Income Tax Appellate Tribunal - Jaipur
Rajesh Corpn. vs Income-Tax Officer on 12 April, 1988
Equivalent citations: [1988]25ITD420(JP)
ORDER
P.S. Dhillon, Judicial Member
1. The assessee has preferred this appeal against the order dated 18-5-1984 of Shri Ashwani Kumar, Appellate Assistant Commissioner of Income-tax, A-Range, Jaipur, who dismissed the appeal against the order dated 7-3-1983 of Shri S.K. Sharma, Income-tax Officer, Sl. Survey, Circle II, Jaipur.
2. The relevant facts, in brief are : that the assessment year involved is 1980-81, the previous year of which ended on 30-6-1979. An application in Form No. 11 was filed before the Income-tax Officer on 17-3-1979 along with the instrument of partnership and a copy thereof, claiming therein that the newly constituted firm of three partners came into existence with effect from 1-2-1979 and, therefore, registration to the firm be granted.
3. The Income-tax Officer, on scrutiny of the claim of the assessee and books of account, so produced before him, found the following facts which were discussed by him with the assessee :
(a) that one Shri Sirehmal Chopra who was doing the business of precious and semi-precious stones brought in as capital on the start of the business on 1-2-1979 in the form of goods valued at Rs. 40,990 ;
(b) Shri Sirehmal Chopra is son of Smt. Bhanwar Devi and is brother of Smt. Vimla Patni who are partners in the partnership firm, who allowed the partners (sic), who in fact did not bring any capital whatsoever, except the amount of Rs. 1,000 which was deposited in the account of Smt. Bhanwar Devi much afterwards ;
(c) that Smt. Bhanwar Devi is aged about 57 years having little experience of trade of precious and semi-precious stones. Moreover, she could not contribute any skill and experience to the carrying on of the business of the alleged partnership firm ;
(d) that her statement was recorded on 15-12-1982 and confronted vide notice dated 5-2-1983, wherein it was revealed that Smt. Bhanwar Devi did not know about the profits so received from the assessee partnership firm ; that it was further averred by Smt. Bhanwar Devi that it was her son Shri Sirehmal who alone was writing the books of account and so looking after all the bank transactions and it was sometimes she also signs the cheque books ;
(e) that on further scrutiny of her capital account, it transpired that she did not withdraw any single penny from her account during the year under consideration and it was only in the accounting year 1981-82 that her capital account was debited for Its. 4,931 representing as payments towards income-tax, H.B.T. and wealth-tax and during that year in her account there appeared a credit of Rs. 5,800 and then the amount of Rs. 16,091 credited as share of profit ;
(f) that her capital account for the accounting year, relevant to the assessment years 1981-82 & 1982-83 is reproduced in the order of the Income-tax Officer from which he came to the conclusion that it was only against some deposits that debits were made in her account, otherwise the profits had never gone to her coffers and the same remained fully controlled and managed by her son, Shri Sirehmal Chopra.
3.1 The details of capital account of Smt. Bhanwar Devi Chopra for 1981-82 & 1982-83 are reproduced hereinafter for ready reference :
Capital Account for 1981-82 Rs. Rs.
To income-tax 2,512.00 By balance 11,953.64
To H.B.T. 189.00 By deposits 5,800.00
To wealth-tax 2,230.00 By profit 16,091.60
To balance C/F 28,914.24
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33,845.24 33,845.24
Capital Account for 1982-83
Rs. Rs.
To income-tax 1,741.00 By balance 28,914.24
" balance C/F 32,902.32 By Profit 5,729.08
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34,643.32 34,643.32
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4. The Income-tax Officer further observed that without bringing any capital by Smt. Bhanwar Devi, except petty deposits of Rs. 5,800 during: the assessment year relevant to the assessment year 1981-82, the accumulation in her account aggregated to Rs. 32,902 as on the last day of the accounting year, relevant to the assessment year 1982-83. From it, he observed that in fact when a person has so much balance, she would like to spend from her own sources of income for maintenance, etc., but nothing whatsoever was withdrawn in her account except payment towards income-tax, etc., which could have been on her saving to her son to deposit out of his income because of having common measure.
4.1 The Income-tax Officer similarly discussed another lady partner, Smt. Vimla Patni observing therein that she is aged about 37 years, having 4 kids, who is matriculate and is a household lady, had no experience in the line of business of precious and semi-precious stones and accordingly there was no contribution, whatsoever, on her part to carry on her business ; that the position of her capital account appearing in the books of the assessee for the year under assessment and the next two years is eproduced in his order at page 3, which is as under :
Capital account of Smt, Vimla Patni for 1981-82 Rs. Rs.
To Income-tax 161.00 By balance 7,824.03
To Balance C/F 19,157.10 By profit 11,494.07
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19,318.10 19,318.10
Capital account of Smt. Vimla Patni for 1982-83
Rs. Rs.
To L.I.P. 1,429.80 By balance 19,157.10
" Income-tax 660.00 By profit 4,092.62
" Balance C/F 21,159.92
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23,249.72 23,249.72
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Thus from the above facts, the Income-tax Officer came to the conclusion that Smt. Vimla Patni, neither contributed any share capital, nor withdrew any amount towards her maintenance or pocket expenses. He further observed that she was not in a position to contribute anything to carry on the business which is a must for the partner, who had not invested any capital share in the business. Her statement was recorded by the Income-tax Officer and it was confronted to her that how much share of profits was received by her, who was not able to part with any information, except stating that she could tell only after looking into the books of account.
4.2 In view of the above facts, the Income-tax Officer dealt with the claim of the assessee that the partners had agreed to share the profits of business carried on by all or any of them, carrying for all (sic) and as such the registration should be allowed to the assessee observing as follows : that it was not a partnership amongst the strangers but the partners are closely related with each other being members of one family ; moreover, it was only in the case of family concern that such an arrangment is possible that one partner brings the capital as much as amounting to Rs. 41,500 and whereas the other lady partners have not brought in any capital at all and still the partner bringing in capital had been allowed a share of 40 per cent only and the other partners, i.e., mother had been allowed a share of 35 per cent and the sister had been allowed a share of 25 per cent without any capital contribution in the form of skill and business activities whatsoever.
