Income Tax Appellate Tribunal - Ahmedabad
Dr. Rasiklal T. Acharya vs Assistant Commissioner Of Income Tax on 30 May, 1996
ORDER
B.L. Chhibber, A.M.
1. The following four grounds have been raised by the assessee in this appeal arising out of the order of the CIT(A)-II Surat :
(1) The learned CIT(A) erred in confirming that the business of Hotel Surat was a business of partnership firm and not proprietary concern of the appellant.
(2) The appellant submits that on the basis of the details and the evidence submitted, the learned CIT(A) ought to have held that the business of Hotel Surat was proprietary business.
(3) The Appellant submits that consequently the loss sustained in the business of proprietary concern in the name and style of Hotel Surat ought to have been allowed to be adjusted against other income of the appellant.
(4) The appellant craves to leave, add, alter or vary any of the grounds of appeal.
2. Shri Rasiklal T. Acharya, assessee in the present case, is an orthopaedic surgeon and is Master of Surgery. His wife Smt. Shardaben R. Acharya is also a Doctor with B.A.M.S. degree of Gujarat University. The couple built a hospital known as 'Acharya Hospital' in Surat and entered into a partnership on 2nd Jan., 1976. The preamble of the partnership reads as under.
"Partner No. 1 and partner No. 2 are husband and wife and have acquired medical qualification from Gujarat University as stated above. Both together have now planned to run "Acharya Hospital" in partnership and on opening of the hospital it will facilitate general public and people coming from all classes will get medical assistance. Along with orthopaedic treatment, general medical facility can also be given. With this aim in mind land has been purchased at Galemandi, Surat, Suthar Falia, for construction of Acharya Hospital. Both the persons have decided to run the hospital from 1st Jan., 1976 in partnership. The partnership deed in regard to the above was pending yet. Terms and conditions of the deed as mentioned below have been approved today."
The above partnership was disallowed w.e.f. 30th June, 1985, vide deed of dissolution of partnership executed on 17th July, 1985. Thereafter the couple converted a part of the hospital building into a hotel known as "Hotel Surat", and executed a partnership on 15th July, 1988, with 50 per cent share each. A search was carried out at the premises of the assessee on 6th Dec., 1990, and cash of Rs. 69,753 was found out of which Rs. 40,000 was seized and gold ornaments to the extent of Rs. 5,20,000 were found out of which ornaments worth Rs. 1,50,000 were seized. During the course of search proceedings the assessee's statement under s. 132(4) was recorded and he made a disclosure of Rs. 10 lakhs which was bifurcated as under :
Rs.
1. Amount spent for construction and development of Hotel Surat 4,86,300
2. Amount spent for purchase of jewellery and ornaments 1,73,700
3. Cash credits in the case of the assessee and his wife 2,90,000
4. Professional income 50,000
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10,00,000
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In their statements both the assessee and his wife admitted that they were partners with 50 per cent share each in the business styled as "Hotel Surat". It will be worthwhile to reproduce question Nos. 18 and 19 from the statement of the assessee recorded during the search :
"Q. 18 : How much you have invested in the hotel business?
Ans : In my hotel business I have invested about Rs. 30 lakhs.
Q. 19 : In the partnership business of Hotel Surat who are the other partners and what is their share?
Ans : In Hotel Surat I and my wife Shardaben are partners and our share is 50-50."
In her statement recorded on 6th Dec., 1990, Dr. Mrs. Shardaben wife of the assessee in question No. 6 replied as under :
"Q. 6 : State the sources of your income?
Ans. 1 : I get Rs. 1,500 annually as salary in Surat Safe Deposit Vault.
2 : I am a partner in Acharya Hospital, Galemandi, Surat.
3. I am a partner in Hotel Surat, Galemandi Acharya Hospital Building which is converted from 17th March, 1990, into guest house by converting 34 rooms in Acharya Building and there are seven to eight rooms in upper story. I have left medical practice for last five to six years."
From the above questions and answers reproduced from the statements of the assessee and his wife it is evident that initially they were both partners in Acharya Hospital and later on partners in equal proportions in the business styled as "Hotel Surat". Later on during assessment proceedings relating to the assessment year under appeal the assessee claimed that the business styled as "Hotel Surat" was his proprietary concern from which he had suffered a loss of Rs. 2,20,402. It was pointed out that the partnership entered into vide partnership deed dt. 15th July, 1988, had been dissolved vide dissolution deed dt. 19th Jan., 1990, whereby Dr. Mrs. Shardaben had been retired from the partnership and the assessee had taken over the business of "Hotel Surat" and ran it as his proprietary concern. The learned AO was of the opinion that the submission of the assessee that he was a sole proprietor of the business styled as "Hotel Surat" was an afterthought to get set off of loss of Rs. 2,20,402 against the disclosure of Rs. 10 lakhs made during the search operations. He gave the following reasons :
(1) During the course of search operations conducted on 6th Dec., 1990, both the assessee and his wife had categorically submitted that they were partners with 50 per cent share each in the business styled as Hotel Surat.
