Gifts and Partnership: contemporaneous entries plus subsequent conduct upheld to establish valid gifts and genuine partnership registration.

Whether the assessee firm was entitled to registration under section 26A turned on (i) genuineness of the partnership and (ii) validity of antecedent gifts to proposed partners. The HC applied the principle that contemporaneous book entries evidencing transfer, when corroborated by subsequent acts effectuating divestment (execution of a partnership deed, profit sharing, firm registration and bank notification), can constitute valid gifts; mechanical scepticism by revenue without investigation into other donor assets or collateral evidence was insufficient. Outcome: the gifts were valid and, read with subsequent conduct, established a genuine partnership entitling the firm to registration under section 26A for the year in question.

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Issues: Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to registration under section 26A of the Income-tax Act for the assessment year 1956-57.

Analysis: The question required examination of (i) whether a genuine partnership came into existence and (ii) whether antecedent transactions claimed as gifts to the proposed partners were true and valid. Contemporaneous book entries crediting the daughters with capital, execution of a partnership deed admitting the daughters' capital shares, registration of the firm with the Registrar of Firms, and notification to banks were treated as relevant acts and conduct to be weighed with the entries. Authorities and principles considered include the requirement of divestment appropriate to the nature of the subject-matter in Mohammedan law, the principle that entries in accounts may be evidence of gifts when followed by acts effectuating divestment, and that sleeping partners or passive partners and admission of minors do not by themselves negate the genuineness of a partnership. Mechanical scepticism by revenue without investigation into other assets of the donor or collateral evidence was held insufficient to displace the combined effect of the entries and subsequent conduct.

Conclusion: The gifts to the two daughters were validly made and, read together with the subsequent conduct (partnership deed, profit division, registration and bank notification), established a genuine partnership; the assessee-firm was entitled to registration under section 26A for the assessment year 1956-57.

Ratio Decidendi: Contemporaneous book entries evidencing a transfer, when corroborated by subsequent acts and conduct that effectuate divestment and formation of a partnership, can constitute a valid gift and support registration of a bona fide partnership.

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