JUDGMENT H.N. Seth, J.
1. At the instance of the CWT, the Income-tax Appellate Tribunal, Allahabad, has in the cases of the assessees, Sri Padampat Singhania (HUF), Kailashpat Singhania (HUF) and Sri Laxmipat Singhania (HUF), for the assessment years 1965-66 and 1966-67, stated these three cases and has referred the following questions for the opinion of this court :
" 1. Whether, on the facts and in the circumstances of the case, the liability to the Kamla Town Trust for payment of Rs. 13,53,005.57 undertaken by J. P. Agarwal by virtue of the dissolution deed dated 10th January, 1949, became the liability of the firm on its reconstitution under the partnership deed dated 25th February, 1949, and, subsequently, the liability of the three Singhania Brothers to the extent of one-third share each and was deductible from the total wealth of the assessee in its wealth-tax assessments for the assessment years 1965-66 and 1966-67 ?
2. Whether the aforesaid liability as held by the Appellate Tribunal was a legal and enforceable liability ? "
2. The three assessees, hereinafter referred to as the three Singhania Brothers, representing their respective HUFs, are partners in a firm known as M/s. J. K. Hosiery Factory and the controversy in these references relates to their claim that an amount of Rs. 4,51,002 standing to the debit of each of them in the books of the firm should be accounted for and deducted in computing their respective wealth for the assessment years 1965-66 and 1966-67. Briefly stated, the facts giving rise to the aforesaid controversy are that the three Singhania Brothers along with one Sri J. P. Agar-wal had been carrying on a partnership business under the name and style of M/s. J. K. Hosiery Factory, By means of a deed dated 27th October, 1941, a company known as M/s. J. K. Cotton Spinning and Weaving Mills Ltd., created a trust known as Kamla Town Trust which purported to be a public charitable trust. The three Singhania brothers were designated as its trustees. Subsequently, the company filed Suit No. 40 of 1945, in the Court of the Civil Judge, Kanpur, praying for the rectification of the trust deed. The aforesaid suit was decreed on 18th August, 1945. On 15th January, 1946, the three Singhania brothers withdrew from the firm, M/s. J. K. Hosiery Factory, and assigned a sum of Rs. 1,50,000 each, the amounts standing to their credit in the books of the firm, to Kamla Town Trust. Thereafter, on 5th February, 1946, a partnership agreement was entered into between J. P. Agarwal and the trust for running the business in the name and style of M/s. J. K. Hosiery Factory with effect from 1st January, 1946. The trust contributed a sum of Rs. 4,50,000, the amount which had been assigned to it by the three Singhania brothers, towards the capital of the partnership.
3. The new firm as set up under the partnership deed dated 5th February, 1946, was refused registration under Section 26A of the I.T. Act and it continued to be treated as an unregistered firm for purposes of the I.T. Act. During the income-tax assessment of this firm for the assessment year 1947-48, a question arose as to who were its partners. The ITO held that as the amended trust deed contained certain objects which were charitable and others which were not charitable, no public charitable trust came into existence and the trust deed was invalid. After considering various circumstances of the case, he came to the conclusion that the real partners of the firm, constituted by the deed dated 5th February, 1946, were the three Singhania brothers and J. P. Agarwal. In appeal, the AAC affirmed the findings of the ITO and concluded that the deed dated 5th February, 1946, did not bring into existence any change in the original firm of which the three Singhania brothers and J. P. Agarwal were partners and that as a result of that deed no genuine change in the constitution of that firm took place. When the matter was taken up before the Income-tax Appellate Tribunal, the Tribunal agreed with the authorities below that having regard to the objects of the trust, Kamla Town Trust could not be considered to be a valid trust and that the agreement dated 5th February, 1946, was invalid. It also concluded that it were the three Singhania brothers and not the Kamla Town Trust, who had continued to be the partners of the firm, M/s. J. K. Hosiery Factory along with Sri J. P. Agarwal. Subsequently, the Tribunal referred certain questions of law arising out of its appellate order for the opinion of the High Court which answered the same, vide its judgment dated 4th December, 1970 (since reported in[l971] 81 ITR 557--J. K. Hosiery Factory v. CIT). This court held that the objects underlying the rectified trust deed could not be described as public charitable objects and that at any rate they were a mixture of charitable and non-charitable objects. Accordingly, the trust created by the document dated 27th October, 1941, and as rectified by the decree of the civil judge dated 18th August, 1945, was invalid. It also held that the finding recorded by the I.T. authorities that the three Singhania brothers along with Sri J. P. Agarwal were the partners of the firm was borne out by the material on the record and that the said finding was not vitiated in any manner.
