Income Tax Appellate Tribunal - Delhi
Assistant Commissioner Of Income Tax vs Steel & Steel Fabricators on 31 July, 1998
Equivalent citations: [1999]69ITD124(DELHI)
ORDER
Smt. Moksh Mahajan, A.M.
1. These three appeals filed by the Revenue separately in the cases of three parties are taken up together and disposed of by common order. This is for the reason that the facts are common and the finding in one case has a direct bearing on the others.
2. Facts in brief as gathered from the orders of the Revenue authorities as well elaborated on both sides are that the searches were conducted in the premises of Steel & Steel Fabricators, Industrial Fabricators and Mohit Steel Febricators on 17th January, 1989. On the basis of documents as discovered in the premises and on the strength of the decision of the Hon'ble Supreme Court in the case of Ladhu Ram Taparia vs. CIT (1962) 44 ITR 521 (SC) and in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC), the registration granted to three firms was cancelled under the s. 186(1) of the IT Act. The firms were treated as unregistered and the income of the two firms namely Industrial Fabricators and Mohit Steel Fabricators was brought to tax in the hands of Steel & Steel Fabricators. Against the orders passed under s. 186(1) of the Act by the concerned AOs the assessee filed appeals and the learned CITs(A) for the detailed reasons given in their orders, held that the concerned AOs were not justified in cancelling the registration in the case of three firms and directed the AOs to allow continuation of the registration under s. 184(7) of the Act for asst. yr. 1989-90 in case of all the assessees. Aggrieved against these orders, the Department is in appeal.
3. Relying strongly on the orders of the AO the learned Departmental Representative emphasised reasons leading to the cancellation of registration under s. 186(1) of the Act in respect of the three concerned firms. It was submitted that while all the partners of three firms are closely related, the businesses of all the firms were carried on in the common premises. The books of account of all the firms and the cash were found in one premises. The management and control vested in Shri V. B. Gulati as evident from the surrender made on behalf of all the firms. These factors clearly established that there existed no genuine firms and resultantly the registration had to be cancelled.
4. At the outset Shri Anand Prakash, the learned authorised representative pointed out that as the main facts have been discussed in the case of Steel & Steel Fabricators, the same may be taken into consideration while deciding the appeals in respect of the other two firms also. Strong reliance was placed on the order of the learned CIT(A) where in case of Steel & Steel Fabricators the written submissions as filed were discussed at length. It was submitted that apart from the fact that all the three firms came into existence on different dates, they were constituted of different partners though related to each other. These are as under :
Firm's Name of the Share Relation Date of Date or order
names partners ratio partnership granting
deed registration
under s. 185(1)
(1) (2) (3) (4) (5) (6)
Steel & Sh. V. B. 60% Father 4-4-1976 30-12-1977
Steel Gulati
Fabri- Sh. Sunil 40% Son
cators Gulati
Indus- Sh. Sunil 1/3 Son of 4-2-1976 4/80
trial Gulati Sh. V. B.
Fabri- Deepak Gulati
cators Gulati 1/3 -do-
Smt. Sudha 1/3 Daughter-
Rani in-law of
Sh. V. B.
Gulati
Mohit
Sanjay 40% Son of Sh. 2-7-1984 13-3-1989
Steel Gulati V. B. Gulati
Fabri- Smt. Meenu 30%
cators Gulati
Smt. Renu 30%
Gulati
Not only the business was carried on in different premises, i.e., Plot No. 291, Sector 24; Plot No. 508, Sector 22; and Plot No. 293, Sector 24, the management was not concentrated in the hands of Shri V. B. Gulati as is the case made out by the Department. While Steel and Steel Fabricators carried on activity of heavy lathe work as a speciality apart from fabrication, Industrial Fabricators did planner jobs. Mohit Steel Fabricators on the other hand, dealt in purchase and sale of raw materials. There was nothing brought on record to show that Shri V. B. Gulati had any control on the functioning of Industrial Fabricators or Mohit Steel Fabricators. The surrender made was by respective partners of all the firms as borne out from the statement of Shri V. B. Gulati. In any case the joint declaration so made was not questioned by the ADI or for that matter DDI at the time of searches. Discovery of books of account and cash in the same premises by no means proved that other firms were not genuine. List of debtors and creditors of three firms clearly showed that very few creditors and debtors were common which is normal in any business. There were no frequent transactions between the three concerns as pointed out by the AOs. Separate books of account were maintained by all the firms. On these facts the learned CIT(A) rightly held that the facts available in the case of Ladhu Ram Taparia (supra) were different. Coming to the legal aspect of the issue it was submitted that the conditions laid down for cancellation of registration under s. 186(1) of the Act do not include the case of non-disclosure of income by a genuine firm. On the other hand, as held by the Hon'ble Allahabad High Court in the case of Raj Stores vs. CIT (1988) 170 ITR 119 (All), the concept of a genuine firm for the purposes of the provisions of ss. 184, 185 and 186 of the Act is that the firm seeking either a registration or continuation of registration must continue with the identity of the partners and the share ratio in the profits and losses as specified in the instrument. In the absence of any evidence brought on record to show that the genuine firms did not exist, the learned CIT(A) was justified in setting aside the findings of the concerned AO.