(2) Because Dr. Acharya has made a disclosure Rs. 10 lakhs to get set off of the disclosure he created one dissolution deed shown the date of dissolution as 18th Jan., 1990. "So the ulterior motive behind creating the picture of the dissolution of the firm is nothing but to defraud the Revenue in the form he may not have to pay any taxes on the disclosure made during the search."
(3) "It is confessed by them that adjustment entries have not been passed with the books of accounts. So unless and until necessary entries are passed with the books of accounts distributing the assets of the firm on the date of dissolution in the eye of law there is no dissolution at all. Therefore, assessee's plea is not accepted."
(4) It is confessed by the assessee that no intimation regarding dissolution of the firm was given to the bank.
(5) Similarly, no intimation regarding the dissolution of the firm was given to the Registrar of the firms.
In view of the above reasons, the AO concluded as under :
"For getting the benefit of the bank loan the assessee wanted to treat M/s Hotel Surat as firm and at the same time, getting the benefit of depreciation and loss assessee wants that Hotel Surat should be treated as his proprietary concern. This position is not acceptable under any circumstances. Looking to the above fact and as no necessary entries regarding dissolution of the firm is passed on the date of dissolution, M/s Hotel Surat is treated as a firm. It is gathered from Mr. Bhatt that they have not made any application for registration of the firm. Therefore, M/s Hotel Surat's correct status will be unregistered firm. As such, the loss claim as well depreciation claimed from M/s Hotel Surat is not allowable in the case of the assessee and same is disallowed accordingly."
3. On appeal, the learned CIT(A) concurred with the findings of the AO. Written submissions were filed before the CIT(A) which have been reproduced by him in para 2 of his order. Besides, what had been stated before the AO, the following new issues were raised before the CIT(A) :
"(1) So far as the wife of the assessee is concerned, she was not well and her brother was admitted to hospital on that day and she was not in a proper frame of mind. Otherwise, also at the time of s. 132 action, it is difficult to compose oneself and those who have not experienced it earlier, get disturbed. The replies have, therefore, to be viewed from this angle.
(2) Hotel licence from Surat Municipal Corporation in name of "Hotel Surat" was taken on 1st Oct., 1988, and in that licence, the proprietor has been shown as Dr. Rasiklal T. Acharya. This licence was issued long before action under s. 132.
(3) Certificate from the Police Commissioner for commencement of hotel dt. 17th Oct., 1988, was also obtained in the individual name of Dr. Acharya and this certificate was also obtained prior to s. 132 action.
(4) In the balance-sheet filed, there is no capital account of Mrs. Acharya and proprietor capital account on Dr. Acharya has been shown. In fact, Mrs. Acharya had given loan to Dr. Acharya for which interest has been paid by Dr. Acharya to his wife and received by his wife. Both the transactions are reflected in their respective IT assessments and have been accepted.
(5) Whole case of the Department ends on the statement of Dr. Acharya and his wife at the time of action under s. 132 which was taken in a different atmosphere. The entire external evidence as reflected in the above and which was in existence even before action under s. 132 cannot be brushed aside."
The CIT(A) after hearing the learned counsel for the assessee and considering the written submissions filed before him, held as under :
"I have considered the above arguments of the appellant's counsel and also the order of the AO. A perusal of the case records shows that the appellant wrote a letter dt. 21st March, 1992, to the AO wherein he has made the following contentions :
"Initially the business of Hotel Surat was started in partnership alongwith my wife Smt. Shardaben R. Acharya and initial investment were made. The date of commencement of business was from 15th July, 1988. In the Registrar of the Firm application for registration with the Registrar of Firm also was made.
Actually the property in which Hotel Surat situated is in the joint ownership of we both i.e., my wife Smt. Shardaben R. Acharya and myself since the beginning of our profession and when the hospital building acquired originally we had purchased and constructed hospital building jointly. At present also we are having property income i.e., rent from Surat Diagnostic Centre and income from the said shown in the books of accounts which Surat Safe Deposit Vault (P) Ltd. is accepted by the Department.