4. It appears that while the aforementioned proceedings for the assessment of the firm, M/s. J. K. Hosiery Factory for the assessment year 1947-48, were going on, the company, M/s. J. K. Cotton Spinning and Weaving Mills Ltd. took proceedings to enable it to amend its memorandum of association so as to expressly authorise it to create a public charitable trust. This amendment was sanctioned by the High Court under the provisions of Section 12 of the Indian Companies Act on 26th March, 1955. Thereafter the company on 10th May, 1955, filed Suit No. 163 of 1955, in the Court of Civil Judge at Kanpur seeking further rectification of the trust deed with a view to bring its objects entirely in consonance with public charity. The suit was decreed on 18th August, 1955, and the deed was rectified accordingly. As the trust had throughout been claiming that it was a public charitable trust exempt from paying income-tax, it did not file the returns of the income derived by it in various years. The ITO, however, took action against the trust under Section 34(1) of the Indian I.T. Act, 1922, and Section 148 of the I.T. Act, 1961. He held that the trust was not a public charitable trust and that its income was liable to be taxed. The view taken by the ITO was affirmed by the AAC. The Income-tax Appellate Tribunal, however, held that as a result of rectification made in the trust deed, as a result of the decree of the civil judge dated 18th August, 1955, the trust became a valid public charitable trust with effect from the date of the decree. In the result, it held that the assessments made under Section 34(1) of the Indian I.T. Act, 1922, Section 148 of the I.T. Act, 1961, for the years 1949-50 to 1956-57, were in order and dismissed the appeals by the trust. It, however, held that after the decree passed by the civil judge on 18th August, 1955, the assessee, namely, Kamla Town Trust, became a valid public charitable trust and that its income was not liable to be taxed. It, accordingly, allowed the appeals filed by the trust for the years 1956-57 to 1964-65. The matter was again referred to this court for opinion. This court decided the reference on 20th February, 1975, and its decision has since been reported in [1975] UPTC 195 (Kamla Town Trust v. CIT) (see p. 632 infra). This court held that the decree dated 18th August, 1955, had the effect of rectifying the trust deed with effect from 27th October, 1971, the date on which the trust deed was originally executed. The objects of the trust, as mentioned in the rectified trust deed, were public and charitable objects and that the trust so created was quite valid in law. In the result, the assessee, Kamla Town Trust, was entitled to relief not only for the assessment years 1956-57 to 1964-65, but also for the years 1949-50 to 1955-56, and answered the questions referred to it accordingly. Reverting to the conduct of business that was being carried on in the name and style of M/s. J. K. Hosiery Factory of which the Kamla Town Trust and J. P. Agarwal were the ostensible partners (real partners being the three Singhania brothers and J. P. Agarwal), a deed of dissolution dated 10th January, 1949, was drawn up and it was signed by the three Singhania brothers as trustees of Kamla Town Trust of the first part and J. P. Agarwal of the second part. According to this deed the firm J. K. Hosiery Factory was to stand dissolved with effect from 1st January, 1949, and the Kamla Town Trust was to get a sum of Rs. 21,98,828 as reduced by certain tax liability from Sri J. P. Agarwal and that all assets, credits and effects of the firm were to be held by Sri J. P. Agarwal. Subsequently, the three Singhania brothers and J. P. Agarwal again executed a fresh partnership deed on 25th February, 1949, and agreed to carry on the business in the name of M/s. J. K. Hosiery Factory with effect from 1st January, 1949. Sri J. P. Agarwal brought the entire assets of the firm which were received by him under the deed of dissolution dated 10th January, 1949, into the new firm as part of the capital contributed by him. According to the assessees, the new firm also undertook to pay Sri J. P. Agarwal's liability to Kamla Town Trust created under the deed dated 10th January, 1949. At a later stage Sri J. P. Agarwal retired from the firm leaving the three Singhania brothers alone as partners of the firm. In the books of the firm as also in the balance-sheet prepared up to 30th December, 1964, the liability to the trust still outstanding was shown as Rs. 13,53,995.57 and the accounts of the three partners were debited accordingly.
