Judgment:
B.P. Jeevan Reddy, J.
1. These two references arise from a common order of the Income-tax Appellate Tribunal in two appeals, I.T.A. No. 126/Hyd/1976-77 and I.T.A. No. 127/Hyd/1976-77. R.C. No. 131 of 1981 arises from I.T.A. No. 127/Hyd/1976-77, while R.C. No. 152 of 1982 arises from I.T.A. No. 126/Hyd/1976-77. The question referred in R. C. No. 131 of 1981 is the following :
'Whether, on the facts and in the circumstances of the case, having found Sri Goverdhana Finance Corporation, Kadiri, has satisfied the requirements that are enjoined by law to claim registration, the Appellate Tribunal is justified in law in holding that its income and that of Sri Krishna Finance Corporation be clubbed together and assessed collectively ?'
2. The question referred in R. C. No. 152 of 1982 is the following :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the assessee-firm is entitled to the benefits of registration for the assessment year 1972-73 ?'
3. Both the references are made under section 256(2) of the Income-tax Act, 1961.
4. The facts leading up to these references are the following :
On March 1, 1967, a partnership styled 'M/s. Sri Krishna Finance Corporation, Kadiri' was constituted, comprising of four partners, namely, (1) G. V. Suryanarayana Setty, (2) P. R. Nagabhushanam, (3) M. Jayaprakash Narayana, and (4) P. N. Krishna Kumar. P. N. Krishna Kumar is the son of P. R. Nagabhushanam.
5. On April 1, 1971, another partnership styled 'Sri Goverdhana Finance Corporation' was constituted, under a partnership deed of the same date, with three partners, namely, (1) Smt. Mutyala Thayaramma, (2) Smt. P. Lakshminarasamma, and (3) Smt. K. Kalavathamma. Smt. P. Lakshminarasamma is the wife of P. R. Nagabhushanam and the mother of P. N. Krishna Kumar. Smt. M. Kalavathamma is the wife of M. Jayaprakash Narayana.
6. For the assessment years 1972-73 and 1973-74, the firm Sri Goverdhana Finance Corporation' was granted registration and was assessed separately as such. For the assessment year 1974-75, however, the Income-tax Officer came to the conclusion that there was no separate firm in existence and that 'Sri Krishna Finance Corporation.' Accordingly, he canceled the registration granted to 'Sri Goverdhana Finance Corporation' under and in accordance with section 186 of the Act and clubbed the income of 'Sri Krishna Finance Corporation'. The income of 'Sri Goverdhana Finance Corporation' so clubbed for the assessment year 1974-75 was Rs. 10,390. The Income-tax Officer came to the above conclusion on the following seven grounds :
'(1) the firm has been constituted with the close relatives of the partners of M/s. Sri Krishna Finance Corporation;
(2) the business of the firm was run on the same lines as those of M/s. Krishna Finance Corporation and there was no specific reason for the wives of the close relatives of the family for starting a rival business;
(3) the business premises were the same as the business premises of the main firm, i.e., M/s. Sri Krishna Finance Corporation, and the firm was utilising the services of the clerks and stationery of M/s. Sri Krishna Finance Corporation;
(4) this firm consists of only 3 lady partners and none of them have any experience of the business. Out of the three partners only one partner resides at Kadiri and the other two partners are not residents of Kadiri.
(5) the only lady partner staying at Kadiri has also professed complete ignorance of the running of the business;
(6) in the partnership deed, the firm has appointed Sri P. R. Nagabhushanam to look after the business activities of M/s. Sri Goverdhana Finance Corporation and though there is a clause that he will be paid reasonable remuneration, no remuneration is paid to him for the assessment years 1972-73 to 1974-75; and
(7) it is quite unlikely that the firm M/s. Sri Krishna Finance Corporation would have allowed a rival firm called M/s. Sri Goverdhana Finance Corporation to start the same line of business in the same premises, unless the business run by the firm is also for its benefit.'
7. On a consideration of the aforesaid seven factors cumulatively, the Income-tax Officer came to the conclusion that M/s. Sri Goverdhana Finance Corporation is not a genuine firm and, therefore, not entitled to registration. The order of the Income-tax Officer was confirmed on appeal by the Appellate Assistant Commissioner. The matter then came up before the Tribunal by way of two appeals filed by both the partnership firms as stated above.
8. The Tribunal first took up the question whether 'M/s. Sri Goverdhana Finance Corporation' is entitled to grant of registration. It took into consideration the fact that 'Sri Krishna Finance Corporation' was carrying on money-lending business with four partners, that 'M/s. Sri Goverdhana Finance Corporation' was constituted with the wives of two partners and the married daughter of one partner and that inasmuch as the three lady partners have contributed their own capital as is evidenced from their depositions recorded by the Income-tax Officer, it held, it cannot be said that they are 'make-believe' partners.
9. The Tribunal further opined that the proposition that the wives or daughters of the partners cannot constitute another partnership is not an acceptable proposition. Finally, it held on the first question :
'On the facts and in the circumstances, we must hold that Sri Goverdhana Finance Corporation, Kadiri, has satisfied the requirements that are enjoined by law to claim registration and the authorities below have erred in refusing to grant registration to the firm.'