As Smt. Shardaben Acharya was busy with Surat Safe Deposit Vault (P) Ltd. full time, and we have decided that the firm was to dissolve, the said has been dissolved on 17th Jan., 1990, and accordingly dissolution deed has also been executed."
On perusal of the contents of the letter quoted above clearly shows the admission of the part of the appellant that the business of Hotel Surat was started in partnership along with his wife Smt. Shardaben R. Acharya on 15th July, 1988. It also confirms the fact that an application was made by the firm for registration to the Registrar of Firm. The letter also states that since Smt. Shardaben R. Acharya was busy with Surat Safe Deposit Vault (P) Ltd. it was decided to dissolve the firm and the said firm was dissolved on 18th Jan., 1990, and accordingly a Dissolution Deed was also executed. Keeping in view the above position the reliance by the appellant's counsel on the certificate of Surat Municipal Corporation dt. 1st Oct., 1988, and the certificate from the Police Commissioner dt. 17th Oct., 1988, in the name of Dr. Acharya does not have any significance. Since the partnership firm as per the letter dt. 21st March, 1992, was dissolved on 18th Jan., 1990, the contention of the appellant's counsel that the certificates of the Surat Municipal Corporation and the Police Commissioner that Dr. Acharya was a proprietor since the certificates were issued in his name is absolutely contradictory. It is clear from the statement of appellant himself as reflected in the letter dt. 21st March, 1992, that the partnership was in operation till 18th Jan., 1990, hence the question of the two certificates referred above having any meaning does not arise. It is clear that the applications were made as an individual and the municipal authorities or the Police Commissioner are not particular whether the application is made in the name of an individual or in the name of a firm. Since the application was made to the two Departments in the individual name, the licences were granted in individual names. However, the fact remains even as per the appellant's own contention vide his letter dt. 21st March, 1992 that the firm was only dissolved on 18th Jan., 1990. Moreover, what is relevant in deciding the issue is bank account of the hotel which continued to be in the name of partnership firm and the application to the Registrar of Firms and IT Department. Another interesting feature is that during the course of search no dissolution deed was seized or available. If a dissolution deed was available the same would definitely have been found at the premises of the appellant or at hotel. Another factor which goes in favour of the Department is that even in the books of accounts no entries have been passed regarding the dissolution and distribution of the assets of the firm. Coupled with the above facts, the fact that both the appellant and his wife gave a statement during the course of search confirming that they were partners with 50 per cent share each, I have no hesitation to coming to the conclusion that the business of Hotel Surat was in fact a partnership firm and not the proprietary concern of the appellant. Accordingly, the contention of the AO in this regard is confirmed. Keeping in view my finding that Hotel Surat is not the above proprietary concern of the appellant the claim of depreciation made by the appellant also does not hold goods."
4. Shri J. P. Shah, the learned counsel for the assessee, reiterated the submissions made before the CIT(A). He submitted that since originally the building belonged to the original firm of "Acharya Hospital", it was loosely referred to as belonging to the partnership but in fact, it got to the share of Dr. Acharya, the assessee in this case. He further submitted that so far as the wife of the assessee is concerned, she was not well and her brother was admitted in hospital on that day and she was not in a proper frame of mind when her statement under s. 132 was recorded. He submitted that no reliance should be placed on her statement that she was partner in the firm of M/s Hotel Surat in view of the decision of the Ahmedabad Bench "B" in the case of Asstt. CIT vs. Mrs. Sushiladevi S. Agarwal (1994) 49 TTJ (Ahd) 663 : (1994) 50 ITD 524 (Ahd). The learned counsel for the assessee further submitted that the partnership styled as M/s Hotel Surat was duly dissolved vide dissolution deed executed on 19th Jan., 1990. He further brought to our notice that the dissolution deed was executed on stamp paper and was duly witnessed by two witnesses and nothing has been brought on record by the authorities below that it was not a genuine document. The learned counsel also placed reliance on the hotel licence from Surat Municipal Corporation which was in the name of the assessee Dr. Acharya and the certificate from the Police Commissioner for commencement of hotel dt. 17th Oct., 1988, which was also showed Dr. Acharya as the sole proprietor. The learned counsel for the assessee further relied upon the judgment of the Hon'ble Supreme Court in the case of CIT vs. J. H. Gotla (1985) 156 ITR 323 (SC) and said that the assessee was entitled to adjustment of loss from Hotel Surat against his other income. The learned counsel further relied upon recent judgment of the Gujarat High Court in the case of Banyan & Berry vs. CIT, wherein it has been held that every legitimate and genuine act on the part of tax-payer resulting in reduction of tax liability cannot be treated as device for avoidance of tax. Heavily relying upon the aforesaid judgment of the jurisdictional High Court, the learned counsel for the assessee submitted that the dissolution deed was a genuine one and should not have been treated by the Revenue for avoidance of tax on the part of the assessee.