5. We have carefully considered the rival submissions and have also gone through the material placed on record. The undisputed facts are that the three firms came into existence on different dates and are constituted of different partners. Registration has been allowed to all the three firms by the concerned AOs for the earlier assessment years. All the three firms carry on different businesses in different premises. There is no material brought on record to show that Steel & Steel Fabricators had passed on its turnover to the other two concerns. There was no evidence produced or documents discovered during the course of searches which revealed that Shri V. B. Gulati had any control over the functioning of Industrial Fabricators or Mohit Steel Fabricators. The statement of Shri V. B. Gulati as recorded showed that surrender of Rs. 7 lakhs as made in the hands of three firms was also signed by Shri Sunil Gulati and Shri Sanjay Gulati - partners of Industrial Fabricators and Mohit Steel Fabricators. The statements of Shri Sunil Gulati and Sanjay Gulati were not recorded despite their being present at the time of searches. The concerned partners of respective firms were authorised to operate the bank accounts. The investments in the firms flowed from the partners constituting the same. Distribution of profits showed that usufruct was enjoyed by respective partners. In this backdrop the writing of books of account by one accountant who was in the employment of Steel & Steel Fabricators and the availability of cash at one place is not sufficient to show that the business was common and was managed by only one person. Then the transactions between the firms are not uncommons while carrying on any business. The inter-relationship of the partners in noway affect the genuineness of the firm.
6. In the case of Ladhu Ram Taparia (supra) relied upon by the Revenue the facts were that Shri Ladhu Ram and Ganpat Rai along with their sons carried on business in the name of following six firms :
Sr. No. Name of the firm Date of business 1. Ladhu Ram Taparia 28-2-1941 2. Jagannath Hanuman Bux 28-6-1941 3. Jagan Nath Har Narain 11-8-1941 4. Ganpat Rai Jorawar Mull 21-10-1943 5. Seth Ladhu Ram Taparia 8-3-1943 6. Ladhu Ram 1-3-1944
The salient features noted by the AO while examining the case as reproduced by the learned CIT(A) were as under :
(a) Each firm had been considerably financed by the other him.
(b) Almost the same outside parties had financed the aforesaid firms namely 1 to 6.
(c) Huge purchases have been made from and huge sales have been made to allied concerns (excepting firms No. 5 & 6).
(d) The goods had been shifted from one concern to another and only a divided portion of profits is actually shown by each firm.
(e) Most of the outside parties to whom goods had been sold and from whom goods had been purchased were the same for each of the firms No. 1 to 4.
(f) The business of the firms have been carried on nearly at the same place.
(g) Rent of all the firms, for the premises occupied by them had been paid in most cases on the same date during the month.
(h) Goods had been insured with the same insurance company.
(i) ITO further noticed on enquiry that the declaration made by the partners to the bank were mostly conflicting with the constitution of the firm declared before him.
(j) The enquiry from the bank had further revealed that Shri Ladhu Ram had control over the business carried on by firm No. 2, though he was not a partner as therein and that he had, in fact authority to operate some of the accounts.
(k) Similarly, Shri Ganpat Rai had declared himself partner of firm No. 3 to the firm even though he was not partner in the firm.
(l) That the employees of the same firm declared themselves to the proprietor of other firms.
(m) That Shri Ganesh Mal S/o Shri Ladhu Ram had operated some of the accounts of the firm No. 1 to 4 in which he was not a partner.
(n) The outside partners of the firms had little interest in the affairs of the profits of the firms and their names had been included to give appearance of genuineness.
These facts are clearly distinguishable.
7. We would now advert to legal aspect of the issue. There is an integrated scheme as laid down in ss. 184, 185 and 186 of the Act. These relate to grant, continuance and cancellation of registration. Registration is a benefit conferred on firms for which the assessee must confirm to the provisions of ss. 184 & 185 of the Act as well as the Rules. Registration can be refused when the validity for genuineness of the firm is questioned. What is valid in law is distinct from what is genuine in fact. The validity of the partnership is to be decided with reference to the express provisions of Partnership Act. Genuineness on the other hand, is to be examined from the angle whether the firm is fraudulent or bogus. On reading s. 185 of the Act as it was there at the relevant period of time, it is found that amongst other pre-requisite conditions, before the registration is to be granted, the AO is required to enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership. Since enquiry into the constitution of the firm has been separately provided for, the same would be an additional factor for granting or refusing registration to the firm. Genuineness on the other hand, is one of the pre-requisite conditions for both grant and continuance of registration. Though commonly and properly understood as something real, the expression 'genuine' had not been defined as such. What is genuine then ? The expression 'genuine' as defined in Chambers 20th Century Dictionary-reads as natural, native, not spurious, real, pure, sincere. These characteristics or qualities cannot be examined in vacuum. These have to be qua some standard or something which exists in reality. For example purity is to be judged vis-a-vis impurity, real against fictitious and genuine against false or bogus. Transported to the arena of firms what is required to be found is whether whatever is provided in the instrument of partnership is there in reality or not.