In view of these facts, the Income-tax Officer came to the conclusion that the two lady partners, lent their names to Shri Sirehmal Chopra, just to minimise the incidence of tax in his case, when it was seen that he was being assessed on a higher income group. Hence the Income-tax Officer came to the conclusion that in fact, there had been no genuine partnership ; rather it was an arrangement to divert the income and minimise the incidence of tax in collusion with the lady partners, who are mother and sister. Since, without such relations no partner will share the profits with such partners, who have not contributed any share capital as well as labour, experience and only to run the business of the patnership. 4.3 In view of the above facts, the Income-tax Officer held that it was Shri Sirehmal Chopra alone who had masterminded the affairs of business and execution of instrument of partnership which is merely a make-believe document and, therefore, it is Shri Sirehmal Chopra alone, who all the time financed, controlled and managed all the affairs of the business. Hence, the income from partnership business is to be assessed in the hands of Shri Sirehmal Chopra, which is belonging to him in whose hands the same will be assessed to tax as the two lady partners are his benamidars. He further observed that no registration is to be granted to the firm as the firm is a benami firm.
5. The assessee went in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner for his reasons in paras No. 2 to 4 upheld the order of the Income-tax Officer for refusing the registration to the assessee-firm and thereby confirmed the order of the Income-tax Officer on the issue of registration in dismissing the appeal of the assessee.
6. The assessee being further aggrieved has preferred this appeal.
6.1 Shri Ranka, the learned counsel for the assessee, contends that the constitution and execution of the firm and the partnership deed is not held by the Income-tax Officer as non-genuine and, therefore, non-granting of registration to the firm by the Income-tax Officer and the Appellate Assistant Commissioner is unjustified. He, further, contends that contribution of capital share for running the business by the firm by all partners is not a must and, therefore, if the lady partner (sister) has not contributed any capital share, then it cannot be basis for holding the firm non-genuine or such partnership resulting in refusal of the registration to the firm. He further contends that it is not essential that all the partners should contribute personally and physically for running of the business of the firm, since the partners, in the firm can be sleeping partners or dormant. He further contends that when the partners are sharing loss and the ratio of sharing of the partnership is there, then, there is a consideration for the partnership among the partners and as such if no share is contributed by the partner, then it cannot be held that the patrnership deed is non-genuine. He further contends that there is no ban to enter into partnership for the family members, vis., mother, sister and brother. Relying on the partnership deed dated 16-3-1979 and, in particular, Clause 4 of the partnership deed, the learned counsel for the assessee contends that non-contribution of share capital by each partner is allowed by the terms and conditions of the partnership deed, and, therefore, if the lady partner, Smt. Vimla Patni has not contributed any capital share, then it is allowed by Clause 4 of the partnership deed. He, further, contends that the firm is registered under the Indian Registration Act vide registration No. 1229/79 Rajasthan Sales-tax Act and Central Sales-tax. Therefore, the genuineness of the partnership firm and its execution cannot be held as invalid by the Income-tax Officer and particularly when his conclusion regarding it, is based upon surmises and conjectures. He further contends that the department cannot raise the issue at this stage that the partnership among the partners is not genuine, in view of the fact that the authorities below nowhere doubted the constitution of the firm and execution of the partnership deed as non-genuine. He further contends that no doubt the Income-tax Officer recorded the statement of Smt. Bhanwar Devi, the mother, who did not confront it to her. Therefore, the principle of natural justice is violated. He further contends that to prove or say that the transaction is benami, the onus is upon the party, who alleges it and, therefore, it is for the department to prove that the business of the firm is benami and actually belonging to Shri Chopra, while the alleged partners are his benamidars and that the department has not brought on record any material to prove it. He further contends that to prove a transaction or sale or business as benami, it is for the allegor to prove that the consideration of sale or transaction or capital to run the business has not come from the purchaser, but from the third party ; that control of business is not in the hands of such party/purchaser ; that the profits of business are not enjoyed by the purchaser but by the third party who has actually contributed the capital to run the business. Reliance is placed on the partnership deed dated 16-3-1979, copy of which is as Annexure A and on the following decisions :
(a) Addl. CIT v. Rawalpindi Flour Mills (P.) Ltd. [1980J Tax. 56(3)- 134 (All.)
(b) 1984 Tax Law Review 255 (sic)
(c) 14 TTJ 657 (sic)
(d) 1984 Tax. Sec. 4 - 384 (sic)
(e) D.L.F. United Ltd. v. CIT [1984] Tax. 75(3)-135 (Delhi)
(f) CIT v. Rama Transport Co. [1982] 137 ITR 11 (Cal.)
(g) K.D. Kamath and Co. v. CIT [1971] 82 ITR 680 (SC)
(h) Agarwal and Co. v. CIT [1970] 77 ITR 10 (SC)
(i)) P.C. Kapoor v. CIT [1973] 90 ITR 172 (All.) (FB)
(j) CIT v. Daulat Ram Rawatrnull [1973] 87 ITR 349 (SC)
(k) Himalaya Engg. Co. v. CIT [1965] 57 ITR 762 (Pat.)
(l) United Patel Construction Co. v. CIT [1966] 59 ITR 424 (MP)
(m) Subhash Medical Stores v. CIT [1984] 147 ITR 486 (Raj.) and the paper book containing pages 38.
7. On the other hand, Shri Ruhela, the learned senior departmental representative contends that the partnership deed is not genuine and he is within the powers to raise it before the Tribunal because he is representing the respondent-revenue and, therefore, can raise any contention to support the impugned order. He further contends that for genuine firm its constitution and execution of partnership deed is to be genuine and the onus is upon the assessee to prove it that contribution of share capital is a must by the partners for holding the constitution of partnership deed as genuine. Relying on Clauses 4 and 6 of the partnership deed, he contends that the contribution of share capital by each partner is a must and division of the profit in the ratio mentioned therein is a must, but the partners have not contributed the capital share as required by Clause 4 nor divided it as required by Clause 6 and, therefore, the firm is not genuine and the partnership deed is a make-believe document. Reliance is placed on the decision in the case of Krishna Flour Mills v. CIT [1962J 44 ITR 501 (SC).
