Income Tax Appellate Tribunal - Hyderabad
Amrit Apartments vs Assistant Commissioner Of Income Tax on 5 October, 2004
Equivalent citations: [2004]91ITD481(HYD), (2005)92TTJ(HYD)962
ORDER
Abdul Razack, J.M.
1. All these appeals are filed by the assessee. ITA No. 542/Hyd/1995 is against the order of the appellate CIT upholding cancellation of registration under Section 186(1) of the IT Act for the asst. yr. 1990-91. ITA No. 543/Hyd/1995 is against the order of the appellate CIT upholding the action of the Assessing Officer (AO) in not allowing the benefit of continuation of registration for the asst. yr. 1991-92. ITA No. 2045/Hyd/1995 is against that part of the order of the appellate CIT dismissing the assessee's appeal against determination of status for the asst. yr. 1992-93 in the intimation passed under Section 143(1)(a) of the IT Act. The controversy involved in all these appeals is whether or not the appellant- assessee is a genuine partnership firm and whether the AO was justified in cancelling registration under Section 186(1) of the Act for the asst. yr. 1990-91 and thereafter denying the benefit of registration for the subsequent two assessment years, viz., 1991-92 and 1992-93.
2. The order passed by the appellate CIT is a common order dt. 30th Jan., 1995, and it covers the dispute regarding registration from the asst. yr. 1985-86 to the asst. yr. 1991-92 (7 assessment years). In the common order which has been impugned by the assessee for the asst. yrs. 1990-91 and 1991-92, the appellate CIT directed the AO to grant registration not upholding the action under Section 186(1) for the asst. yrs. 1985-86 to 1989-90. Thus, the appellant-assessee was victorious in its first appeals for the asst. yrs. 1985-86 to 1989-90 and got the benefit of registration. It is only, for three assessment years, viz., 1990-91 to 1992-93 that the appellant-assessee could not succeed in first appeal in obtaining registration for these three years.
3. The appellant is a partnership firm which was originally constituted under a partnership deed dt. 15th April, 1980, consisting of 12 partners and a minor admitted to the benefits of partnership, the object of which was to acquire land and construct flats, shops, garages, etc., and sell them to intending purchasers on ownership or other basis, Six of the partners of the appellant-firm and the minor who was admitted to benefits of partnership owned certain contiguous plots of land at Somajiguda, Hyderabad. These different contiguous plots were thrown into the common stock of the appellant-firm as their capital contribution in terms of Section 14 of the Indian Partnership Act. The other partners contributed cash towards their capital in the firm.
4. The appellant-firm was granted registration under Section 185(1)(a) of the IT Act for the asst. yr. 1982-83 by order dt. 9th Nov., 1984. There were changes from time to time in the constitution of the firm consequent upon retirement of some partners and induction of new partners. But, whenever a change was effected in the constitution of the firm, the same was evidenced-by legally executed partnership deed and claim was made in all the succeeding assessment years after 1982-83 as provided in the IT Act, 1961. One partner, Smt. Kasturiben Hiralal, who contributed a plot of land as her capital in the partnership originally constituted on 15th April, 1980, retired from the partnership on 2nd Nov., 1986. Another partner, Sri Hirji Hansraj, who also threw his plot of land as capital into the common stock of the firm, also retired from the partnership as on 31st March, 1989. A new partnership deed was, therefore, executed on 1st April, 1989.
5. While the construction of the flats was in progress, the firm entered into sale agreements with intending purchasers from time to time starting from the year 1982. The appellant-firm in all those sale agreements was described as vendors as a partnership firm having office at door No. 4-3-336, Bank Street, Hyderabad. During the previous year relevant to the asst. yr. 1990-91, the firm proposed to register the flats in favour of the purchasers with whom sale agreements were previously entered into. The firm was advised that if the appellant-firm was described as vendors in the sale deeds, there might be some legal impediments in getting the transfer deeds registered with the Registrar of Assurances under the Registration Act. The partners, therefore, executed a power of attorney in favour of one of the partners of the firm, viz., Sri Sushilkumar Kapadia (for short Kapadia), to act on their behalf and get the sales registered in favour of the purchasers. The later sale agreements were modified accordingly for the purpose of smooth registration of the flats. The format of the sale deed was also drafted on the basis of the revised sale agreements.
6. While filing the return of income for the asst. yr. 1990-91, the appellant declared its status as that of AOP and not as a registered firm although it had filed application in Form No. 11A for claiming registration of the firm as in the past years. In the returns for the asst. yrs. 1990-91 and 1991-92, the partners of the appellant-firm had declared the share income as from AOP and not from registered firm. The appellant-firm even opened a fresh bank account in the status of owners and started operating the same. Later, after filing revised returns for the asst. yrs. 1990-91 and 1991-92 declared the status of registered firm and not as AOP and claimed registration for both the assessment years. The partners of the appellant-firm individually also filed revised returns for the asst. yrs. 1990-91 and 1991-92 declaring share income as from the firm of M/s Amrit Apartments. These corrections/revisions by the partners were effected in January, 1992, that is to say, long before the AO took up the firm's case for finalising the assessments. The partners from time to time were assessed in respect of their share in the firm's income in different assessment years.
7. While processing the return of the appellant-firm for the asst. yr. 1990-91, the AO noticing the inconsistencies, issued a show-cause notice proposing to refuse registration to the firm. A detailed reply was filed by the appellant-firm making submissions that the firm was genuine and there was no reason to doubt the existence or genuineness of the firm. It resisted the proposed action of the AO to refuse registration for the asst. yr. 1990-91. After enquiry and due consideration of the facts of the case and the submissions made by the appellant-firm, the AO granted registration for the asst. yr. 1990-91 and completed the assessment for that year in the status of registered firm.
8. Once again, during the assessment proceedings for the asst. yr. 1991-92, the AO initiated enquiry into the genuineness of the firm and a letter was issued demanding explanation as to why the registration granted to the appellant-firm right from the asst. yr. 1985-86, onwards should not be cancelled in terms of Section 186(1) of the Act. The proposals of the AO were based on the following grounds :
(i) The assessee figures in the status of AOP on the records of Urban Land Ceiling Authority.
(ii) The assessee opened an account in State Bank of Hyderabad, Bank Street, Hyderabad, in the status of AOP.
(iii) The two erstwhile partners, Smt. Kasturiben Hiralal and Shri Hirji Hansraj, having thrown their plots of land in the common stock of the partnership have later sold the same indicating that the plots remained the property of the individual members.
(iv) The sale agreements for flats entered into in 1992 refer to the ownership of the partners of their respective plots.
(v) The partners filed their returns for asst. yrs. 1990-91 and 1991-92 treating the status of the entity as AOP and later reversed to the status of partners in a registered firm.
(vi) The power of attorney executed by the partners on 26th Oct., 1989, in favour of Shri Sushil D. Kapadia refers to M/s Amrit Apartments not as a firm. The individual members are depicted as owners of the plots.