5. Regarding assessees' claim that each one of them was, while computing his wealth for the assessment years 1965-66 to 1966-67, entitled to the deduction of a sum of Rs. 4,51,002, the WTO observed that as the credit balance of Kamla Town Trust, shown as partner in J, K. Hosiery Factory, in the earlier years have been treated as belonging to the three Singhania brothers themselves, the said liability had to be taken to be a fictitious liability and could not be allowed. The AAC also affirmed the decision of the WTO and repelled the claim of the assessees. The Income-tax Appellate Tribunal, however, accepted the assessees' case by making the following observations :
" We have carefully considered the respective submissions. We have stated the facts in detail. After the recent decision of the High Court in the Trust case (1975 UPTC 195), [1982] 133 ITR 632 (infra), it is established that the trust is a valid independent entity. It is correct that the trust, as evidenced by the instrument dated 27th October, 1941, and as rectified by the decree dated 18th August, 1945, was a mixed trust and could not be treated as a public charitable trust, but after the second rectification decree dated 18th August, 1955, it became a public charitable trust. Since this rectification would date back to the date of the original execution of the deed, the trust was for public charitable purposes. Therefore, it is evident that the trust is an independent and valid legal entity. It may be that during the calendar years 1946 to 1948 the three Singhania brothers continued as partners of the firm and the trust was not a partner, but by virtue of the dissolution deed dated 10th January, 1949, J. P. Agarwal undertook upon himself certain liabilities to the trust. After the reconstitution of the firm with effect from 1st January, 1949, as evidenced by the instrument dated 21st February, 1949, the entire assets and liabilities of the old business were taken over by the new firm. It would mean that the liability of J. P. Agarwal to the trust became the liability of the firm. It is certainly an enforceable liability. The trust has been showing it as its assets while the assessee has been showing it as its liability. J. P. Agarwal is no longer a partner in the firm. Only the three Singhania brothers are partners having one-third share each and there are debits in that proportion, in their accounts, of its liability. In our opinion, therefore, it was legal liability of the assessee which was clearly deductible from the total wealth in its wealth-tax assessment and we direct accordingly."
6. A perusal of the aforementioned observations made by the Tribunal shows that in its opinion after the decision of this court in Kamla. Town Trust case [1975] UPTC 195 (see p. 632 infra), it could not but be held that Kamla Town Trust was a valid public charitable trust right from its inception on 27th October, 1941. While the partnership deed between Kamla Town Trust and J. P. Agarwal was being dissolved on 10th January, 1949, J. P. Agarwal undertook to pay a sum of Rs. 21,98,828 minus taxes, etc., to Kamla Town Trust. This liability was a real one which had been under the deed, dated 25 February, 1949, taken over by the firm consisting of the three Singhania brothers and J. P. Agarwal and it became a liability of that firm. Since each of the three Singhania brothers were liable to discharge this liability to the extent of one-third, they were, while computing their wealth for the year in question, entitled to claim proportionate deduction in respect thereof. As the liability of the trust stood at Rs. 13,53,005.57 each one of them was entitled to a deduction of Rs. 4,51,002 in computing his wealth.
7. Learned counsel for the department urged that as, in the case of the, firm, M/s. J. K. Hosiery Factory for the year 1947-48, it has been held that the real partners of M/s. J. K. Hosiery Factory were the three Singhania brothers and Sri J. P. Agarwal and that the name of Kamla Town Trust had been fictitiously introduced therein in place of the three Singhania brothers, who were the real persons carrying on the business in partnership with Sri J. P. Agarwal, the amount shown in the books of the firm as due to Kamla Town Trust actually belonged to the three Singhania brothers, Sri J. P. Agarwal was not liable to pay any amount to Kamla Town Trust and what he undertook at the time of the dissolution of the firm was to pay a sum of Rs. 21,98,828.71 to the three Singhania brothers. In the circumstances, there was no question of the three Singhania brothers and the new firm taking up the liability of Sri J. P. Agarwal to pay the aforementioned amount to Kamla Town Trust. The liability of the three Singhania brothers shown in the profit and loss account, therefore, was, a fictitious liability for which no deduction could be allowed in computing the wealth of the assessees.