7.1 He further contends that the case of K.D. Kamath & Co. (supra) is distinguishable, because the partnership deed was held as valid for the reason that the partners, who did not contribute the share capital were working partners therein ; while in this case it is otherwise. Relying on the decision in the case of Brijlal Madanlal v. CIT [1980] 121 ITR 364 (Bom.), the learned departmental representative contends that the execution and constitution of the partnership deed must be genuine. In this case the constitution of partnership is not at all genuine, in view of the facts mentioned above. He further contends that the capital invested for running the business of the firm is belonging to the male partner, Shri Sirehmal Chopra, while the control and management of the business is in his hands and the profits are not divided and gone to the hands of the lady partners, but they are there with the male partner and, therefore, the three factors for holding the business as benami have been proved fromthese facts of this case. Relying on the decision of Krishna Flour Mills' case (supra), the learned departmental representative contends that the contribution of share capital is a must to hold the firm as genuine.
8. In availing the right of retouttle, Shri Ranka, the learned counsel for the assessee relying on K.D. Kamath & Co.'s case (supra) contends that it is not distinguishable and is applicable to the facts of this case. He further contends that the amount of Rs. 1,000 was deposited on 1-2-1979 and second amount of Rs. 5,800 was on 10-12-1979. However, Shri Ranka refused to show the books of account regarding this fact to the learned departmental representative who demanded it for this purpose. Therefore, in this view of the matter, the learned departmental representative vehemently contends that this factual statement is not to be looked into or relied upon being wrong and false. He further contends that such entry in the cash book is made-up entry. Thus, Shri Ranka, the learned counsel for the assessee in availing the right of rebuttle on the facts mentioned above contends that non-granting of the registration to the assessee-firm is an error in law and facts which is to be rectified by the Tribunal by setting aside the orders of the authorities below.
9. We have heard the rival submissions and have gone through the record before us. The partnership deed dated 16-3-1979 is kept on the record as Annexure-A. The terms and conditions are mentioned therein in details. Clause 4 of it says that the capital shall be subscribed and brought by the parties to this deed by mutual consent and according to the exigencies of business. This clause consists of three parts, i.e., (a) that there will be contribution by the partners as share capital which is to be settled by the consent of the partners and to be to the extent as the exigencies of business demand.
9.1 Clause 6 says that the profit and loss of the trading of the firm shall be divided or borne in the following ratio :
Shri Sirehmal Chopra 40Smt. Bhanwar Devi Chopra 35% Smt. Vimla Patni 25%
9.2 Clause 7 of the partnership deed says that bank account or accounts shall be opened in the firm's name in such bank or banks as may be decided by the said parties and shall be operated by the said parties individually for and on behalf of the said firm.
Thus from the terms and conditions mentioned in the partnership deed and in particular from Clauses 4, 6 and 7, it is clear to us that the contribution of share capital by the partners is a must, but it is to be as per the consent of the partners and exigencies of business. The profit and loss is to be divided and borne by the partners in the ratio mentioned above, per Clause 6. From these clau-. ses and terms and conditions of the partnership it is clear that there should be an agreement among the parties for contribution of share capital by each partner. There is no agreement in black and white to show that Smt. Vimla Patni, sister of Shri Sireh-mal Chopra would not contribute her share capital, nor there is such consent among them that Smt. Bhanwar Devi, the mother of Shri Sirehmal Chopra would not contribute her share capital or would contribute merely a sum of Rs. 1,000 as is shown and alleged. It is clear that the profits to the firm are to be divided in each assessment year, i.e., there should be actual division of the profits of such year, which means that the share of profits should go to the coffers of each partner physically. In this case, this is not there. From the record it is not borne out that there is actually sharing of profits and losses by the partners in the succeeding year, as from the record it is clear that the profits have not gone to the coffers of each partner. It is clear from the record that the partnership consists of brother (male partner) and aged mother and sister who are sleeping partners in this case. Therefore, it is proved that partner No. 3, Smt. Vimla Patni, has not contributed her share capital in cash or by working actively in the business of the firm. Thus it can be safely concluded that the partner No. 3 has not at all contributed to the share capital in cash or in kind at all. Thus the conclusion can be safely arrived at that she is there as partner without contributing any consideration to the partnership. In this view of the matter, we hold that on the facts in this case, there is no consideration for entering into agreement or partnership on behalf of Smt. Vimla Patni. When Clause 4 clearly says that there will be contribution by each partner, then it should be there either in cash or in kind. In this case this condition is not satisfied. It cannot be disputed that it is a family concern. Therefore, we have to see the totality of the facts and circumstances of the case that whether partnership deed is a make-believe document which is a must for granting registration to this firm. As we have observed above, that there is no agreement for non-contribution of share capital among the partners mentioning categorically that partner No. 3 will not at all contribute any share capital in cash or kind which proves that she is there just to help her brother to reduce the liability of income-tax payment. This is supported from the fact that the whole of the capital is contributed by bringing the saleable goods for the business of the firm by Shri Sirehmal Chopra from Ms individual business. Smt. Bhanwar Devi is the mother of Shri Sirehmal Chopra who is an aged lady and she has not contributed, the amount as required as per her share at 35 per cent. It is also clear from the record that the alleged sum of Rs. 1,000 was not contributed by her at the time of execution of the partnership deed or start of the business of the firm. Further, she is an aged lady who is not well conversant with the running of the business. Her statement was recorded and was confronted to her and she was not able to state the receipt, of profit share received by her. Similarly, the lady partner, Smt. Vimla Patni, sister of Shri Sirehmal Chopra was confronted with her statement and she was not able to state the amount of profit-share, as she told that she could do so on looking into the books of account. This fact shows and proves that both the ladies are not aware of their share of profits for the previous year, relevant for the assessment year under consideration. Therefore, from this fact it can be safely concluded that the profits of the firm in the previous year, relevant for the assessment year under consideration, were not actually divided and had not gone to the hands of the lady partners.
