the Partnership Act; his liability to third parties for the acts of the
partnership is co-equal with that of the other partners; the other partners
have no concern with the real owner; they can only look to him for enforcing
their rights or discharging their obligations under the partnership deed. Any
internal arrangement between him and another partner is not governed by the
terms of the partnership; that arrangement operates only on the profits
accruing to the benamidar; it is outside the partnership arrangement. If a
benamidar possesses the legal character to enter into a partnership with
another. the fact that he is accountable for his profits to, and has the right
to be indemnified for his losses by, a third party or even by one of the
partners does not disgorge him of the said character.
(1) (1918) L.R. 46 I.A. 1, 9. (2) (1962) 2
20 It is true that different considerations
may arise, if the partnership is only between two persons of whom one is a
benamidar of the other. In that event the partnership may be bad not because
the benamidar has no power to enter into the partnership but because the
partnership in law is the relationship between at least two persons and in the
case of a benamidar and the real owner in fact there is only one person. It may
also be that in a case where a benamidar is taken as a partner with the consent
of the other partners, he will only be a "dummy". We do not propose
to express any final opinion on the said two questions, as they do not arise in
A Division Bench of the Bombay High Court in
The Central Talkies Circuit, Matunga, In re(1) held that there was evidence to
justify the finding of the Income-tax authorities that the alleged partnership
was not a genuine partnership and that they acted rightly in refusing to
register the firm. That finding was sufficient to dispose of the reference
before the Court. But Beaumont, C.J., in the course of the judgment made some
observations which lend support to the contention of the appellant. The learned
Chief Justice said :
"Speaking for myself, I should say that
if it were shown that one of the partners was only a nominee of a share
allotted to him or her for another partner, the deed would not then specify
correctly the individual shares. I think it must specify correctly the
individual and beneficial shares, because that is a matter which is relevant
from the point of view of the Income-tax authorities. If the Assistant
Commissioner had any evidence before him to lead to the conclusion that the
mother in the case was not really entitled to a beneficial interest of 4 1/2
annas share, I think he was justified in refusing to register the deed."
With great respect, we cannot, agree with the said observations. If a benamidar
has the character of a trustee and, therefore, can enter into partnership with
another in his own name, the share allotted to him in the partnership must be
held to specify correctly his individual share therein. Kania, J., as he then
was, did not express any opinion on this aspect of the case. A Division Bench
of the Andhra Pradesh High Court in Hiranand Ramsukh v. Com- missioner of
Income-tax, Hyderabad(1) held that a person shown as a partner in a partnership
deed was not a genuine partner and (1)(1941)91.T.R.44,52.
(2) 1963)47 T.R. 98.
21 therefore the Income-tax Officer was
perfectly justified in refusing to register the firm. There the assessee firm
originally consisted of 2 partners with equal shares, namely, Ramprasad and
Bhagwandas. After the death of Bhagwandas, Ramprasad took his aunt, Mrs.
Chandrabai, and his minor son as partners. The Income-tax Officer held that
both Mrs. Chandrabai and Ramprasad's minor son were not genuine partners but
were mere dummies, and they were shown merely as partners to reduce the
incidence of tax. As two of the three partners were not genuine partners, the
partnership itself was not genuine. Though some of the observations in the
judgment are wide, that decision does not touch the present case. The decision
of the Madras High Court in P. A. Raju Chettiar v. Commissioner of Income-tax,
Madras(') is also one where the finding was that the partnership was not a
genuine one. 'Mat decision also is besides the point.
The legal position may be stated thus: When a
firm makes an application under s. 26A of the Act for registration, the
Income-tax Officer can reject the same if he comes to the conclusion that the
partnership is not genuine or the instrument of partnership does not specify
correctly the individual shares of the partners. But once he comes to the
conclusion that the partnership is genuine and a valid one he cannot refuse
registration on the ground that one of the partners is a benamidar of another.
If the partnership is genuine and legal, the share given to the benamidar will
be the correct specification of his individual share in the partnership. The
beneficial interest in the income pertaining to the share of the said benamidar
may have relevance to the matter of assessment, but none in regard to the question
In the result, for the aforesaid reasons, we
hold that the answer given by the High Court-is correct. The appeal fails and
is dismissed with costs.
(1) (1949) 17 I.T.R. 51.