8. Learned counsel appearing for the assessee, however, urged that apart from the two questions which have been referred by the Tribunal for the opinion of this court, the department had also requested the Tribunal to state the case in respect of the following question which was numbered by them as question No. 2 :
" Whether, the acceptance of the trust as party by the High Court in its order dated 20th February, 1975, would convert the fictitious liability of the firm to the trust into a genuine legal liability even though the finding of the Tribunal with regard to the fictitious liability was affirmed by the Allahabad High Court in J. K. Hosiery Factory v. CIT [1971] 81 ITR 557?"
9. The Tribunal refused to state the case in respect of the aforesaid question by observing that question No. 2 as framed cannot be referred because it presumed the liability to be a fictitious liability. The department did not thereafter approach this court to have the statement of case called from the Appellate Tribunal on the aforementioned question of law. He contended that as the Tribunal has refused to state the case on the question as to whether the liability mentioned in the books of M/s. J. K, Hosiery Factory for payment to Kamla Town Trust was genuine or fictitious, it is not open to this court to, while answering the two questions referred to it by the Tribunal, go into this question and that we have to proceed on the basis that as found by the Tribunal, J, P. Agarwal was, under the dissolution deed dated 10th January, 1949, liable to pay a sum of Rs. 21,98,828.71 after deducting taxes, etc., from it to Kamla Town Trust.
10. It is well settled that in a reference made under Section 256 of the I.T. Act, the High Court can only answer the question which has been referred to it for opinion. It cannot proceed to discuss or answer a question on which the Tribunal has not stated the case. Question No. I referred to us for opinion by the Tribunal seems to imply that J. P. Agarwal had, by virtue of the dissolution deed dated 10th January, 1949, undertaken to pay a sum of Rs. 13,53,005.57 to Kamla Town Trust. The question on which our opinion is sought is as to whether under the deed dated 25th February, 1949, it became the liability of the firm, M/s. J.K. Hosiery Factory and, consequently, the three Singhania brothers who were to share the same to the extent of one-third each could claim the same as deduction from their total wealths for the years 1965-66 and 1966-671 In effect, what has to be considered by us under question No. 1 is as to whether the liability of J. P. Agarwal to pay a sum of Rs. 13,53,005.57 to Kamla Town Trust became, as a result of the partnership deed dated February 25, 1949, the liability of the firm. Under this question, we are not required to express any opinion, either on the question as to whether or not the liability to pay Kamla Town Trust as undertaken by J. P. Agarwal under the dissolution deed dated 10th January, 1949, was a real liability, or whether J. P. Agarwal never undertook to pay any amount to the trust. It appears to us that even if it be that the case of the department, before the various authorities under the I.T. Act, was that the alleged liability to pay off Rs. 21,98,828.71 taken over by J. P. Agarwal was not a liability to Kamla Town Trust, and was a fictitious liability in that sense, the Income-tax Appellate Tribunal did not accept this case and proceeded to decide the appeal pending before it on the basis that J. P. Agarwal did, by virtue of the deed of dissolution dated 10th January, 1949, incur a liability to pay the said sum to Kamla Town Trust. Since, in this case, the question whether the said liability was not genuine or that it was a liability to pay the three Singhania brothers has not been referred to us for opinion, it is not possible for us to go into it or to express any opinion thereon.
11. Learned counsel for the department contended that in any case it will be open to him to urge that the said liability was a fictitious liability and that the money, which, in the deed dated January 10, 1949, was .shown as payable to the Kamla Town Trust, was in fact payable to the three Singhania brothers, under question No. 2 which requires us to answer whether the liability as held by the Appellate Tribunal was a legal and enforceable liability. It appears to us that while referring question No. 2 and stating the case in respect thereof the Income-tax Appellate Tribunal was in fact referring question No. 3 as formulated by the Commissioner of Wealth-tax in his application for making a reference to the High Court filed before the Income-tax Appellate Tribunal. Question No. 3 so formulated by the Commissioner thus ran thus :
" Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in holding that the aforesaid liability can be legally enforced by the trust against the firm of M/s. J. K. Hosiery Factory ?"