9. In response to the show-cause notice dt. 12th March, 1994, the appellant- firm once again filed a detailed explanation on each of the points raised by the AO. The appellant-assessee denied the proposal/suggestion of the AO that it figured as an AOP in the records of the Urban Land Ceiling Authority and it was explained that there was no need for any such declaration as none of the partners, who contributed land to the partnership, held any land in excess of the permissible limit of 1,000 sq. mtrs. It was further stated in the reply by the appellant-firm that the AO had not referred to any specific document from the Urban Land Ceiling Authority which could show or demonstrate that the appellant figured as an AOP in its records. The AO was unable to do so. As regards the bank account in the name of M/s Amrit Apartments, AOP, it was explained that ever since the inception of the firm in April, 1980, till October, 1989, the appellant-firm had only one current account with State Bank of Hyderabad, Bank Street, Hyderabad, in the name of M/s Amrit Apartments- Firm and that the appellant-firm had no other account in the status of AOP in any other bank during that period. It was explained to the AO that when the appellant proposed to register the flats in favour of the purchasers during the previous year relevant for the asst. yr. 1990-91, it was advised that if the vendors of the flats described themselves as a firm collectively, there might be a problem in getting the flats registered. To overcome this hurdle and ensure smooth registration of the flats in favour of the purchasers, the partners executed a power of attorney in favour of Sri Kapadia describing as co-owners of the land, though in fact they are none other than the partners of the appellant-firm. The AO was told that the opening of a separate bank account as owners in the year 1989-90 was only to ensure that the cheques received from the intending purchasers could be realised without any hitch. It was urged before the AO that the ultimate destination of the sale proceeds of the flats was the coffers of the firm which was finally apportioned amongst the partners in their profit-sharing ratio as per the deed of partnership. It was pleaded that these minor deviations cannot go to demonstrate or establish that the firm was not genuine. In regard to the format of the sale deeds, it was submitted before the AO in the said letter dt. 28th March, 1994, that although they refer to the ownership of the partners of their respective contiguous plots, the various other recitals in the proposed draft sale deeds clearly brought out the intention of all the partners to pool their individual plots and exploit the land for the common benefit of the partnership firm. It was emphasized that the very fact that they have together executed a partnership deed specifying the shares of the individual partners and conducted themselves as partners shows their intention to carry on the business in that status. As regards filing of the partners' individual returns for the asst. yrs. 1990-91 and 1991-92 on the footing that the share income was declared from AOP and not from the firm, it was explained that because of the legal advice that the registration of the flats would present a problem in the status of firm, the partners described themselves as owners. The partners' returns for the asst. yrs. 1990-91 and 1991-92 which were filed first showing share income from AOP were subsequently corrected by filing proper revised returns and showing the share income from the firm and later assessed accordingly. It was thus pleaded before the AO by the appellant-firm that these steps taken during the last few years because of the fear that the whole process of registration of flats might come to a grinding halt, should not be considered as factors militating against the proven genuineness of the firm for the last eight years.
10. As regards the sale of land by Smt. Kasturiben Hiralal and Sri Hirji Hansraj to Kumari Varsha and Shri Sushilkumar, it was explained before the AO that the so-called sale of land was a mere sale of the interest of the outgoing partners in the partnership. It was further urged that when these two partners had thrown the land into the common stock of the partnership, which fact was evidenced by record of the firm, they ceased to be the owners of the respective plots of land and the land had become the property of the partnership. Under the arrangement entered into by the outgoing and incoming partners, the land remained the property of the firm and the assessee did not part with any portion of its land which was its property under Section 14 of the Partnership Act. Therefore, it was urged that no adverse view could be taken on this account.
11. The AO rejected all the contentions raised and held that no genuine firm existed and cancelled the registration granted for the asst. yrs. 1985-86 to 1990- 91. For the same reasons, she rejected the assessee's claim for continuation of registration for the asst. yr. 1991-92. For the asst. yr. 1992-93, the AO issued intimation under Section 143(1)(a) of the IT Act determining the status of the assessee as unregistered firm against the status of registered firm claimed by it.
12. On first appeal challenging the order cancelling registration, the appellate CIT, after keeping in mind the guidelines laid down by the Hon'ble Supreme Court in the case of S. P. Gramophone Co. v. CIT (1986) 158 ITR 313 (SC) and that of the Hon'ble Andhra Pradesh High Court's decision in the case of CIT v. Udayalaxmi Hardware Stores (1990) 183 ITR 159 (AP), gave the following findings :
(i) The facts submitted before him sufficiently provided the factual existence of the firm.
(ii) The sale deeds executed by the outgoing partners are not legally valid and they would not affect the validity of the existence of the firm.
(iii) The events that occurred after Diwali, 1989, when two outgoing partners sold the land to the incoming partners and the partners described their relationship differently for the purpose of overcoming ULC Act and registration of the flats may be relevant for the subsequent years but these facts should not conclusively prove that upto the occurrence of such events the actual relationship of the owners of the plots of land was different from that shown in the partnership deeds which have been executed from time to time, examined and accepted while granting registration by the AO.
(iv) Regarding the validity of the constitution of the firm, the view of the alleged infringement of the provisions of the ULC Act, the appellate CIT held that the main business of the firm was to construct residential flats and sell them for a consideration and holding the land was incidental to its business. He added that if it held excess land, the firm was liable to penal action under the provisions of Urban Land Ceiling and Regulations Act but that would not affect the legal existence of the partnership firm.
(v) The assessee declared its status to the bank as owners only after 1989. Upto 1989, the firm was declaring its status to the bank as partnership and thereafter due to difficulty in registration of flats, the relationship was differently described.
(vi) The AO's finding that the appellant had not mentioned the status as a firm while applying for approval of the building plan was not correct. The application was submitted by Sri Sudhi C. Gala who was a partner of the firm. He had mentioned his designation as owner and partner. It was not necessary that all partners should sign the applications for sanction of the building plan. Thus, the appellate CIT, in paras 6 to 9 of the impugned order, negatived the grounds taken by the AG to cancel the registration already granted for the asst. yrs. 1985-86 to 1989-90. He has given a categorical finding that upto asst. yr. 1989-90 the appellant-firm as described in the successive partnership deeds did factually exist and the firm so constituted was legally valid. However, the Appellate CIT, on the facts of the case, was of the opinion that for the asst. yr. 1990-91 and other two years, no genuine firm was in existence. His reasons are as under :
(i) The format of the agreement of sale has been changed. While in the earlier format used upto Diwali 1989, M/s Amrit Apartments (the assessee) was referred to as a "Partnership firm", in the last format, M/s Amrit Apartments, has been described as a compendium of independent owners who have authorised one of them, Sri Sushilkumar, to enter into agreements for sale and also execute the sale deeds in favour of the purchasers.
(ii) The format of the sale deed also mentions that Shri Sushilkumar was the general power of attorney holder of other co-owners of the land.
(iii) Both the sale agreements and the sale deeds are legal documents enforceable under law and, therefore, the relationship of the co-owners of the land mentioned in those documents is to be treated as the correct relationship as they wanted to show to the world after Diwali, 1989.
(iv) The conduct of the partners shows that they have not only condoned the sale of land buy the outgoing partners, Smt. Kasturiben Hiralal and Sri Hirji Hansraj, in the previous year relevant to the asst. yr. 1990-91 but also accepted the ownership of the incoming partners, Varsha and Sushilkumar, on the said plots of land.
(v) The bank account in the name of AOP has been opened in October, 1989, and the new formats of sale agreements and sale deed have also been used during this period.
