Andhra HC (Pre-Telangana)
Commissioner Of Income Tax, A.P.-Iii, ... vs Tirumalai Traders, Secunderabad on 12 March, 1999
Equivalent citations: 1999(3)ALD578, [1999]238ITR661(AP)
Author: P. Venkatarama Reddi
Bench: P. Venkatarama Reddi
ORDER P. Venkatarama Reddi, J.
1. In this reference case, the following questions have been referred by the Income tax Appellate Tribunal for the opinion of this Court, at the instance of the Commissioner of Income Tax, Andhra Pradesh-III:
"(1) Whether on the facts and in the circumstances of the case that the ITAT should have held that since the Agreement dated 1-4-1980 was entered into not for doing business but only to facilitate transfer of the house properly held by the firm formed under -the deed of partnership dated 8-6-1979 to the Limited Company with a view to avoid payment of capital gains tax, the assessec is not entitled to registration under Section 185(1)(a) of the IT Act, 1961; for the assessment year 1981-82?
(2) Whether on the facts and in the circumstances of the case the ITAT should have observed that the so called new firm which came into existence on 1-4-1980 had not carried on any business either during the year of account or in the subsequent accounting year and hence it cannot be said that there was 'lull' in the business only in the accounting year relevant to the assessment year 1981-82?
(3) Whether on the facts and in the circumstances of the case, the ITAT should have held that by the deed dated 1-4-1980, no new firm legally constituted had come into being and the partnership firm constituted under the deed of partnership dated 8-6- 1 979 continued to exist even during the accounting year relevant to the assessment year 1981-82?"
2. The respondent-firm came into existence as per the partnership deed dated 8-6-1979 with five partners with the object of carrying on the business of trading in cotton, kapas, ginning, building construction etc. It was subjected to assessment as a registered firm for the assessment year 1980-81. For the assessment year 1981 -82, the respondent applied for registration in Form 11A enclosing the new partnership deed dated 1-4-1980. As per the said partnership deed, a Private Limited Company by name 'Tirumalai Hotels & Builders Pvt. Ltd.' was admitted as a partner with effect from 1-4-1980 and it was given 60% share, inter alia, it was mentioned in the partnership deed that the said Private Limited Company was incorporated with the object of taking over the business and assets and liabilities of the firm. It is also stated in Clause 15 that 'the partnership business may be transferred to the Private Limited Company "Tirumalai Hotels & Builders Private Limited". The reconstituted firm was dissolved by a deed dated 11-11-1980, i.e., shortly after the accounting year was over and the entire business was taken over by the Private Limited Company and the erstwhile partners were given equity shares. Thereafter, the Private Limited Company continued to carry on the same business. During the assessment year in question, admittedly the Company did not carry on the business excepting letting out the building owned by the firm for rent. The assessing authority refused the registration for the assessment year 1981-82 on the ground that no business was carried on during the year and that the object of entering into partnership with the Private Limited Company and reconstituting the firm was only to enable the ' assets to be transferred from one entity to another. The Inspecting Assistant Commissioner, therefore, came to the conclusion that there was no genuine firm in existence. Hence, the registration was refused. On appeal, the Commissioner of Income Tax (Appeals) reversed the order of the IAC and held that the firm was eligible for registration for the assessment year 1981-82 and therefore allowed the appeal. On further appeal by the Revenue, the appellate Tribunal confirmed the order of the CIT (Appeals). The Tribunal went a step further and held that the reconstitution of the firm with the induction of the Private Limited Company was for the purpose of promotion of business. The mere fact that there was no active business during the relevant year was held to be an immaterial factor.
3. Though notice was served on the assessec, none appears for the respondent-assessee. We have therefore requested Mr. S. Ravi to assist us.
4. Mr. J. V. Prasad, the learned Standing Counsel for the Department with certain degree of justification, placed heavy reliance on the findings of the primary authority (IAC) and relied on a catena of decisions in which it was laid down that carrying on the business by the partners is a pre-condition for registration. This requirement is not satisfied in the instant case. There was no business at all during the previous year and in fact, there was no intention to carry on the business, according to the learned Standing Counsel. The appellate authority's order is described as perverse.