8. There can be no set formula for determining whether the firm is genuine or not. Each case has to be decided on its own set of facts. Guidelines however can be drawn from certain decisions of Courts where firms have been held to be ingenuine. A few cases in this respect can be examined.
9. In the case of Dhanji Lalji vs. CIT (1977) 107 ITR 395 (Bom), the facts in brief were that one DL was doing business at Kolhapur as sole proprietor. The business was stated to have been converted into partnership deed executed on 12th November, 1958, application for registration was made. The ITO on examining the partners and considering the evidence found that partnership was not genuine. The AAC held that the firm was genuine. The Tribunal restored the order of the ITO. Their Lordships of Bombay High Court found that out of three partners while one was the younger brother of GL, the other two were employees. The reasons given in the recital for taking the three as partners were found to be not correct. No withdrawals were made and the profits were appropriated by two partners. While one of the partners was carrying on his independent business, the other two employees continued to work in the proprietorship concern of GL. Whatever was received by them in the proprietorship concern was drawn as profit from the partnership concern. Then the bank account was to be in the name of DL who could alone draw, accept or endorse the bills or cheques in the names of the partnership. On these facts it was held that the firm was not genuine. It was also pointed out that while "each one of the circumstances taken by itself might not be sufficient to lead to an inference about the non-genuineness of the firm but that did not mean that taking all the circumstances and factors cumulatively, such an inference could never be drawn." In the case of assessee, the partners though related have appropriated their own profits as per the material brought on record. There is no clause that the bank account is to be operated upon by only one of the partners. Furthermore there was no provisions in the partnership deed that one of the partners of Shri V. B. Gulati for that matter had a power to employ, remove or dismiss any person. The facts available in the aforesaid case are not there in the case of the assessee.
10. In the case of CIT vs. S.S.A.M. Shanmugha Nadar Financing Corpn. (1983) 141 ITR 656 (Mad), the facts were that one of the partners of the firm along with the wives of other 8 partners entered into the partnership and constituted the financing corporation. The eight ladies had to their credit certain amounts in other firm which were withdrawn and credited as capital contribution to the firm. On the same date the firm advanced the same amount to another firm from where the 8 ladies had withdrawn their sums. Similar act was repeated by the other partners of the firm. The entries were made by book adjustments and no cash actually passed in these transactions. While the ITO held that the assessee-firm was not genuine, the AAC and the Tribunal allowed registration to the same. Their Lordships of Madras High Court held that the entries in the transaction are posted in such a manner that there is a triangle and ultimately as the amounts reach the same point, there is no passing of any cash. On the facts it was held that "the execution of partnership deed is not by itself a talisman which can entitle a firm to be registered. Apart from the execution of the partnership deed, there must be circumstances and facts to show that it had carried on business." In the case of the assessee there was sufficient material on record to show that the firms had come into existence on different dates and that they had separately carried on business.
11. In the case of S. P. Gramophone Co. vs. CIT (1986) 158 ITR 313 (SC), the facts are that two partners carried on business having half share in the profit and losses. Fresh partnership deed was drawn by inducting the son and brother of one of the partner and two brothers of another partner. The new partners were not required to contribute any capital. Furthermore the two new partners who were originally employees should continue to draw their salaries or remunerations as was earlier being drawn by them. The new partners were not to interfere in the management or the affairs or the accounts of the partnership business. These could only sell their shares in the firm to the two original partners. These were as per various clauses of the partnership deed. The ITO found that the partnership deed had been signed by the four partners mechanically without knowing the contents. Then unsigned P&L a/c and balance sheet prepared on loose sheets of papers were submitted. On the facts the registration was refused. This was confirmed uptill the Tribunal. The matter travelled to the Supreme Court and their Lordships of the Supreme Court affirmed the decision of the High Court that the real controversy centered round the question whether or not factually a genuine firm had come into existence and whether there was material on record for a negative finding. It was further held that there was sufficient material on record on the basis of which Tribunal could record an adverse finding on the genuineness of the firm. The clause of the deed indicated that four partners were dummies and that they had signed the deed mechanically. Deed was executed merely as a cloak to secure registration. It was however, held that four new partners being benamidars was no bar to a registration, did not preclude the High Court from confirming the refusal of registration. While holding so, reliance was placed on the decision of Supreme Court in the case of CIT vs. A. Abdul Rahim & Co. (1965) 55 ITR 651 (SC). Amendment to this effect has been made in the Act to provide that in case any partner of the firm is benamidar in relation to whole or any part of profit of the firm, the firm is to be treated as ingenuine. As regards other factors we find that they are not present in the case of the assessee.