12. Reading question No. 2 in the light of question No. 3 formulated by the Commissioner in his application filed before the Appellate Tribunal, it appears to us that the scope of question No. 2 merely is as to whether in the circumstances of the case and as a consequence of execution of the partnership deed dated 25th February, 1949, the Kamla Town Trust acquired a legal enforceable right in respect of the amount mentioned in question No. 1 as against the firm, M/s. J. K. Hosiery Factory. The question in our opinion does not cover the controversy with regard to the nature of the liability which was taken over by J. P. Agarwal under the dissolution deed dated 10th January, 1949.
13. The deed dated 10th January, 1949, had been executed by the three Singhania brothers in their capacity as trustees of the Kamla Town Trust (parties of the first part) and J. P. Agarwal (party of the second part). Under this agreement, the party of the first part was to receive a sum of Rs. 21,98,828.71 after deducting from it certain taxes, etc., that may be found to be payable by the firm which was being dissolved or by any person who may be adjudged to be its partner, from party of the second part. The question is whether this liability was subsequently undertaken by the firm consisting of the three Singhania brothers and J. P. Agarwal constituted by the deed dated 25th February, 1949. The legal position on the question as to when the liability of a person can be taken over by another person and when it becomes enforceable against the person taking over the liability it has been stated in Lindley on Partnership, 12th Edn., p. 249, thus :
" If an incoming partner chooses to make himself liable for the debts incurred by the firm prior to his admission therein, there is nothing to prevent him so doing. But it must be borne, in mind, that even if an incoming partner agrees with his co-partners that the debts of the old shall be taken by the new firm, this, although valid and binding between the partners, is, as regards strangers, res inter alias acta, and does not confer upon them any right to fix the old debts on the new partner. In order to render an incoming partner liable to the creditors of the old firm, there must be some agreement, express or tacit to that effect entered into between him and the creditors, and founded on some sufficient consideration. If there be any such agreement, the incoming partner will be bound by it, but his liability in respect of the old debts will attach by virtue of the new agreement, and not by reason of his having -become a partner."
14. Accordingly, in order to show that a liability of J. P. Agarwal had been taken over by the firm as constituted under the deed dated 25th February, 1949, the following two conditions have to be fulfilled :
1. That all the partners of the firm had, in their capacity as partners of the firm, agreed to discharge the liability of J. P. Agarwal to Kamla Town Trust ; and
2. That the Kamla Town Trust had agreed to treat the new firm as its debtor in place of J. P. Agarwal.
15. So far as the first of the aforementioned two conditions is concerned, we find that the liability of Sri J. P. Agarwal to pay the amount in question to Kamla Town Trust was created under the deed dated 10th January, 1949, which had been signed by the trustees of the Kamla Town Trust on the one hand and J. P. Agarwal on the other. In the partnership deed dated 25th February, 1949, executed by the three Singhania brothers (described as parties of the first, second and third part) and J. P. Agarwal (described as party of the fourth part) it was mentioned thus :
"Now, this identure witnesseth and it is hereby mutually agreed by and between the parties hereto as follows :...
4. The parties hereto of the first, second and third parts hereby accept the covenants and stipulations contained in the deed of dissolution dated 10th January, 1949, and made between the party hereto of the fourth part of the said trustees as if the said covenants and stipulations were made between all the parties hereto and the said trustees......"