5. Shri K. V. Trivedi, the learned Departmental Representative relied upon the orders of the authorities below. He submitted that during the course of search both the assessee and his wife had categorically admitted that they were partners in the business styled as M/s Hotel Surat with 50 per cent share each. There was not even a whisper of any dissolution deed in their statements and no copy of dissolution deed was found during the course search operations. He, therefore, submitted that the story of dissolution deed was only a concocted story to defraud the Revenue. He further submitted that no reliance should be placed on the hotel licence from Surat Municipal Corporation and the certificate from the Police Commissioner for commencement of business in hotel as the same were fresh pieces of evidence and were not produced before the AO and in any case the CIT(A) rightly rejected the same. He concluded that in view of the peculiar facts and circumstances of the case the orders of the authorities below should be upheld.
6. We have considered the rival submissions and perused the facts on record. We find that both the assessee and his wife are doctors by profession and are highly qualified persons. During the course of search operations they spontaneously submitted that they were partners in the business styled as Hotel Surat with 50 per cent share each. The relevant portions from their statements reproduced supra show that they submitted without any presure and/or coercion. If the partnership had been dissolved by dissolution deed dt. 19th Jan., 1990, they would have brought this vital information to the notice of the authorised officer who recorded their statements during the course of search operations. Another interesting feature is that during the course of search no dissolution deed was found and this further gives credence to the belief that the dissolution deed was an afterthought to get adjustment of the loss against the disclosure of Rs. 10 lacs made by the assessee during the course of search. Further, it is noted that no entries were passed in the books of accounts as a result of the so-called dissolution deed. No intimation was sent to the Registrar of the Firms and to the bank regarding the dissolution of the firm. It is now well settled that taxing authorities are entitled to look into surrounding circumstances to find out the reality of documents relied upon by the assessee - CIT vs. Durga Prasad More (1971) 82 ITR 540 (SC). Taking into consideration surrounding circumstances and the totality of the facts of the case it can be inferred that the dissolution deed dt. 19th Jan., 1990 was an afterthought and fabricated piece of evidence to be used for the purpose of getting adjustment of loss of Hotel Surat against other income of the assessee. A cursory look on the alleged dissolution deed reveals that it was executed without giving any solid reasons for the dissolving of the partnership firm. It simply states "as on this date 19th Jan., 1990 and now onwards this partnership will be considered dissolved, and the firm's entire business will be taken care of by our partner Dr. Rasiklal Tulsidas Acharya." Nowhere it has been mentioned whether retiring partner (Smt. Shardaben got anything on the dissolution of the firm Hotel Surat. It is no doubt witnessed by two witnesses but their addresses are not given. One witness is K. C. Rajput and the other witness has simply affixed illegible signature. Obviously the deed was rushed through in a hurry with an ulterior motive and cannot be accepted as a valid piece of evidence, more so in the face of categorical and spontaneous statements of the assessee and his wife recorded during the course of search operations.
7. Further, as stated above, no effect was given to the terms of the alleged deed of dissolution as no entries were passed in the books of accounts; and no intimation of the dissolution was sent to the Registrar of Firms and the bank. Reliance placed by the learned counsel for the assessee on the hotel licence from Surat Municipal Corporation showing the assessee as sole proprietor and the certificate from the Police Commissioner for commencement of hotel again showing the assessee as a sole proprietor is of no significance because the first document is dt. 1st Oct., 1988, and the second document is dt. 17th Oct., 1988, when the Hotel Surat was a partnership concerned and accordingly the stand now taken is self-contradictory.
8. As regards the contention of the learned counsel that the wife of the assessee was not well as her brother was admitted in the hospital on that day and reliance placed on the decision in the case of Smt. Sushiladevi's case (supra), carries no merit. In Sushiladevi Agarwal's case, the assessee was "an illiterate, aged, rustic domestic and tradition bound Marwadi lady" whereas in the case of the present assessee his wife was highly qualified/educated and doctor by profession.