10. The Tribunal then took up the question whether the assessing authority was right in clubbing the income of 'Sri Goverdhana Finance Corporation' with that of 'Sri Krishna Finance Corporation'. It referred with approval to all the seven factors referred to by the Income-tax Officer, which we have extracted hereinbefore, and on that basis held that 'Sri Goverdhana Finance Corporation' was merely a branch of 'Sri Krishna Finance Corporation' and hence the income of the former should be clubbed with the income of the latter.
11. Both the parties, viz., M/s. Sri Krishna Finance Corporation, as well as the Commissioner of Income-tax, asked for reference under section 256(1) of the Act, which was refused, whereupon they approached this court and the in pursuance of a direction, these cases were stated by the Tribunal for the opinion of this court. The question which has been referred at the instance of 'Sri Krishna Finance Corporation' shows that it is aggrieved by the order clubbing the income, of 'Sri Goverdhana Finance Corporation' with its income, while the Revenue is aggrieved with the finding that 'Sri Goverdhana Finance Corporation' is entitled to registration for the assessment year 1974-75 (the figure '1972-73' mention in the question the question is evidently a mistake for '1974-75').
12. We have perused the judgment and order of the Tribunal and we must say at once that the judgment is not at all happy. The reasons for which the Tribunal held that the income of 'Sri Goverdhana Finance Corporation' should be clubbed with the income of 'Sri Krishna Finance Corporation', if true, militate against the genuineness of the firm and disentitle it form registration. If the Tribunal was of the opinion that 'Sri Goverdhana Finance Corporation' was a genuine firm - which is the inference that flows from its finding that it is entitled to registration - then the Tribunal should have held that its income cannot be clubbed with the income of Sri Krishna Finance Corporation'. Conversely, from, the finding that the income of 'Sri Goverdhana Finance Corporation' is liable to be included in the income of 'Sri Krishna Finance Corporation' because the former is, in effect a branch of the latter, it follows that Sri Goverdhana Finance Corporation' is not a genuine firm and, therefore, not entitled to registration; yet, the Tribunal has come to two mutually contradictory findings.
13. We shall first have to consider the justifiability of the two contradictory findings recorded by the Tribunal, viz., (i) that 'Sri Goverdhana Finance Corporation' is entitled to registration, and (ii) that its income should be clubbed with the income of 'Sri Krishna Finance Corporation'. On a consideration of the reasons upon which the Tribunal has come to the above findings, we are of the opinion that the Tribunal's finding that 'Sri Goverdhana Finance Corporation' is entitled to registration is wholly unsustainable and must be held not warranted in the facts and circumstances of the case. For the same reasons, we must hold that the finding that the income of 'Sri Goverdhana Finance Corporation' should be clubbed with the income of 'Sri Krishna finance Corporation' is warranted on the material before the Tribunal. It must be said that there was ample material upon which the Tribunal came to the above conclusion that Sri Goverdhana Finance Corpn. is in truth and effect a branch of Sri Krishna Finance Corporation. But there is one fact which stands out and to which we must make a reference. According to the finding of the Tribunal - the correctness of which has not been disputed before us - the three ladies who are partners in the firm 'Sri Goverdhana Finance Corporation' have contributed their own capital. It appears that these three ladies have actually contributed to a total extent of Rs. 45,000 in the 1971. Indeed, the partnership deed itself shows that they were supposed to contribute the capital in certain specified amounts to a total extent of Rs. 60,000. Now, the result of the direction given by the Tribunal, viz., clubbing of the income, is that the three ladies are totally deprived of the benefit of their capital. We do not find a direction in the order of the Tribunal that these three ladies are totally deprived of the benefit of their capital. We do not find a direction in the order of the Tribunal that these three ladies should be given a reasonable return upon their capital by way of interest, which should have been the direction given by the Tribunal consistent with justice and equity of the case. These ladies cannot be totally deprived of the benefit of their capital, not can the benefit of interest arising from the capital be included in the income taxed in the hands of 'Sri Krishna Finance Corporation' of which their husbands/father are the partners. May be that there is no genuine partnership in the name and style of 'Sri Goverdhana Finance Corporation', but that is no reason for depriving these three ladies of the benefit of interest accruing or arising from their own capital. It may also be seen that even if these three ladies had not become partners in 'Sri Goverdhana Finance Corporation', they could have deposited the said amount in 'Sri Krishna Finance Corporation' and, in the normal course, they would have been entitled to a reasonable interest upon the said deposits.
14. We therefore, direct that the Tribunal, while passing its order under section 260(1) of the Act in accordance with this judgment, shall determine and award a reasonable amount of interest on the capital invested by the three ladies. It is for the Tribunal to determine what would be the reasonable rate of interest which should be awarded. It may also direct that such interest should be deducted from out of the income included in the income of 'Sri Krishna Finance Corporation'.
15. For the above reasons, both the referred cases are answered in the terms indicated above. No costs.