5. The following facts are noted by the appellate authority:
(1) The assessee-firm carried on business in cotton in the preceding year;
(2) During the previous year relevant to the assessment year 1981-82, the firm derived the income only from telling out the immovable properly.
(3) There was only a change in the constitution of the firm and the same firm which had previously five partners, continued the business with an additional partner.
(4) The line of business mentioned in the partnership deed dated 1-4-1980 was the same as that carried en earlier. It was nowhere mentioned that the partnership business should be handed over to the private limited Company during the relevant year.
(5) The assessee firm was not dissolved during the previous year ending on 7-11-1980 relevant to the assessment year 1981-82. But, the actual dissolution took place only in the subsequent year. The fact that the firm was dissolved on 7-11-1980 cannot be a ground for denying registration for the assessment year 1981-82.
(6) The IAC had not shown that any of the five partners did not represent a genuine entity and the genuineness of the firm cannot be doubted merely because a Company was admitted as a partner, may be with a view to facilitate the ultimate take-over of the business.
(7) The fact that the business was kept in abeyance during the previous year relevant to the assessment year or that income was not derived, are not material factors.
6. The Tribunal held : "In the circumstances, we agree with the Commissioner (Appeals) that there was, in existence, a genuine firm with the Constitution as specified in the partnership deed".
7. On the basis of the above facts, the conclusion reached by the appellate Commissioner as well as the appellate Tribunal is more in the nature of a finding of fact. Though it is possible that on the same set of facts a different view could be taken, while disposing of the Reference Case, it is not proper for the High Court to disturb the finding of fact. We cannot say that the finding of fact is wholly without basis or falls within the parameters of perversity in approach. There is some force in the contention of the learned Standing Counsel that the factum of not carrying on business during the relevant year must be viewed in the context of the decision of the partners to make over assets and liabilities and the going business to the Private Limited Company. But, the fact that the business was in fact not carried on is not conclusive, nor the fact that the dissolution did take place in the next year, is conclusive. On an overall view of the matter, we hold that the conclusion reached by the appellate Commissioner and the Tribunal is essentially a finding of fact backed up by some basis. It is not therefore possible to upset that finding.
8. The induction of a new partner with the object of ultimate transfer of assets etc., to another entity is not inconsistent with the recital in the partnership deed of the firm that it will cany on the business in cotton etc., as before. There is no positive finding by the primary authority that there was no intention at all to carry on the business during the relevant year and that the recital in the deed was merely fictitious. The main stress was on the fact that the business was not actually carried on, and the firm was dissolved soon after the assessment year 1981-82. These factors arc no doubt relevant, but not clinching. That is why we are inclined not to disturb the finding of fact arrived at by the appellant Commissioner and the Tribunal.
9. The learned Standing Counsel Mr. Prasad relied upon a decision in Sudarshan & Co. v. CIT, Mysore, 89 ITR 85. It was observed therein that the question whether a firm has legal existence has to be tested under the provisions of the Partnership Act. It was further observed that "the actual existence of business carried on by the partners is essential to constitute a partnership". That was a case in which the business as contemplated in the deed of partnership was not commenced at all and the assessee invested the monies received from the partners with another firm. The facts herein are materially different. We cannot understand the observations of the Mysore High Court as laying down the law that the partnership business must actually be carried on during the previous year relevant to the assessment year in order to entitle the firm for registration.
10. The next decision relied upon by the learned standing Counsel for the Department is CIT v. Kuya and Khas Kuya Colliery Co., 156 ITR 206. In that case, it was observed that the firm can be registered only if there is an existing partnership and if the firm is not carrying on business, it cannot be a partnership. Here again, we must point out that those observations were made in the context of facts of that case. The assessee-firm which was a firm having the object of mining coal, leased out the Colliery and as per the Agreement, the entire business was to be controlled by the lessee. The transaction did not involve the lease of commercial assets only, but it was a lease of entire business. The assessee after executing the lease, completely effaced itself from the control of the delivery and the business of selling coal. It was therefore held that the firm was not entitled to registration.
11. In the light of the above discussion, we are inclined to answer the question in favour of the assessee and against the Revenue. The RC is accordingly disposed of.