10. No doubt, it is contended by the learned counsel for the asses-see that the lady partners were not given particular and proper opportunity of being heard and, therefore, principles of natural justice are violated in non-confronting the statement so recorded by the Income-tax Officer. This contention has no force at all in view of the facts as mentioned above. Furthermore, this issue is not seriously pressed before us and, accordingly, we reject it.
11. From the above facts, it is clear to us that non-contribution of capital share and distribution of profits among the partners is not there as is required by Clauses 4 and 6 of the partnership deed. It cannot be held, as otherwise on the ground that in the books of account it is there, then it should be known to the lady partners (sic). In the family concern like this, the onus is upon the assessee to prove satisfactorily the terms and conditions of the partnership. In this case it is proved that these are not satisfied ; in view of the fact that there is neither an agreement among the partners or writing to show that the partners agreed among themselves that the lady partners should not contribute their share capital in accordance with their share in the partnership. Moreover, there is material on record that the profits of business are not distributed among the partners as per Clause 6. If the division of the profits is there in the books of account, then it cannot be held that there is actual division of profits and share of profits in case of each partner has gone to the hands of such partners particularly, when unknown to the lady partners. Further the facts and circumstances of the business are such that exigencies are there for contribution of the share-capital by each partner per the share in their names, as is proved from the details hereinafter in regard to the trading position, i.e., for 1980-81 Rs. 98,749, 1981-82 Rs. 53,898 and 1982-83 Rs. Nil
12. Thus from the above facts, it is clear that the exigencies of business required the contribution of share capital by the partners. It cannot be held that in the assessment year 1980-81 there are sales amounting to Rs. 98,749 since the initial capital investment is amounting to Rs. 30,990 by way of goods value share brought by Shri Sirehmal Chopra, against the capital of Rs. 40,990 in the assessment year 1980-81 the sales are as we have mentioned above, which shows that the exigency of business demands more investment and as such the partners have to contribute more for running the business smoothly. Therefore, in view of these facts, it can be safely held that the terms and conditions of the partnership deed are violated and it is there on account of family concern and to benefit Shri Sirehmal Chopra. Therefore, in the situation of the matter, we hold that the constitution of the firm and its execution is not valid.
13. No doubt, Shri Ranka, the learned counsel for the assessee, contends that the partnership has been accepted by the sales-tax authorities as the firm is registered under the Indian Partnership Act vide Registration No. 1229 as well as under Central Sales-tax Act vide registration certificate No. AA-158/72 JPA(RST) and A-49/50/JPA/CST, but the Income-tax Officer is within his power to satisfy himself regarding the genuineness of the firm. Therefore, if the firm has been registered and the partnership deed is taken as valid by the aforesaid authorities, then it cannot be held that the Income-tax Officer has no power to investigate and collect the facts to prove that the constitution of the firm is non-genuine. Accordingly, we reject the contention of Shri Ranka that when the registration has been granted by the sales-tax authorities mentioned above, then the Income-tax Officer has no power to question the genuineness of the firm.
14. The learned departmental representative is within his powers to raise this issue before the Tribunal as he is representing the respondent revenue in the appeal before the Tribunal and, therefore, he can support the impugned order by raising any argument which was not considered by the authorities below or which is new argument to support the impugned order. The argument of the learned departmental representative cannot be rejected on the plea that the departmental representative is making a new case by raising the argument that the constitution of the firm is not genuine or the partnership is not valid. The reason is that the genuineness vis-a-vis the constitution of the firm and execution of the partnership deed is the basis for granting the registration to the firm. Accordingly we hold that Shri Ruhela, the learned departmental representative is within his power to raise this issue.
15. In this case, as we have observed that the terms and conditions of partnership deed are not satisfied on account of violation of the terms and conditions prescribed under Clauses 4 and 6 as discussed above, we hold that the constitution of the firm is not genuine on the totality of the facts and circumstances of the case as mentioned above.
16. It is settled law that an agreement or contract to be valid, consideration is a must. The partnership is admittedly an agreement and, therefore, there should be consideration in case of each partner to the partnership. It may be in cash or kind. In this case, there is no contribution of the share capital on behalf of partner No. 3 being an admitted position. She has not contributed to the working of the business by working in it. Similar is the state of affairs regarding another lady partner (mother) of Shri Sirehmal Chopra. Further, the whole of the capital has been brought out by the male partner. Moreover, the distribution or division of the profits in shares as required by the partnership deed is not there, as we have observed above. Therefore, on these facts it can be held that the partnership is not genuine, in view of the fact that its constitution and execution is not genuine as is evident from the facts as stated above.
17. No doubt, Shri Ranka, relying on the decision in the case of K.D. Kamath & Co. (supra), the learned counsel for the assessee, contends that the contribution of share capital by each partner is not a must. We are not in agreement with him to this extent, since a partner who has not contributed share capital, must be active partner for running the business of the firm. This is there in this case. But in the case before us, it is not there as partner No. 3 has not either contributed capital share or worked to run the business. So this is a distinguishable case with that of K.D. Kamath & Co.'s case (supra). The careful reading of this case as a whole makes us clear that in the partnership which is an agreement or contract, consideration is a must on the part of the partners which may be in cash or in kind. Therefore, we hold that this case is not in favour of the assessee ; rather it proves the stand of the learned representative of the department. No doubt, the counsel for the assessee has cited aforesaid cases, but we do not deem it proper to discuss each case, in view of the fact that in deciding the issue regarding the genuineness of the firm the same is to be decided on the totality of the facts and circumstances of each case. The totality of facts proves that the alleged partners are there to reduce the liability of tax and, therefore, the partnership deed is a make-believe deed, particularly in view of the fact that the terms and conditions of the partnership deed are not fulfilled, as we have observed above.