(vi) Filing of returns of partners showing share from AOP and computation of income filed with the return in the case of the firm mentioning apportionment of the profit sharing among the co-owners/members of AOP corroborate this finding.
The appellate CIT, therefore, held that there was no genuine firm, in existence w.e.f. asst. yr. 1990-91 and upheld the order of the AO cancelling the registration. For the asst. yr. 1992-93, the appellate CIT summarily dismissed the assessee's objection that change of status from registered firm to unregistered firm in the intimation under Section 143(1)(a) and without an opportunity of being heard to the assessee, was illegal and in violation of principles of natural justice and that, therefore, the intimation was liable to be set aside. It is these findings of the appellate CIT for the asst. yrs. 1990-91 to 1992-93 that are challenged before us for adjudication.
13. Both sides have filed written submissions which have been placed on the record. There is nothing new in the written submissions filed by the assessee as it reiterates the contentions and case law relied before both the lower tax authorities. The written submissions filed by the Departmental Representative also reiterate the stand of the AO which we have briefly recorded above. The Departmental Representative also drew support from the judgment of the Supreme Court rendered in the case of S.P. Gramophone Co. (supra) and from the decision of the Hon'ble Andhra Pradesh High Court in the case of Madhusudana & Co. v. CIT (1973) 88 ITR 395 (AP).
14. In cancelling the registration, the below given factors weighed heavily with the AO :
(i) The assessee figures in the status of AOP on the records of Urban Land Ceiling Authority.
(ii) The assessee opened an account in State Bank of Hyderabad, Bank Street, Hyderabad, in the status of AOP.
(iii) The two erstwhile partners, Smt. Kasturiben Hiralal and Shri Hirji Hansraj, having thrown their plots of land in the common stock of the partnership have later sold the same indicating that the plots remained the property of the individual members.
(iv) The sale agreements for flats entered into in 1992 refer to the ownership of the partners of their respective plots.
(v) The partners filed their returns for asst. yrs. 1990-91 and 1991-92 treating the status of the entity as AOP and later reversed to the status of partners in a registered firm.
(vi) The power of attorney executed by the partners on 26th Oct., 1989, in favour of Shri Sushil D. Kapadia refers to M/s Amrit Apartments not as a firm. The individual members are depicted as owners of the plots.
14.A In our view none of the above factors could disentitle the assessee-firm from claiming the registration benefit holding it to be a non-genuine firm. The declaration of status as AOP by the assessee-firm before the Urban Land Ceiling Authority or even opening a bank account stating it to be an AOP and not a firm are not so fatal so as to brand the appellant-firm as non-genuine authorising the AO to cancel the registration. The sale by the two retiring partners, namely, Smt. Kasturiben Hiralal and Shri Hirji Hansraj, of their respective plots which they earlier brought into the common stock of the firm as their capital contribution does not make the appellant-firm a non-genuine one. Admittedly, those two retiring partners committed illegalities in selling those two plots after their retirement from the appellant-firm. But their illegal acts cannot make the appellant-firm a non-genuine one so as to lose the registration benefit under Section 186(1) of the Act. We fail to see any justification on the part of the AO to cancel registration for the reason that in the sale agreements of constructed flats the partners are identified or described as owners of their respective plots which they brought into the appellant-firm at the time of its formation. Similarly, how can the firm become a non-genuine one if few partners in their individual returns for the asst. yrs. 1990-91 and 1991-92 mention their share income from the AOP and not registered firm, particularly when such mistake was subsequently rectified in the revised returns filed by the respective partners? We are unable to agree with the AO as well as the appellate CIT that the non-description of the appellant-firm as a firm in the power of attorney executed by the partners in favour of Shri Sushil Kumar D. Kapadia could ever lead to a conclusion that the firm is a non-genuine firm thus empowering the AO to resort to cancellation of registration under Sub-Section (1) of Section 186 of the IT Act, 1961.
15. It is a settled law that in order to constitute a partnership, there must be three elements :
(i) There must be an agreement entered into by two or more persons;
(ii) The agreement must be to share the profits of a business; and
(iii) the business must be carried on by all or any one of those persons acting for all.
All these three elements must be present before a group of persons can be held to be partners of a partnership.
16. The Gujarat High Court in the case of Baroda City Ice Co. v. CIT (1962) 44 ITR 56 (Guj) has held that if the essentials of a valid partnership do exist, then the firm is entitled to registration by the fulfilment of statutory requirements. The Bombay High Court also in the case of CIT v. Hind Commission Agents (1963) 48 ITR 615 (Bom) has held that it is not necessary that in order that a business activity may be carried on by a person, he has to carry on transactions by himself only. He can as well carry them out through agents or servants or employees appointed by him for the purpose, himself remaining inactive. The transactions, however, carried out by the agents on behalf of the principal will be business transactions of the principal. Thus, a partnership firm can carry on the business through its sub-agents and brokers and registration cannot be refused on that ground alone. The partnership business can be carried out by the partners through. agents, servants or employees and the partners can remain inactive but that cannot be a factor to refuse registration. According to Section 4 of the Indian Partnership Act it is not necessary that the business should be carried on by all the partners and that all the partners should participate in running the business. So long as the business is carried on by any party on behalf of all the partners with a view to share the profits then it would be sufficient to hold that the partnership deed exist. According to Section 6 of the Partnership Act, 1932, in determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.
17. The Hon'ble Supreme Court as far back as in the year 1963 in the case of Champaran Cane Concern v. State of Bihar (1963) 49 ITR 152 (SC) have held that a partnership is a relationship between more than one person created by contract inter se whether each partner is an agent for the other or others and for the firm and it is the existence of the element of mutual agency among the partners which is the crucial test to find out about the existence or the genuineness of a partnership firm.
17A. From the conspectus of the judicial decisions which we have discussed above, it does not emerge or establish that the appellant-firm is a non-genuine one. All the ingredients and the essentials which are necessarily required for the existence of a genuine partnership are found to be present in the instant case. That being the case, we cannot subscribe to the view of both the lower tax authorities that the firm is non-genuine insofar as the asst. yrs. 1990-91 to 1992-93 with which we are concerned. The appellate CIT, therefore, went wrong in taking a view that the firm was not a genuine one for the asst. yr. 1990-91 and upholding the cancellation of registration under Section 186(1) of the Act. Similarly, we do not approve the action of the appellate CIT in upholding the denial of registration for the asst. yrs. 1991-92 and 1992-93 while making prima facie adjustments and adopting the status as that of unregistered firm.