16. This averment made in the deed dated 25th February, 1949, clearly indicates that all the four partners of the new firm had agreed amongst themselves that the liability, if any, of J. P. Agarwal to Kamla Town Trust created by the deed dated 10th January, 1949, should be the liability of all the partners, i. e., of the new firm. In oar opinion, the Tribunal was justified* in holding that under the deed dated 25th February, 1949, the partners of the new firm agreed to take over the liability, if any, of J. P. Agarwal to pay a sum of money to Kamla Town Trust created by the document dated 10th January, 1949. However, this would become an enforceable legal liability against the firm only if it could be shown that condition No. 2, mentioned above, was also satisfied, namely, that Kamla Town Trust had entered into an agreement with J. P. Agarwal and partners of the firm, M/s. J. K. Hosiery Factory, namely, the three Singhania brothers, to treat in place of J. P. Agarwal, the firm as its debtor. We have carefully looked into the order passed by the Income-tax Appellate Tribunal and we do not find anything therein to show that the Tribunal applied its mind to this part of the case. It appears to have assumed that in case the partners of the firm agreed and undertook to discharge the liability of J. P. Agarwal to Kamla Town Trust, it automatically became a legally enforceable liability of the firm. In our opinion, such an assumption does not follow as of course. There has to be evidence to show an agreement between Kamla Town Trust and the firm, M/s. J. K. Hosiery Factory, to treat the firm as its debtor in place of J. P. Agarwal. In the circumstances, the Tribunal could not, without adverting to or applying its mind to the question as to whether Kamla Town Trust had agreed to accept J. K. Hosiery Factory as its debtor in place of Sri J. P. Agarwal, record a finding that the liability of J. P. Agarwal to pay the amount in question to Kamla Town Trust became a legally enforceable liability of the firm, M/s. J. K. Hosiery Factory, and that the questions referred to us cannot be answered in the absence of a finding on the said question.
17. Learned counsel appearing for the assessee contended that the Tribunal has in its order pointed out that the amount in question had been shown as due to Kamla Town Trust in the books of M/s. J. K. Hosiery Factory and that it has also been shown in the books of the trust as due from M/s. J. K. Hosiery Factory. This circumstance, according to him, is sufficient to indicate that Kamla Town Trust had agreed to accept M/s. J. K. Hosiery Factory as its debtor in place of J. P. Agarwal and if the Tribunal has, acting upon this circumstance, ruled that an enforceable legal liability had been created against M/s. J. K. Hosiery Factory, it cannot be said that the Tribunal has not applied its mind to the crucial question and that its finding is based on no material. It may be that the fact that the amount in question is shown in the books of the trust as due from J. K. Hosiery Factory is a circumstance relevant for the purposes of appreciating whether the trust had agreed to accept the firm as its debtor in place of J. P. Agarwal, but then in the circumstances of the present case, this fact by itself can, in our opinion, not provide sufficient basis for holding that such an agreement between Kamla Town Trust and the partners of the firm in fact existed. It is significant to note that in this case despite changes in the constitution of the firm which were made from time to time the business was throughout being run in the name of J. K. Hosiery Factory. Accordingly, an entry in the books of Kamla Town Trust that certain money was due from J. K. Hosiery Factory by itself cannot show that the said money is due from the firm, as it, at present, stands constituted. There is nothing on the record that at any stage the books of the trust showed that it treated the amount in question as the personal liability of J. P. Agarwal and thereafter as liability of the firm as it stood after its creation under the deed dated 25th February, 1949. The liability for payment of the aforementioned amount by J. K. Hosiery Factory undoubtedly originated at a time when the business was being run in the name of M/s. J. K, Hosiery Factory, a firm having a different constitution. It is not unlikely that in the books of Kamla Town Trust reference to M/s. J. K. Hosiery Factory is a reference to the firm as it constituted stood prior to 25th February, 1949, and throughout the trust had been treating the firm with that constitution as its debtor, While making this observation we should not be understood as holding that this was the sense in which the entries appearing in the books of the trust had been made. We have made these observations merely to emphasize that this material by itself is not sufficient to establish that Kamla Town Trust had agreed to accept the firm, J. K, Hosiery Factory as constituted after 25th February, 1949, as its debtor. We, are, therefore, unable to agree with the learned counsel that the Tribunal either applied its mind to the crucial question arising in the case or that the material indicated by him as such on the basis of which the Tribunal could effectively decide the controversy. The matter will have to be decided afresh after examining evidence on the record and if necessary after obtaining fresh evidence. In a case, where the question referred to the court cannot be answered in the absence of a finding on a crucial aspect of the case, it is open to the High Court to return the question referred to it unanswered with a direction to the Tribunal to go into that aspect of the case and to decide the appeal accordingly--See CIT v. Greaves Cotton and Co. Ltd. [1968] 68 ITR 200 (SC) and B. Muniappa Gounder v. CIT [1976] 102 ITR 787 (Mad).
18. In the result, we return the questions referred to us unanswered. It will be open to the Income-tax Appellate Tribunal to re-hear the appeal and to dispose of the same afresh keeping in view the observations made by us in this judgment and in accordance with law. In the circumstances we make no order as to costs in these references.