18. It is pertinent to note that Shri Ranka refused to show the cash book to the learned departmental representative regarding the entry dated 1-2-1979 wherein it is alleged that the partner Smt. Bhanwar Devi, has deposited a sum of Rs. 1,000, which proves that the said entry in the books of account is not correct and hence should not be trusted and relied upon. Otherwise Shri Ranka should have shown the entries in the cash book on the demand of the learned departmental representative and, as such, we do not take notice of this entry. Hence, we hold that the intention of the learned departmental representative is well-founded and must prevail and thereby hold that the lady partner mother has also not contributed any amount towards her share capital. Apart from it, the authorities below have assigned cogent and relevant reasons with which we agree and adopt for coming to the conclusions that the constitution of the firm and execution of the partnership deed is not genuine, in view of the facts mentioned above.
19. Since this is a case where the partners are brother, sister and mother, the onus is upon the assessee to prove that the partnership deed is genuine. It is not genuine in view of the fact that share capital is not contributed as required. Further share of each partner in the profits is not physically distributed because the lady partners are not in the know how much profits they are getting in the previous year, relevant to the assessment year under consideration, as we have mentioned above.
20. It is clear that the total capital has been brought by male partner Shri Sirehmal and it is he, who is controlling the business and management of its affairs. It is further proved that the profits of the lady partners are also under his control, in view of the fact that the lady partners are not in the know of their profits of the year, Thus, the three factors for the benami business (have been proved ?), vis., that the initial capital investment for running the business of the firm has come from Shri Sirehmal Chopra ; secondly it is also proved that the control and the management of the business is in the hands of Shri Sirehmal Chopra ; thirdly it is further proved that the profits of the business are enjoyed and controlled by Shri Sirehmal Chopra as the lady partners are not aware of their share in the profits. Moreover, if these are there in the books of account, then these are under the control of Shri Sirehmal Chopra, Thus from the facts of this case, it is proved that the partners, namely mother and sister of male partner are his benamidars and the business is also belonging to him. Therefore, we hold that the department has proved that the business is benami business of the male partner on the totality of the facts and circumstances of the case.
21. In view of our above discussions and reasons thereto, we hold that the authorities below are justified in non-granting of registration to the firm, in view of the fact that the firm is not genuine as well as the execution of the partnership deed, which are the conditions precedent for granting the registration. Accordingly, we confirm the impugned order.
22. In the result, the appeal is dismissed.
A. Kalyanasundharam, Accountant Member
1. I have gone through the order passed by my learned brother, but even on facts I am unable to agree with the views of my learned brother. On page 13, in para 9, he has reproduced Clauses 4, 6 & 7 of the partnership deed. These are reproduced again below for easy references :
Clause 4 of it says that the capital shall be subscribed and brought by the parties to this deed by mutual consent and according to the exigencies of business. This clause consists of three parts, i.e. (a) that there will be contribution by the partner as share capital which is to be settled by the consent of the partners and to be to the extent as the exigencies of business demand.
Clause 6 says that the profit and loss "of the trading of the firm shall be divided or borne in the following ratio :
Shri Sirehmal Chopra 40% Smt. Bhanwar Devi Chopra 35% Smt. Vimla Patni 25%
Clause 7 of the partnership says that bank account or accounts shall be opened in the firm's name in such bank or banks as may be decided by the said parties and shall be operated by the said parties individually for and on behalf of the said firm.
On page 14, my learned brother has interpreted the abovesaid clauses and had come to the conclusion that there being no specific agreement amongst the partners that the other two lady partners are not required to contribute capital and that the amounts of profit though credited to the capital account of the partners not being withdrawn by the partners tantamounts to the profit not going to the coffers of the partners physically and due to the relationship of the partners as brother and son of the ladies the partnership was a sham. My learned brother is also impressed by the fact that the main capital in the shape of stocks was brought in by the male partner and the other partner that is the sister brought in Rs. 1,000 as her capital during the course of the year, which also made my brother to conclude that the partnership was a sham one. My learned brother had also referred to the statements that were recorded of the two lady partners, who were unable to state the amount of profit that was received by them. Therefore, my learned brother came to the conclusion that there was no actual division of profits and the profits never reached the hands of the lady partners. My learned brother has also examined the requirements of a contract which could be valid only if there is a consideration, in the shape of capital contribution. The reliance placed on the case of K.D. Kamath & Co. (supra) was rejected on the ground that in a situation where partners do not contribute capital they contribute skill, which is absent in the present case. Since this was a case of partnership between the brother, sister and their mother and that the business was being managed by the male partner only and that even the capital of the other partners are under the control of male partner it has been held that no genuine firm existed and that the lady partners were, in fact, benami of the male partner.
The reading of Clause 4, which is reproduced above, to my mind, indicates that the partners may contribute capital as is required for the business by a mutual consent reached between the partners. If the partners had intended that all of them would contribute capital they would have provided for it in the capital contribution clause stating that each partner shall contribute capital in their respective profit-sharing ratios or by mentioning such specific amount to be contributed by each of the partners. This partnership deed has been signed by all the partners. This itself is sufficient enough, as otherwise there was no necessity of bringing in the words to be settled by the consent of the partners. The partners, thereafter, acted upon this partnership deed and when some capital was required, Smt. Vimla Patni contributed Rs. 1,000. Emphasis has been given to the fact that there has been no withdrawals by the two lady partners in the year under review. To my mind, this is totally irrelevant. The reference to pages 19 to 25 of the paper book, which contains the statement (copies of statements in Hindi) as was recorded by the ITO of the two lady partners clearly indicates that no specific question was put to the ladies as to why they did not make any withdrawals from the firm. The question that was put to the ladies was about the quantum of rent that was received on the properties as also the quantum of interest earned by them. The ladies replied that the rent to the tune of Rs. 200 was received about 3-1 years back (Smt. Bhanwar Devi) and Smt. Vimla Patni mentions that she received interest of about Rs. 1,000 to Rs. 1,500 combined with rent from property. A specific question that was put to Smt, Vimla Patni was :
Q. When you did not contribute any capital to the firm, how did you become the partner of the firm ?
Ans : At the start of the business, there was no requirement of cash and I, therefore, did not contribute capital at the beginning. Later, I did contribute capital, which remained with the firm and as of now it has got accumulated.