18. As recorded by us above, the partners of the assessee-firm from time to time have been filing their returns and declaring the share income from the appellant-firm which has been assessed accordingly. It is only for the asst. yrs. 1990-91 and 1991-92 that the partners declared their share income from the AOP and not from the registered firm which returns were subsequently revised and the mistake rectified showing the share income from the registered firm and not from the AOP. The Hon'ble Supreme Court in the well known case of CIT v. Murlidhar Jhawar & Puma Ginning & Pressing Factory (1966) 60 ITR 95 (SC) have held that if the assessment of a partner has been finalised accepting share income from a partnership firm then it is not open to the AO to assess the firm as unregistered firm. This decision has been accepted by the CBDT and a circular was also issued by the Board in this regard bearing F. No. 75/19/191/62-II-J, dt. 24th Aug., 1966, which has been referred in the case Laxmichand Hirjibhai v. CTT (1981) 128 ITR 747 (Guj) at p. 751. This decision of the Hon'ble Supreme Court in Murlidhar Jhawar & Puma Ginning & Pressing Factory's case (supra) has been referred to and applied by the Bombay High Court in the case of CIT v. V.H. Sheth (1984) 148 ITR 169 (Bom) as well as by the Rajasthan High Court in the case of Narnauli Jewel Corporation v. CIT (1987) 163 ITR 293 (Raj), following the decision of the Hon'ble Bombay High Court. From this angle also, we are of the view that the appellate CIT erred in upholding the cancellation of the registration for the asst. yr. 1990-91 holding that the firm was not genuine for that year and also upholding the denial of registration benefit for the subsequent two assessment years.
19. It is not the case of the AO that he conducted a full-fledged enquiry regarding the genuineness of the firm by examining the partners or any person having dealing with the firm and then drawing a conclusion that the appellant- firm is a non-genuine one. The AO, as is evident from the order passed under Section 186(1) of the Act, has merely noticed certain misdeeds, mistakes and irregularities by the appellant-firm in relation to its conduct and existence with others, which we have recorded elsewhere and jumped upon a conclusion that the appellant is a non-genuine firm. This is neither intent nor purpose of the provisions of Section 186 of the IT Act. In order to cancel the registration under Section 186(1) of the Act, the AO has to do something more by embarking upon a full- fledged enquiry as per law and establish by cogent evidence about the non- genuineness of the appellant-firm. It has not been done. Such being the situation, the order cancelling registration under Section 186(1) becomes not sustainable and the CIT would have directed the AO to grant registration benefit for the asst. yr. 1990-91 as well as for the two subsequent years.
20. The ratio of the decision in the case of S.P. Gramophone Co. (supra) cannot come to the rescue of the Revenue because in that case the AO after examining four new partners established that they were dummies, as the new partners in that case made statement that they had signed the instrument mechanically without knowing or reading. As we have recorded above, in the instant case no such enquiry has been made and not a single partner has been examined by the AO which could have perhaps established the non-. genuineness of the firm. Therefore, the apex Court's decision in the S.P. Gramophone Co. case (supra) cannot be applied.
21. The decision of the Hon'ble Andhra Pradesh High Court in the case of Madhusudana & Co. (supra) also cannot be applied because in that case also the AO established that the firm was a non-genuine and the three other, partners who were inducted to the firm were all dummies and not the real partners. On these facts, the Andhra Pradesh High Court upheld the Tribunal's findings which were based on the material that there was no genuine firm in existence and that the business was a sole proprietary concern of one individual. We reiterate that no such enquiry or exercise has been done by the AO in the instant case and, therefore, the decision of the Andhra Pradesh High Court in Madhusudana & Co.'s case (supra) is distinguishable.
22. From the foregoing discussion we are clear in our minds that the appellate CIT went wrong in upholding the cancellation of registration for the asst. yr. 1990-91 and agreeing with the AO in taking the status as unregistered firm for the subsequent two years. We, therefore, reverse the order of the appellate CIT for the three assessment years impugned by the assessee in all these appeals.
23. In the result, the assessee's appeals are allowed.
P. Pradhan, A.M.:
4th July, 1997
1. With due respect to my learned Brother, I am inclined to disagree with the order proposed by him in the foregoing paras. As for the facts of the case and the submissions of the parties summarised by my learned Brother in paras 1 to 13 of his order and the factors that weighed heavily with the AO in cancelling the registration to the assessee, noted in para 14 of his order, I fully concur with my learned Brother. However, I do not agree with my learned Brother with regard to the findings and conclusion of my learned brother discussed in paras commencing from para 14A of his order. The reasons for my disagreement and my findings on the point at issue are discussed hereunder.
2. Facts in brief, to recapitulate, are that for the asst, yr. 1990-91, assessee filed return of income on 30th Jan,, 1992, and application in Form Nos. 11 and 11A for registration on 8th Dec, 1989. The deed of partnership dt. 1st April, 1989, showed that the assessee was constituted with nine partners till 31st March, 1989, when two partners, viz., Hirji Hansraj and Smt. Laxmiben Chunilal retired and the remaining seven persons took over the business as a going concern w.e.f. 1st April, 1989. Registration was originally granted for the asst. yr. 1990- 91 under Section 185(1)(a) on 31st March, 1993. AO subsequently initiated action for cancelling the registration granted to the assessee and passed an order under Section 186(1) of the Act on 30th March, 1994, for the asst. yrs. 1985-86 to 1990-91 cancelling the registration already granted to the assessee. Similarly, for the asst. yr. 1991-92, though assessee filed Form No. 12 on 31st Jan., 1992, alongwith the return, the AO, following the cancellation of registration for the asst. yrs. 1985-86 to 1990-91 by her order dt. 30th March, 1994, and observing that the Form No. 12 has been filed belatedly, and after issuing show-cause notice has not allowed the benefit of registration to the assessee for this year, by her order dt. 31st March, 1994. When the assessee contested the action of the AO for these two years, the CIT(A), vide his impugned consolidated order for all the assessment years from 1985-86 to 1991-92, dt. 30th Jan., 1995, confirmed the cancellation of the registration for 1990-91 and 1991-92 assessment years, though he held that the registration allowed for the earlier years was very much correct. Aggrieved by the order of the CIT{A) insofar as it related to asst. yrs. 1990-91 and 1991-92, assessee preferred the present appeals before us. Similarly, for the asst. yr. 1992-93, assessee filed Form No. 12 on 28th Aug., 1992, and return of income on 29th April, 1994. While processing the return under Section 143(1)(a), AO treated the status of the assessee as 'URF'. Assessee's application seeking rectification under Section 154 has been rejected by the AO by his order dt. 25th Aug., 1995. On appeal, the CIT{A) confirmed the action of the AO vide impugned order for that year dt. 27th Nov., 1995. Aggrieved by this order of the CIT(A), assessee preferred the present appeal for the asst. yr. 1992-93.
3. Thus, while for the assessment years upto 1989-90, granting of registration to the assessee was held to be in order and the action of the AO in cancelling the registration already granted under Section 186(1) has not been approved by the CIT(A), the decision of the CIT(A) for the years subsequent to asst. yr. 1989-90, viz., the years under appeal, is exactly opposite inasmuch as he has confirmed the cancellation of registration/refusal of registration benefits to the assessee for these years. The factual position that existed after 1989 has been noted by the CIT(A) in para 10 of the impugned order dt. 30th Jan., 1995, in the following words :
"10. However, the facts existing after 1989 indicate that the partners have already decided not to continue their status as a partnership, but to carry on the business as co-owners or AOP. For the purpose, they have changed the format of the agreement of sale. While in the earlier format which was used upto Diwali, 1989, M/s Amrit Apartments has been mentioned as a partnership firm, in the second format used after Diwali, 1989, M/s Amrit Apartments has been described as a compendium of independent owners who have authorised one of them, Sri Sushil Kumar Kapadia, to enter into agreement for sales and also execute the sale deeds in favour of the purchasers. The sale deed also mentions that Shri Sushil Kumar Kapadia was general power of attorney holder of other co-owners. Both the sale agreements and sale deeds are legal documents enforceable by law and, therefore, the relationship of the co-owners of the land mentioned in those documents is to be treated as the correct relationship as they wanted to show to the world after Diwali, 1989. Even if there was no formal dissolution of the firm, the conduct of the erstwhile partners shows that they have not only condoned the sales of land by the outgoing partners to the incoming partners, they have also accepted the ownership of the incoming partners, Miss Varsha and Master Sushil Kumar, over those lands in the changed format for agreement of sales and in the sale. deed. The lands had been sold by Smt. Kasturiben Hiralal on 11th Sept., 1989, and by Shri Hirji Hansraj on 9th Oct., 1989, which were within the Diwali year relevant for asst. yr. 1990-91. The bank account in the name of AOP has been opened in October, 1989, and the new format of the sale agreement and sale deed has been also used for the first time during that period. All these facts sufficiently indicate that the erstwhile partners of the firm did not intend to continue as a partnership, but they have changed their status as AOP..."