12. In the case of Arya Confectionery Works vs. CIT (1983) 143 ITR 814 (MP) the facts are that the assessee-firm derived income from manufacture and sale of confectionery and biscuits. The assessee's accounts were rejected and it was held that the assessee's income could not be properly deduced from the accounts as maintained. It was further found that (head note) - (i) a business in the name of G agencies was carried on from the assessee's business premises; (ii) account books in the name of G agencies were found in the premises of the assessee, and the books revealed that purchases were made by G agencies from the assessee-firm without bills; (iii) G agencies carried on the same business which the assessee carried on and the sale proceeds were handed over daily by G to a senior partner of the assessee-firm, who initialled in the cash book of G agencies in token of having received the sale proceeds; (iv) no rent or shop expenses were recovered by the assessee from G agencies; (v) G had not capital of his own and he was an employee either of the assessee-firm or of a sister concern, in both of which he father-in-law of G was a partner; (vi) an affidavit in the name of G was filed but G was not produced for examination in spite of opportunities given to the assessee and even when a summons was served on him at the address of the assessee, G failed to appear before the ITO, and that his father-in-law stated before the ITO that he had not knowledge about the whereabouts of G. Therefore, the Tribunal held that the business carried on in the name of G agencies was the benami business of the assessee-firm."
13. In the case of the assessee except for the fact that the account books of other two firms were found in the premises of the assessee, the other factors were not present namely that purchases were made from the other firms and that the same business was carried on or that no rent or shop expenses were recovered from the parties and that the partners did not appear before the AO as and when required. Only cash was discovered in the premises of Steel & Steel Fabricators which was also allocated amongst the three firms as per entries made in their books of account. There was no material on record to hold that the aforesaid firm or Shri V. B. Gulati and control over the management of other two firms. The presence of one factor by itself if not sufficient to conclude that the firms were ingenuine.
14. As regards the non-disclosure of income by the firm, our attention was drawn to the decision of Rajasthan High Court in the case of CIT vs. Swaroop Chand Kojuram (1985) 154 ITR 660 (Raj), wherein it was held that the registration cannot be cancelled under s. 186(1) of the Act for the reason that part of the income of the firm was not disclosed. As per the reasoning given the non-disclosure of the income is not one of the grounds for cancellation of registration under s. 186(1) of the Act. Similar decision was taken by the Andhra Pradesh High Court in the case of Variety Hall & Ramakrishna Textiles vs. CIT (1972) 84 ITR 202 (All). In this context we find that in the case of Khanjan Lal Sewak Ram vs. CIT (1972) 83 ITR 175 (SC) their Lordships held that in case the firm had earned the profits in the black market and though it had distributed its book profit amongst the partners according to instrument of partnership deed but in case it had not distributed the profits earned by it in the black market amongst the partners according to the Partnership Act, the firm was not entitled to the renewal of registration for the concerned assessment year. This decision however, was considered by their Lordships of Delhi High Court in the case of Addl. CIT vs. Chanderbhan Harichand & Co. (1980) 126 ITR 709 (Del) : (1981) 5 Taxman 178 (Del). They took note of the observations of their Lordships that the legal position under the Act of 1922 was contained in the Rules and not in the Act. Application had to be in particular form and the ITO had the power to reject the application for renewal. After noting the provisions of 1922 Act it was held that under the Act of 1961 there has been a considerable change in the legal position. The provisions have been contained in ss. 182 to 189 of the Act. On examination of the relevant provisions it was held that in case one or more partners have acted dishonestly qua their other partners the same does not have the effect of altering the partnership deed or the right of the partners. Thus the decision of the Hon'ble Supreme Court was distinguished insofar as the same was rendered under the provisions of IT Act, 1922.
15. Reference to above case law is purposive. This is to comprehend the meaning of expression 'genuine' in relation to grant and cancellation of registration. What comes out from above discussion is that whatever is alleged to be there, should be found to exist in reality. In other words terms of partnership as reduced in writing should be found to be translated in action. While no single factor may be sufficient to lead inference about ingenuineness of the firm, a set of factors may lead to the conclusion that firm is bogus.
16. In the result both on facts and in law the Revenue failed to prove that the firms were not genuine and hence registration granted was required to be cancelled. Accordingly we would uphold the orders of the learned CIT(A) for asst. yr. 1989-90 in the case of all the assessees.
17. In the result, the appeals filed by the Revenue are dismissed.