Q. The next question was-do you pay income-tax or not ?
Ans : I have been paying income-tax for the last 8-10 years, but I do not remember the exact Ward where I am assessed.
From the above answers, I am unable to come to the same conclusion as my learned brother had come that the lady partners were not genuine partners. Both the ladies were specifically asked the question as to who are the partners and what are their profit sharing ratios. The answers by both the ladies are categorical and to the point, which can be seen from the question and the answer given below :
Q. Kindly tell us correctly as to who are the partners in the firm along with their profit-sharing ratios ?
Ans : In this firm, my son Shri Sirehmal Chopra, Smt. Vimla Patni, my daughter and I, are the three partners. Sirehmal Chopra has 40 per cent, Vimla has 25 per cent and my share is 35 per cent.
Similar question was put to Smt. Vimla Patni, who also gave the answer in the same manner as has been given above.
Another specific question was put to Smt. Vimla Patni:
Q. What was the profit derived by you from the firm ?
Ans : The correct profit can be given from the books. In the last year, I derived a profit of about Rs. 4,000 from the firm.
To the same question, Smt. Bhanwar Devi mentioned that she did not know the exact figure and the same could be given from the books.
From the above, I am unable to comprehend any other possible conclusion which could be taken otherwise as has been done by my learned brother. The ladies have correctly stated the profit-sharing ratios and Smt. Vimla Devi Patni had gone to the extent of stating that profit was derived to the tune of Rs. 4,000. The statement was taken sometime in August 1982 and for assessment year 1982-83, the profit as was credited to her account was Rs. 4,092. The capital account of the lady partners for assessment years 1980-81, 1981-82 and 1982-83 which have been filed in the paper book on pages 16 to 18 are given below :
ASSESSMENT YEAR 1980-81 Smt. Bhanwar Devi Chopra :
Rs. Rs.
To Balance 11,953.64 By Deposit 1,000.00
By Profit 10,953.64
---------
11,953.64 11,953.64
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Smt. Vimla Patni
To Balance 7,824.03 By Profit 7,824.03
--------- ---------
7,824.03 7,824.03
ASSESSMENT YEAR 1981-82
Smt. Vimla Patni :
Rs. Rs.
To Income-tax 161.00-By Balance 7,824.03
To Balance C/F 19,157.10 By Profit 11,494.07
--------- ---------
19,318.10 19,318710
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Smt. Bhanwar Devi-Chopra :
To Income-tax 2,512.00 By Balance 11,953.64
To H.B.T. 189.00 By Deposits 5,800.00
To Wealth-tax 2,230.00 By Profit 16,091.60
To Balance C/F 28,914.24
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33,845721 33, 845.24
ASSESSMENT YEAR 1982-83
2. Smt. Vimla Patni:
Rs. Rs.
To L.I.P. 1,429.80 By Balance 19,157.10
To Income-tax 660.00 By Profit 4,092.62
To Balance C/F 21,159.92
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23,249.72 23,249.72
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3. Smt. Bhanwar Devi Chopra :
To Income-tax 1,741.00 By Balance 28,914.24
To Balance 32,902.32 By Profit 5,729.08
--------- ---------
34,643.32 34,643732
--------- ---------
On these facts, the conclusion drawn by my learned brother in my view is not correct. The complete texts of the statements recorded of the ladies are enclosed as Annexure to my order. The partners have acted in accordance with the partnership deed. The profit derived from the business was distributed to the partners in accordance with the partnership deed and the distribution was correctly made. My learned brother has expressed that more running capital would be required for the firm, by recording the cost of the goods brought in which was to the tune of Rs. 30,990 to the Bales of Rs. 98,749 and had come to the conclusion that more capital was required in order to make the sales to the tune of Rs. 98,000. It is for the businessman to decide what is the quantum of capital that is required and how much working capital would be necessary. Therefore, on the basis given about the requirement of the funds the same cannot be the basis for holding that the terms and conditions of the partnership deed were violated.
There is no denial that under the Income-tax Act, the ITO has all the powers to enquire into the genuineness of the partnership for the purpose of granting of registration of the firm. But, the ITO while exercising his powers under the statute must examine the issue in entirety and should not pick and choose and decide the issue merely because the other two partners are ladies, who have not contributed the capital, have not withdrawn or made any drawings for the year under review cannot be the sole criterion to come to the conclusion that they are not partners. The examination of the statement shows that the ladies were also looking after the business as and when they were required to do so. The partnership is an agreement between the partners and it is a known phenomenon that partners are responsible to the third parties in the same proportion in which they have agreed to share the profits or the losses. This itself could be a sufficient consideration for a person to be a partner. For the mere reason that there was no capital contribution of the partner and that the main or the managing partner happens to be the male partner only does not also lead to the conclusion that the other two lady partners are benami of the male partner. Their Lordships in the K.D. Kamath & Co.'s case (supra) had clearly held that contribution of a share capital by a partner is not a necessity. It is also not necessary that all the partners should take active interest in the firm. On these facts, I am of the view that the two lady partners cannot be termed to be benamidars of the male partner and, therefore, the firm is a genuine one entered into by means of an agreement amongst the partners and, therefore, the firm should be granted registration.
2. In the result, I allow the appeal in full.
ORDER UNDER Section 254(5) OF THE INCOME-TAX ACT, 1961 P.S. Dhillon, Judicial Member
1. As there is a difference of opinion between us in this case, we frame the following question under Section 254(5) of the Act for reference to the Hon'ble President, Income-tax Appellate Tribunal for disposal by a Third Member or Members :
Whether on the facts and law of the case, the authorities below are justified in non-granting of registration to the firm on the ground that the firm is non-genuine and the partnership is a sham on account of the lady partners, the benamidar of male partner, Shri Sirehmal Chopra THIRD MEMBER ORDER K.C. Srivastava, Vice President (WZ)
1. The following point of difference between the Accountant Member and the Judicial Member has been referred to me by the Hon'ble President in the above matter :
Whether on the facts and law of the case, the authorities below are justified in non-granting of registration to the firm on the ground that the firm is non-genuine and the partnership is a sham on account of the lady partners, the benamidar of male partner, Shri Sirehmal Chopra ?