Reliance placed by the learned counsel of the assessee on the judgment of the Supreme Court in the case of CIT vs. J. H. Gotla (supra) is also misplaced. In that case, the respondent-assessee, an individual, was running an oil mill, carried on business in purchase and sale of groundnut oil and was also an abkari contractor. On 1st June, 1957, he gifted away a part of the oil mill machinery viz., a solvent extraction plant, to his wife and three minor children. A firm was constituted by the wife and a third person, to the profits of which the three minor children were admitted. The mill premises as well as the remaining machinery of the respondent were leased out to that firm which carried on the business of manufacture and sale of groundnut oil. Under an agreement with the firm, the respondent rendered certain services by way of management for which he was entitled to a commission based on the purchase and sale of oil and cake. The respondent had incurred losses in his individual business in earlier years which were being carried forward from year to year upto asst. yr. 1958-59. The share income of the wife and minor children in the firm was included in the total income of the respondent under s. 16(3) of the Indian IT Act, 1922 for the asst. yrs. 1959-60, 1960-61 and 1961-62, and the question was whether the respondent was entitled under s. 24(2) to set off the losses, which was incurred in his individual business in earlier years and brought forward, against the share income of his wife and minor children. In those years, the respondent had continued to carry on business in purchase and sale of groundnut cake and oil on a small scale. The Tribunal held that though the respondent was continuing to carry on business of oil in general in those three years, he was not entitled to the set off, since he could not be said to be carrying on the business out of which the share income of the wife and minor children arose. On a reference, the High Court held that the respondent was entitled to the set off under s. 24(2). On appeal, the Hon'ble Supreme Court held, affirming the decision of the High Court, that the respondent was entitled under s. 24(2) to set off the loss in his individual business which had been carried forward against the share income of the wife and minor children included in his total income under s. 16(3), as the share income had to be regarded as business income derived from business carried on by the respondent. In the case before us the income of the wife was never included in the income of the assessee and accordingly the facts here are distinguishable and accordingly the ratio laid down by the Hon'ble Supreme Court in the case of J. H. Gotla (supra) will not apply.
Coming to the case of Banyan & Berry vs. CIT (supra) heavily relied upon by the learned counsel for the assessee, it was a partnership firm and deed of partnership was executed on 16th Nov., 1982, with 16 partners. The business of the firm was of contractors, engineers and builders. A private limited company under the name and style of Banyan and Berry Construction (P) Ltd. was incorporated on 16th April, 1983. A transfer deed was executed between the firm M/s Banyan & Berry Construction (P) Ltd. and the assessee firm, by virtue of which it was agreed that subject to provisions contained in the agreement, the firm would transfer to the company w.e.f. 1st July, 1984, all assets and liabilities of the firm together with the goodwill thereof with an intention that the firm's business may be taken over as a running concern by the company w.e.f. 1st July, 1984. There was specific provision in the agreement to the effect that the benefit of additional claims relating to construction of dam at Mazam Irrigation Scheme would not stand transferred to the company.
Thereafter, the firm was dissolved by a dissolution deed dt. 16th Aug., 1984. Clause 7 of the dissolution deed read as under :
"(7) The parties hereto are not undertaking any further business activity in the said firm and have no outstanding business save and except to the extent of pursuing aforementioned claims against the Government of Gujarat in respect of the contract of construction of earthen dam for Mazam Irrigation Scheme in the Sabarkantha District."
The Revenue treated the dissolution deed as a mere device to avoid tax by treating the realisation of actionable claim as the business to be carried on by the firm by placing reliance on the decision of Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (1984) 154 ITR 148 (SC). After going through the terms and conditions of the dissolution deed, the Hon'ble High Court of Gujarat held that it was "lawful valid and bona fide dissolution" and that every legitimate and genuine act on the part of the taxpayer resulting in reduction of tax liability cannot be treated as device for avoidance of tax. It was further held that McDowell & Co. Ltd. vs. CTO (supra) has not affected the freedom of citizen to plan his business affairs within the framework of law unless they may properly be called a subterfuge. Obviously the facts of the case before us are distinguishable. Hotel Surat was a partnership firm constituted of husband and the wife i.e., rank insiders in equal profit sharing ratio and as established in the preceding paras beyond any shadow of doubt the dissolution deed dt. 19th Jan., 1990, was not a lawful valid and bona fide dissolution deed.
Accordingly the ratio laid down by the Gujarat High Court in the case of Banyan & Berry (supra) is not applicable to the facts of the case before us. Moreover, the said judgment has explained McDowell & Co. Ltd. vs. CTO's case which has not been relied upon either by the AO or by the CIT(A) while deciding the issue against the assessee. In our view, the assessee concocted evidence by allegedly executing deed of dissolution with an ulterior motive to defraud the Revenue and such mala fide practice has to be disapproved and discouraged.
9. In the light of the above discussion we concur with the findings of the CIT(A) and dismiss the grounds raised by the assessee.
10. In the result, the appeal is dismissed.