There is no dispute with regard to the correctness of these facts noted by the CIT(A) in the impugned order and there is a material change in the status in which assessee carried on its activity after 1989-90, when compared to its position earlier.
4. The AO while cancelling the registration granted for the asst. yrs. 1985-86 to 1990-91 and refusing registration benefit for the asst. yr. 1991-92, was guided by this material change in the status of the assessee. Under the Hyderabad Urban Land Ceiling Act, 1976, the definition of 'person' includes an individual, a family, a firm, a company or an AOP, and under the Land Ceiling Act, each person is allowed to hold 1,000 sq. mtrs. of land situated in the urban agglomeration. However, the land bearing No. 6-3-668 owned by all the partners of the assessee-firm was having total area of 6,308 sq. yards. If the assessee is treated as a firm, it violates the Urban Land Ceiling Act and hence, it is to overcome this difficulty under the Urban Land Ceiling Act that the assessee, in the opinion of the AO, described itself after 1989-90 as M/s Amrit Apartments, a venture and not a firm and thus, according to the AO the correct status of the assessee in these years after asst. yr. 1989-90 was AOP and- not firm. In support of this conclusion, it was noted that M/s Amrit Apartments, bank account was opened and being operated as AOP. Out of the two bank accounts that the assessee has, viz., 11222 and 11226, the account No. 11222 was operated by all the partners, though the account opening form has not been systematically authenticated as per bank rules, whereas in the other account No. 11226, the status of the assessee was described as ownership. The AO further noticed that even after retirement of the two partners, Smt. Kasturiben Hiralal and Hirji Hansraj, who had contributed their land while joining the partnership, had sold the land, and even though the said land was claimed to have been given back to the partners as their share on retirement, AO found no document in proof thereof and even date of release was not indicated. She also noted that the partners of the firm even filed the returns stating the status of M/s Amrit Apartments as AOP for the asst. yrs. 1990-91 and 1991-92, though later on, they have reverted to the status as registered firm. The power of attorney executed by all the partners on 26th Oct., 1989, in favour of Sushil Kumar Kapadia does not refer M/s Amrit Apartments as a firm.
5. It is evident from the above facts noted from the orders of the lower authorities that the assessee claimed itself and acted as an AOP in the matter of sale agreements, operation of bank accounts, etc. for the purposes of overcoming the difficulties in continuing as a firm under the Urban Land Ceiling Act, but it continued to claim itself as a firm for purposes of IT Act. The assessee submitted in the written submissions filed before us itself that the necessity to effect changes in the sale deeds, etc. was on account of the fact that if it called itself a firm, there might be difficulty in getting the flats registered in the light of the limit on land holding under the Urban Land Ceiling Act.
6. In the case of S.P. Gramophone Co. v. CIT (1986) 158 ITR 313 (SC), the Hon'ble Supreme Court held that the emphasis in the provision is with regard to the satisfaction of the AO as to the non-existence of a genuine firm during the previous year. There is thus a limitation imposed by the legislation for cancellation of registration. It has been confirmed to one ground only, that is, the firm that existed during the relevant year was not genuine. Such a power cannot be equated with a power to grant registration to a firm under the Act, there shall be a firm valid in law and also in fact. The concept of the firm being valid in law is distinct from its factual genuineness and for the purpose of granting registration, both the aspects are relevant and must be present and fulfilment of one without the other will be insufficient, But, these two requirements need not be present for purposes of cancelling the registration once granted. If the AO wants to cancel the registration under Section 186, all that he has got to know is whether there was during the previous year, no genuine firm in existence as registered. In the case on hand before us, the business activities of the assessee have not been carried out in the years under appeal in its status as a firm, but they were carried out in the status of AOP. Even the partners who retired, continued to exercise their ownership rights over the property of the firm. Even though the said property has been contributed by them to the firm when they were partners of the firm, there is no evidence to show that the same has reverted to those retired partners. It is evident from these facts that the assessee was not carrying on its activities in accordance with the deed of partnership during the years under appeal and inasmuch as it was carrying on the activities for which it was constituted in the status of an AOP, there was no firm genuinely existing during the years under appeal, as held by the Supreme Court in the case of S.P. Gramophone Co. (supra).
7. In the case of CIT v. Phair Laboratories (1985) 154 ITR 141 (Ker)(FB) at p. 146, the Kerala High Court held that:
"....In a case where registration has been already granted and the ITO is of opinion that there was during the previous year "no genuine firm in existence as registered", he is empowered to cancel the registration. Before the power is exercised, the ITO must satisfy himself that the firm, as registered on the basis of its constitution, evidenced by the instrument of partnership did not exist during the relevant previous year. The words "no genuine firm in existence as registered" appearing in Section 185(1) refer to the absence of the state of affairs during the previous year on the basis of which registration was granted to the firm."
Inasmuch as the sale deeds executed after Diwali, 1989, described M/s Amrit Apartments as a compendium of independent owners who authorised one of them, being Sushil Kumar Kapadia, to enter into agreement for sale and execute sale deeds, as against the sale deeds executed earlier to Diwali, 1989, describing Amrit Apartments as a partnership firm, the partnership firm of the assessee ceased to carry out its activities in its status as such, subsequent to Diwali, 1989. As such, in the light of the decision of the Kerala High Court in the case of Phair Laboratories (supra), the AO was very much correct in cancelling the registration/refusing registration benefit to the assessee for the years under appeal.
8. The case law discussed by my learned Brother in paras 16 and 17 of his order have no application to the facts of the case on hand inasmuch as the assessee was claiming itself to be an AOP for certain purposes in order to overcome the difficulties envisaged in continuing to be a firm while registering the properties in the names of the independent owners, in terms of Urban Land Ceiling Act. Thus, the assessee itself was claiming its status to be AOP for certain purposes and to be a firm for certain other purposes, in order to derive benefits of both the statuses under different legislations at the same time. Such a stand of the assessee is not permissible in law as laid down by the Hon'ble Supreme Court in its decision in Biharilal Jaiswal v. CIT (1986) 217 ITR 746 (SC). The Hon'ble Supreme Court in that case at p. 759 of the Reports (217 ITR) observed as follows :
"One arm of law cannot be utilised to defeat the other arm of law. Doing so would be opposed to public policy and bring the law into ridicule. It would be wrong to think that while acting under the IT Act, the ITO need not look to the law governing the partnership which is seeking registration. It would have probably been a different matter if the IT Act had specifically provided that the registration can be granted notwithstanding that the partnership is violative of any other law-but it does not say so."