2. The assessee, M/s. Rajesh Corporation, had applied for registration in Form No. 11. It was stated that there were three partners in the firm, which came into existence with effect from 1st February, 1979. The accounting year of the firm ended on 30-6-1979. The Income-tax Officer, however, held that the partnership was not genuine and the two lady partners, Smt. Bhanwar Devi and Smt. Vimla Patni, were not genuine partners but were benamidars of the male partner, Shri Sirehmal Chopra. He further held that the execution of the instrument of partnership was only a make-believe document. He, therefore, refused the registration of the firm and the assessment has been made in the status of an unregistered firm.
3. The Income-tax Officer had found that Shri Sirehmal Chopra was doing the business of precious stones and at the time of constitution of the firm on 1-2-1979 he brought in some precious stones valued at Rs. 40,990 as his capital in the firm. Shri Sirehmal Chopra was the son of Smt. Bhanwar Devi and brother of Smt. Vimla Patni, who joined as partners of the firm. The Income-tax Officer noted that the two lady partners had not brought in any capital except for a small amount of Rs. 1,000 brought in by Smt. Bhanwar Devi. He referred to the fact that Smt. Bhanwar Devi had no experience or skill in this business. The Income-tax Officer examined Smt. Bhanwar Devi and from her statement he inferred that she did not know much about the business and also the fact about the profit received by her. She had admitted that Shri Sirehmal was carrying on business and she was only signing the cheques sometimes. He referred to her capital account on the first three years and pointed out that except for the payment of taxes, there were no other withdrawals from the capital account. He noted that the deposit made in the year relevant for the assessment year 1981-82 was only Rs. 5,800 and the partner was shown to have earned a profit of Rs, 16,091 as a result of the business of the firm. From the absence of withdrawals he inferred that the money was being fully used by Shri Sirehmal Chopra. In respect of Smt. Vimla Patni also the Income-tax Officer noted that she had no experience of carrying on business and in her account also there was no withdrawal except for the payment of insurance and income-tax. Thus, according to the Income-tax Officer, no part of profit has gone to the ladies and it has all remained under the control of the male partner, Shri Sirehmal Chopra. The Income-tax Officer also noted that Smt. Vimla Devi was fully occupied with her household duties and she had also stated that her brother, Shri Sirehmal Chopra, was looking after the affairs of the firm. It was also noted by the Income-tax Officer that whereas the male partner had a share of 40 per cent, the two ladies have been given a share of 35 per cent and 25 per cent respectively which was quite out of proportion, considering that they had no investment made. Prom these facts the Income-tax Officer inferred that the partnership was an attempt to divert the income and was a result of collusion between the persons concerned, thus holding the two ladies to be benamidars of the male partners. He declined the registration of the firm.
4. The Appellate Assistant Commissioner has upheld the order of the Income-tax Officer, who also relied on the factor of the male partner bringing in the precious stones as his capital and the lady partners not bringing in any capital worth the name. The Appellate Assistant Commissioner also noted that the precious stones were sold off by the year 1981-82, after which the firm had only income from interest and commission. Thus, according to him, this was merely a conversion of individual assets into the assets of partnership and thus diverting the income, which would have normally come to him. He also referred to the lack of experience of the lady partners, who could not have contributed to the commission income earned in later years. He, therefore, held that the registration had rightly not been granted.
5. Before the Tribunal there was a difference of opinion between the Members and whereas the Judicial Member held that the registration could not be granted to the assessee-firm, the Accountant Member held that the firm was genuine and the registration could not be refused to it. He also held that the two lady partners could not be termed to be benamidars of the male partner.
6. Both the sides have addressed in favour of their respective claims. The learned counsel for the assessee submitted that the partnership deed had been duly executed and the application had been properly filed. The firm was registered under the Sales-tax Act and the partners were operating a bank account as envisaged in the partnership deed. It was also pointed out that one of the lady partners was already an income-tax assessee and both the partners had been assessed prior to the assessment of the firm. Referring to the orders passed by the Judicial Member, the counsel for the assessee submitted that the inference drawn by the lower authorities as well as the Judicial Member from the statement of Smt. Bhanwar Devi was completely wrong. It was submitted that she had accepted that she was a partner in this firm, which was deriving income from the business of a jeweller. She had also stated about her investment in the firm stating that in the beginning she had invested Rs. 1,000 but later on Rs. 5,000 to Rs. 6,000 were further invested. She had stated that her son and daughters were also partners in the firm and she correctly gave out the share of profit and loss agreed to between the partners. She had also stated the correct address of the firm and she had accepted that she was signing the cheques though generally the business was being looked after by her son, Shri Sirehmal Chopra. In reply to a question that how much was the profit earned by the firm she had stated that this could be stated after looking into the books of account. It was, therefore, contended that she knew all the relevant details as a partner and the fact that she was not an active partner actually carrying on day-to-day business of the firm was not a relevant consideration for holding her to be a benamidar of the male partner. The learned counsel also referred to the statement of Smt. Vimla Patni, the other partner. She had also accepted that she was a partner of the firm and she also knew about the nature of the business carried on by the firm. It is true that the active business participation was by Shri Sirehmal Chopra but that could not make the other partners benamidars of the male partner. She knew about the shareholding of the partners and also about the fact that she had not invested any money in the firm. She knew about the address of the firm and also about the bank account where she had issued cheques. She had also stated the approximate extent of the profit earned in a particular year. She had also stated that she was a regular income-tax assessee. From these statements the learned counsel submitted that there could be no inference that the ladies were benamidars of the male partner.