9. In the light of the above discussion, I am of the considered opinion that the assessee is not entitled to the benefits of registration subsequent to Diwali, 1989, inasmuch as the assessee did not carry out its activities in accordance with the deed of partnership and consequently no genuine firm entitled for registration existed after Diwali, 1989. The partners have filed the returns for the asst. yrs. 1990-91 and 1991-92, showing the share income as income from AOP and not firm. The power of attorney executed on 26th Oct., 1989, refers Amrit Apartments not as a firm and the individual owners of the plots who are the partners of the firm are depicted as owners of the plots, The computation of income filed alongwith the return of the firm mentioning about apportionment of profit among the co-owners/members of AOP also corroborates this findings. It is thus absolutely clear from the material on record and the conduct of the partners that the erstwhile partners of the firm did not intend to continue as a partnership, but they have changed their status as AOP. In this view of the matter, the CIT(A), in my opinion, was perfectly correct in concluding that there was no genuine firm in existence w.e.f. asst, yr. 1990-91. I accordingly confirm the orders of the CIT(A) and hold that the cancellation of registration for the asst. yr. 1990-91, and refusals of registration benefits for the asst. yrs. 1991-92and 1992-93 were perfectly justified.
10. In the result, all the three appeals of the assessee are dismissed.
REFERENCE UNDER Section 255(4) OF THE IT ACT, 1961 11th Aug., 1997 Since we have differed in our views, we request the Hon'ble President, Tribunal, for appointing a Third Member to resolve the difference of opinion under Section 255(4) of the IT Act, 1961 on the below given question :
"Whether, on the facts and in the circumstances of the case, the cancellation of registration for the asst. yr. 1990-91 and refusal of renewal of registration for the asst. yrs. 1991-92 and 1992-93 is justified ?"
Vimal Gandhi, President 5th Oct., 2004
1. This matter has come up before me on account of difference between Hon'ble Members of Hyderabad Bench 'B' and the question referred by the Members is as under:
"Whether, on the facts and in the circumstances of the case, the cancellation of registration for the asst. yr. 1990-91, and refusal of renewal of registration for the asst. yrs. 1991-92 and 1992-93 is justified ?"
2. The facts of the case, in brief, are that the assessee-appellant is a partnership firm constituted on terms and conditions contained in partnership deed dt. 15th April, 1980. It comprised of 12 partners including a minor admitted to the benefits of partnership. The object of the firm was to acquire land and construct flats, shops, garages, etc., and sell them to the prospective buyers on ownership or other basis. Six of the partners owned immovable properties in the shape of contiguous plots, which were thrown into common stock of the firm as capital contribution in terms of Section 14 of the Partnership Act. Other partners contributed cash towards their share of capital. The firm carried on business and was assessed as the registered firm till asst. yr. 1989-90. In accounting year 1989-90, a further change in the constitution of the firm took place and following two partners retired from the partnership ;
(I) Smt. Kasturiben Hiralal w.e.f 1st Nov., 1986.
(II) Shri Hirji Hansraj w.e.f. 31st March, 1989.
3. A new partnership deed was, therefore, executed on 1st April, 1989, among the remaining partners and claimed to carry on the business of the partnership referred to above. The partnership as per belated application dt. 31st Jan., 1992, on Forms 11 and 11-A sought registration of firm for the asst. yr. 1990-91. The assessee further applied for getting the delay condoned in submitting the application. The AO granted registration to the above firm. Although there is no order granting registration on file but from the fact that the AO passed order under Section 186(1) of the IT Act purporting to cancel registration already granted, I presume that there was some order. The firm was held to be a non-genuine firm and, therefore, not entitled to registration under the IT Act: The AO has passed order for asst. yrs. 1985-86 to 1991-92 but on appeal, the CIT(A) set aside the impugned order upto asst. yr. 1989-90 but sustained order for asst. yrs. 1990-91 and 1991-92. In other words, the assessee was treated as a registered firm upto asst, yr. 1989-90 and unregistered firm for asst. yrs. 1990- 91 and 1991-92. Assessment for asst. yr. 1992-93 was made by issuing intimation under Section 143(1){a) on 27th Feb., 1995. In the above intimation, the status of assessee was taken as unregistered firm in place of registered firm claimed by the assessee in its return.
4. Thus, the assessee came before the Tribunal in appeal ITA No. 5.42/Hyd/1995 in asst. yr. 1990-91 for cancellation of registration under Section 186(1) of the IT Act, in ITA Nos. 543 and 2045/Hyd/1995 against order of the CIT(A) for not allowing the benefit of continuation of registration for asst. yrs. 1991-92 and 1992-93, respectively.
5. After hearing both the parties and after examining the material on record, learned JM was of the view that the assessee-firm was a genuine firm. He took into account the following objections, which, according to the learned JM, were raised by the AO for not treating the firm as a genuine entity :
"I. The assessee figures in the status of AOP on the records of Urban Land Ceiling Authority.
II. The assessee opened an account in State Bank of Hyderabad, Bank Street, Hyderabad, in the status of AOP.
III. The two erstwhile partners, Smt. Kasturiben Hiralal and Shri Hirji Hansraj, having thrown their plots of land in the common stock of the partnership have later sold the same indicating that the plots remained the property of the individual members.
IV. The sale agreements for flats entered into in 1992 refer to the ownership of the parties of their respective plots.
V. The partners filed their returns for asst. yrs. 1990-91 and 1991-92 treating the status of the entity as AOP and later reversed to the status of partners in a registered firm.
VI. The power of attorney executed by the partners on 26th Oct., 1989, in favour of Shri Sushil D. Kapadia refers to M/s Amrit Apartments not as a firm. The individual members are depicted as owners of the plots."
5A. The learned JM referred to show-cause notice dt. 12th March, 1994, issued by the AO and detailed reply given by the assessee to the above show-cause notice. He noted that the assessee had denied that it figured as an AOP before Urban Land Ceiling Authority. It was noted that no specific document where appellant declared itself as an AOP before Urban Land Ceiling Authority was shown. As regards bank account in the name of the appellant, it was explained that the assessee since its inception was maintaining its account with State Bank of Hyderabad, Bank Street, Hyderabad, till October, 1989, in the name of M/s Amrit Apartments-firm and no account in the status of AOP was opened. The assessee had explained that the appellant was facing difficulty in the registration of flat in favour of purchasers during accounting year 1989-90 and was advised that if vendors of flats would be described as a firm collectively there would be problem in getting flats registered. To overcome this hurdle and to ensure smooth registration of flats in favour of purchaser, partners executed the power of attorney in favour of Shri Kapadia described this as co-owners of land though, in fact, they were none other than partners of the appellant-firm. Opening of separate account as owners in the year 1989-90 was only to ensure that cheques received from intending purchaser would be realised without any hitch. It was pointed out that sale proceeds of flats were taken into account as proceeds of partnership and duly accounted in the books of the firm. These minor deviations, it was claimed, did not affect the genuineness of the partnership, In regard to the format of the sale deed, it was submitted before the AO that although they referred to ownership of partners of their respective shares, the various other recitals in the proposed draft sale deed clearly brought out the intention of all the partners to pool their individual plots and exploitation of land for the common benefit of the partnership firm. In this connection, emphasis was laid on the fact that a new deed was executed to carry on the business as a partnership firm. As regards filing of return by partners showing share from AOP and not from firm, it was explained that this was done on erroneous legal advice. The mistake was corrected by revising return of partners showing share income from firm. The assessments were also made on the share income.