7. The learned counsel further submitted that the Income-tax Officer having held that the ladies were benamidars of the male partner has proceeded to accord the status of an unregistered firm to the assessee and he has not assessed the whole income in the hands of the male partner. He referred to the provision of the partnership deed about the contribution of capital and pointed out that it was not necessary for the partners to contribute capital and such capital could be contributed only if the firm required it. Clauses 15 and 16 stated that there was agency between the partners and each partner could act on behalf of the other. He pointed out that the order of the Judicial Member suffers from certain infirmities and he pointed out that the profit earned from year to year by the ladies have been assessed as a part of their wealth by the Income-tax Officer. He also contended that one of the considerations of partnership is the sharing of losses and the partners had been taken for this consideration as well. The liability was not limited and the ladies were persons with means and could be called upon to make up their share of losses or the loss suffered by the firm if such a situation arose. The learned counsel contended that there is nothing wrong if the members of the same family decide to carry on a business in a partnership. Smt. Bhanwar Devi had contributed Rs. 1,000 at the time of constitution of the firm and this entry in the books had been noted by the Sales-tax Inspector. The original of the books were produced to establish this position. The learned counsel also contended that there was no evidence or even a suggestion that the profit earned by the partners has gone to the coffers of the other partner or had been used for his benefit.
8. Relying on certain case laws, the learned counsel submitted that contribution of capital is not an essential requirement for establishing the genuineness of the firm and for this he relied on the decision of the Patna High Court in the case of Himalaya Engg, Co. (supra). He also contended that the withdrawal for expenses is not necessary but in this case there were withdrawals for the payment of taxes or insurance premium. For this he relied on the decision in United Patel Construction Co.'s case (supra). He contended that the sharing of losses is a valid and sufficient consideration for taking a partner in a firm and for this he relied on the case of Lalli Ram Sunderlal Jhansi, In re [1951] 19 ITR 372 (All.). The learned counsel also contended that the burden was on the revenue to establish that the ladies were benamidars of the male partner and for this he relied on the Supreme Court decision in the case of Daulat Ram Rawatmull (supra). He strongly relied on the decision of the Rajasthan High Court in CIT v. Gulab Das [1986] 159 ITR 24 and submitted that the facts given in this case help the assessee. In this case it was held that a partner could not be held to be benamidar only on the ground that a partner has not contributed any capital. It was also held that the question of benami is a question of fact and in the present case there was no evidence whatsoever to establish that any of the partners were benamidars of the other partner. He also strongly urged that the partners having been assessed earlier, the registration of the firm could not be refused as held in Narnauli Jewel Corporation v. CIT [1987] 163 ITR 293 (Raj.).
9. The departmental representative, on the other hand, strongly relied on the order of the Appellate Assistant Commissioner and pointed out the circumstances under which the male partner, Shri Sirehmal Chopra, has brought in some precious stones and had formed a partnership to divide the profits from the transactions in respect of precious stones. He submitted that Shri Sirehmal Chopra was in total charge of the business and the ladies were there only to divide the profit. He also contended that after two years there was no business of the firm and only commission income was earned after that, where the ladies had no part to claim. The departmental representative admitted that the Income-tax Officer had not assessed Shri Sirehmal Chopra in respect of the whole income of the firm and he could not rebut the statement made by the counsel for the assessee that till today Shri Sirehmal Chopra has not been assessed in respect of this income. However, he submitted that from all the facts it was clear that the firm was not genuine and the whole purpose of bringing the ladies was to divide the profits for the purposes of income-tax. He contended that the factual genuineness was different from merely where being (sic) a legal entity of the firm. In support of his submission he relied on the decision of the Calcutta High Court in the case of CIT v. Lalit Trading Corporation [1980] 125 ITR 586. He also relied on the observations made in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) where the requirement of going behind the whole transaction has been approved.
10. The Departmental Representative also submitted that in this case there was no question of loss and, therefore, that could not be a consideration for taking two partners who were close relations of the male partner. It was also contended that while one lady partner had not contributed any capital, the other lady partner had withdrawn only that much money which she had contributed as her capital. Thus, she, in fact, has also not contributed any capital.
11. In reply, the learned counsel for the assessee submitted that Shri Sirehmal Chopra had received certain precious stones on the dissolution of a firm, in which he was a partner and he wanted to continue this business partnership and he took the two ladies as his partners. He submitted that capital was not contributed by the partners as it was not required by the firm as the purchase of the precious stones was only from the Hindu undivided family in which the partners were interested and cash payment was, therefore, not necessary. It was pointed out that both the ladies were members of that Hindu undivided family. It was submitted that the precious stones were taken at cost and the possibility of loss could not be ruled out at the time of formation of the firm. As the two lady partners were ladies and had the status and money, they were in a position to share losses, if that contingency arose. It was also submitted by him that the interest income and the commission income earned in later years was the income of the firm as such and not an income of any individual. He also contended that in this case no device has been employed and there was no attempt to evade any income as their share income actually belonged to the lady partners and they were properly assessable in respect of the share income.
12. I have heard the parties at great length. I am inclined to agree with the learned Accountant Member that the materials brought on record by the revenue authorities were not sufficient to hold that the ladies were benamidars of the male partner. It is not possible to hold from the statements of these ladies that they were unaware about the nature of the business of the firm and their relationship in respect of this firm. They were aware of the profit being earned by them and also the other details about the partnership business. The Income-tax Officer himself has held that the assessee was a firm though he has accorded the status of an unregistered firm. There has been no attempt on the part of the Income-tax Officer to assess the income of the firm in the hands of the male partner which should have been the obvious result if the two lady partners were bogus partners and benamidars of the male partners. There is no requirement in law about the capital contribution by a partner and in this case the capital as such was not required and all what had come in were precious stones in respect of which the business was carried on. The firm has carried on the business by making credit purchases from the Hindu undivided family and in view of this there was no requirement of cash for the business of the firm. The partners again had been debited with their taxes and insurance premiums and there is no requirement for withdrawing the profits for household expenses as the ladies had other resources for their maintenance. I agree with the learned Accountant Member that on the facts of the case there was no requirement of cash capital contribution and on that basis the lady partners could not be held to be benamidars of the male partner. The learned Accountant Member has relied on the decision of the Supreme Court in the case of K.D. Kamath & Co. (supra) where it was held that one partner can carry on business on behalf of the others and that alone could not result in the inference that the firm was not a genuine firm. I, therefore, agree with the inference drawn by the learned Accountant Member.
13. The matter will now go back to the Bench for passing an order in accordance with the decision of the majority.