6. As regards sale of land by Smt. Kasturiben Hiralal and Shri Hirji Hansraj to Kum. Varsha and Shri Sushilkumar, it was explained before the AO that so- called sale of land was a mere sale of interest of the outgoing partners in the partnership. It was explained that these partners had thrown their land into common stock of partnership and, therefore, they ceased to be exclusive owners of respective plots held by them under an arrangement between outgoing and incoming partners. The land remained the property of the firm. The assessee did not part with any portion of firm's property under Section 14 of the Partnership Act.
7. The learned JM noted that the AO rejected all the contentions raised on behalf of the assessee and treated the firm as unregistered firm for the asst. yr. 1990-91. Consequently, orders for asst. yrs. 1991-92 and 1992-93 were passed refusing benefit of continuation of the registration.
8. The learned JM then proceeded to consider the proceedings before the appellate CIT. He noted the contentions raised on behalf of the assessee in para 12 of his order and found that the appellate CIT held the firm to be non-genuine for the following reasons :
"(i) The format of the agreement of sale has been changed. While in the earlier format used upto Diwali, 1989, M/s Amrit Apartments (the assessee) was referred to as a 'Partnership firm', in the last format M/s Amrit Apartments has been described as a compendium of independent owners who have authorized one of them, Shri Sushilkumar, to enter into agreements for sale and also execute the sale deeds in favour of the purchasers.
(ii) The format of the sale deed also mentions that Shri Sushilkumar was the general power of attorney holder of other co-owners of the land.
(iii) Both the sale agreements and the sale deeds are legal documents enforceable under law and, therefore, the relationship of the co-owners of the land mentioned in those documents is to be treated as the correct relationship as they wanted to show to the world after Diwali, 1989.
(iv) The conduct of the partners shows that they have not only condoned the sale of land by the outgoing partners, Smt. Kasturiben Hiralal and Shri Hirji Hansraj, in the previous year relevant to the asst. yr. 1990-91 but also accepted the ownership of the incoming partners, Varsha and Sushilkumar on the said plots of land.
(v) The bank account in the name of AOP has been opened in October, 1989, and the new formats of sale agreements and sale deeds have also been used during this period.
(vi) Filing of returns of partners showing share from AOP and computation of income filed with the return in the case of the firm mentioning apportionment of the profit sharing among the co-owners/members of AOP corroborates this finding."
The learned JM did not subscribe to the view taken by the Revenue authorities. For reasons mentioned in paras 14A, 15 and 16 of his order, which are reproduced below, learned JM held that the assessee was a genuine firm and is entitled to registration and continuation of registration.
" 14A. In our view none of the above factors could disentitle the assessee-firm from claiming the, registration benefit holding it to be a non-genuine firm. The declaration of status as AOP by the assessee-firm before the Urban Land Ceiling Authority or even opening a bank account stating it to be an AOP and not a firm are not so fatal so as to brand the appellant-firm as non-genuine authorising the AO to cancel the registration. The sale by the two retiring partners, namely, Smt. Kasturiben and Shri Hirji Hansraj, of their respective plots, which they earlier brought into the common stock of the firm as their capital contribution does not make the appellant-firm a non-genuine one. Admittedly, those two retiring partners committed illegalities in selling those two plots after their retirement from the appellant-firm. But their illegal acts cannot make the appellant-firm a non-genuine one so as to lose the registration benefit under Section 186(1) of the Act. We fail to see any justification on the part of the AO to cancel registration for the reason that in the sale agreements of constructed flats the partners are identified or described as owners of their respective plots, which they brought into the appellant-firm at the time of its formation. Similarly, how can the firm become a non-genuine one if few partners in their individual returns for the asst. yrs. 1990-91 and 1991-92 mention their share income from the AOP and not registered firm, particularly when such mistake the subsequently rectified in the revised returns filed by the respective partners? We are unable to agree with the AO as well as the appellate CIT that the non-description of the appellant-firm as a firm in the power of attorney executed by the partners in favour of Shri Sushilkumar D. Kapadia could ever lead to a conclusion that the firm is a non-genuine firm thus empowering the AO to resort to cancellation of registration under Sub-Section (1) of Section 186 of the IT Act, 1961.
15. It is a settled law that in order to constitute a partnership, there must be three elements :
(i) There must be an agreement entered into by two or more persons;
(ii) The agreement must be to share the profits of a business; and
(iii) The business must be carried on by all or any one of those persons acting for all.
16. The Gujarat High Court in the case of Baroda City Ice Co. v. CIT (1962) 44 ITR 56 (Guj) has held that if the essentials of a valid partnership do exist, then the firm is entitled to registration by the fulfilment of statutory requirements. The Bombay High Court also in the case of CIT v. Hind Commission Agents (1963) 48 ITR 615 (Bom) has held that 'it is not necessary that, in order that a business activity may be carried on by a person, he has to carry on transactions by himself only. He can as well carry them out through agents or servants or employees appointed by him for the purpose, himself remaining inactive. The transactions, however, carried out by the agents on behalf of the principal will be business transactions of the principal. Thus, a partnership firm can carry on the business through its sub-agents and brokers and registration cannot be refused on that ground alone. The partnership business can be carried out by the partners through agents, servants or employees and the partners can remain inactive but that cannot be a factor to refuse registration. According to Section 4 of the Indian Partnership Act, it is not necessary that the business should be carried on by all the partners and that all the partners should participate in running the business. So long as the business is carried on by any party on behalf of all the partners with a view to share the profits then it would be sufficient to hold that the partnership deed exist. According to Section 6 of the Partnership Act, 1932, in determining whether a group of persons is or is not a firm, or whether a person is or is not partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together."
8.1 To support his conclusion, the learned JM relied upon the decision of the Hon'ble Supreme Court in the case of Champaran Cane Concern v. State of Bihar (1963) 49 ITR 152 (SC) and CIT v. Murlidhar Jhawar & Puma Ginning & Pressing Factory (1966) 60 ITR 95 (SC). The above decision, learned JM noted, has been accepted by the CBDT as per circular bearing F. No. 75/19/191/62-11- J, dt. 24th Aug., 1966. He further relied upon the cases of V.H. Sheth (1984) 148 ITR 169 (Bom) and Nainauh Jewel Corporation v. CIT (1987) 163 ITR 293 (Raj).
8.2 The learned JM further observed that partners of firm from time to time have been filing their returns declaring share income from the appellant-firm. Even for asst. yr. 1990-91, share income from firm was shown in the revised returns and assessed accordingly. The learned JM further noted that the AO did not carry on any full-fledged enquiry regarding genuineness of firm by examining the partners or any persons having dealings with the firm but merely noticed certain misdeeds, mistakes and irregularities and jumped upon a conclusion that the assessee is a non-genuine firm. The learned JM distinguished the decision of Supreme Court in S.P. Gramophone Co. v. CIT (1986) 158 ITR 313 (SC) and Madhusudana & Co. v. CIT (1973) 88 ITR 395 (AP) and held them not applicable to the facts of the case.
8.3 With the aforesaid observations, the learned JM allowed assessee's appeals and held that the assessee be treated as registered firm for all the three years under consideration.
9. Learned AM did not agree with the above view of the learned JM. After reporting the facts of the case on which there is not much controversy, learned AM relied upon para 10 of the impugned order of the CIT(A), dt. 30th Jan., 1995. He was of the view that there was material change in the status of the assessee in the period relevant to asst. yrs. 1990-91 and 1991-92. He was of the view that all the partners of the assessee-firm were having total area of 6,308 sq. yds. which was much more than the permissible area of 1.000 sq. mtrs., a person (including firm) could hold under Urban Land Ceiling Act ('ULC Act' for short). If assessee was treated as a firm, then it violated the provisions of ULC Act. In order to overcome difficulties under the above ULC Act, the assessee, in the opinion of the AO, described itself after 1989- 90 as M/s Amrit Apartments, a venture and not a firm and, therefore, the status of the assessee was association of persons (AOP). The above conclusion is supported by the fact that assessee who opened new account with Bank A/c. No. 11226 to be operated by AOP. Ownership of account was described as ownership. Learned AM further noted sale of lands by Smt. Kasturiben Hiralal and Shri Hirji Hansraj after their retirement from the partnership, the fact of execution of power of attorney dt. 26th Oct., 1989, and submission of return by partners disclosing share of income from AOP were also considered. The learned AM, accordingly, concluded that the assessee itself claimed and acted as an AOP in matters of sale agreement, operation of bank account, etc., and for overcoming difficulty under ULC Act. The learned AM held that the assessee, therefore, could not claim to be a genuine firm entitled to registration under the IT Act.
9.1 In support of the above conclusion, learned AM relied upon the decision of Supreme Court in the case of S.P. Gramophone Co. (supra) and the case of CIT v. Phair Laboratories (1985) 154 ITR 141 (Ker)(FB). He further observed that the case relied upon by the learned JM was not applicable to the facts of the case. Learned AM, accordingly, upheld the orders of the Revenue authorities.
9.2 On account of above difference, the matter has come before me.
10. I have heard both the parties. There is no dispute that the firm was validly constituted on the terms and conditions recorded in the instrument of partnership deed dt. 15th April, 1980. Some of the partners had contributed their individual plots towards the capital of the firm. Others had contributed cash. The firm filed returns showing all above transactions and was granted registration upto asst. yr. 1989-90. The firm was treated as a genuine firm. There is further no dispute that even in the three years under consideration, the partnership maintained books of account and profit of the firm was distributed among the partners as provided in the instrument of partnership dt. 1st April, 1989. On account of certain acts and deeds which were described by the learned JM as misdeeds, mistakes and irregularities, the firm was treated as non-genuine,. The objections, raised by the Revenue authorities have been fully met by the learned JM and, therefore, there is no reason for not agreeing with him. All the same, I would further briefly give my reasons for adopting the above course :
10.1 The fact of retiring partners, Smt. Kasturiben Hiralal and Shri Hirji Hansraj, dealing with the plots, which they had contributed towards capital of the partnership is one circumstance taken against the assessee. In my humble opinion, the approach of the Revenue is not correct in law. The properties were thrown in the common pool at the inception of the partnership, That is somewhere in financial year 1980-81 or 1981-82. The act of throwing individual property to the common hotchpot of firm has been accepted and firm remained to be a registered firm for periods in which the property was thrown. After above two persons had retired from partnership, their accounts were required to be settled, The firm settled the account by taking properties once owned by them. During the course of existence of partnership and after their retirement, they did have a share in the property of the firm to the extent these persons were entitled to share the profits of the partnership. Thus, if the property has been purchased from them and their shares settled, there is nothing illegal in the transaction nor it affects the genuineness of the firm. Revenue authorities have not shown that what was paid to these partners was beyond their share in the partnership asset. Even if it is shown that it was more than their share, there is nothing wrong as partners can always mutually agree to settle accounts. If what was paid was more than the due amount, Revenue authorities could have subjected the excess to GT Act. This fact could not affect the genuineness of the partnership. Revenue authorities also attached undue importance to the alleged conduct of the assessee before the Urban Land Ceiling Authority. In the first place, it is not shown that the assessee had claimed the status of AOP before the above authority. The further allegation that the assessee was holding land in excess of the ceiling limitation does not advance the case of the Revenue as it, in no way, affects the genuineness of the firm. No material which would make the firm non-genuine on account of some admission of the assessee before Urban Land Ceiling Authority has been brought on record.
11. Revenue authorities also attached undue importance to the opening of second account with bank and also execution of power of attorney by partners in favour of one Shri Sushilkumar Kapadia.
11.1 It is not proved that opening of second account in any way affected the rights and interests of partners of the firm as shown in the deed dt. 1st April, 1989. Execution of power of attorney in favour of Shri Sushilkumar Kapadia is quite in line with the principle of agency entitling one of the partners to act on behalf of all other partners. There is nothing in the circumstances which would go against the genuineness of the firm.
11.2 Similarly, some other irrelevant facts have been taken into consideration without in any way impinging upon the legality of constitution and continuity of a valid partnership noted in para 15 of the order of the learned JM. So, the question that arises is whether any of the acts of the partners resulted in modification of the agreement stated in the instrument of partnership deed dt. 1st April, 1989, or altered the share of profits which the partners were entitled to in the partnership business and, lastly, whether any act went against the principle of agency; one partner acting on behalf of all other partners ? Answer to all the above questions is 'No'.
11.3 There is no finding or indication to show that in the alleged AOP these partners had different shares or some outsider shared the profits or any term of the partnership was violated or the profits were divided otherwise than as reflected in the books of account. In fact, as rightly contended by the learned counsel for the assessee, no assessment of AOP was made. The assessment was made as an unregistered firm. In other words, assessment was made of a firm without showing that firm so assessed had a constitution different from the one pleaded and projected by the assessee. It is, therefore, abundantly clear that there is no material to record to show that there was any firm different in constitution from the one placed by the assessee on record. The business was carried on by the compendium is not in dispute. It was carried on by the partners of the assessee-firm. There was in existence a different legal entity has not been shown. In the above circumstances, there was no question of treating the firm as non-genuine and refusing registration or revising or cancelling registration already granted to the assessee-firm. I, for the aforesaid reasons, agree with the learned JM.
12. Before close, it is relevant to mention that the learned Departmental Representative stated that applications of registration for asst. yr. 1990-91 and for continuation of registration for 1991-92 were belated. The learned counsel for assessee, on the other hand, stated that applications for condonation of delay were filed and that delay was condoned. I find from record that the AO did not raise any objection relating to delay in the filing of application for registration/continuation of registration. Further, this point does not emerge from the orders of the CIT(A) or the discussion of the learned Members of the Tribunal. I, therefore, do not take notice of this objection.
13. With the aforesaid observations, the matter may now be listed before the regular Bench.