1. 1. This is an appeal by the assessee against the refusal to grant registration to it.
2. The assessee is governed by a partnership deed executed on 5-5-1983 taking over the proprietary business of Sri George Varghese till then carried on by him under the name and style of M/s. Indian Coir Trades.
Sri George Varghese is the son of Smt. Sosamma Varghese and husband of Smt. Nimmi George. As per the partnership deed the partners are Smt.
Sosamma Varghese and Smt. Nimmi George. The firm obtained loans from State Bank of India on the hypothecation of the stock-in-trade and also on the collateral security of the Life Insurance Policy standing in the name of Sri George Varghese and the land and buildings standing in the joint name of Sri Geroge Varghese and his son, Sri Rajan Varghese. The partners gave a power of attorney in favour of Sri George Varghese who carried on the day-to-day affairs of the firm. The firm applied for registration under the Income-tax Act, 1961, in the prescribed form and within the prescribed time. The Income-tax Officer examined Smt.
Sosamma Varghese and Smt. Nimmi George on 5-11-1986 and was cross-examined by the Chartered Accountant on 26-7-1991 and 20-12-1990 respectively. From the depositions made by Smt. Sosamma Varghese, the Income-tax Officer noticed that she had once mentioned that there are three partners, viz., herself, Sri George Varghese and Smt. Nimmi George. He held that she had no clear ibea regarding the actual constitution of the partnership, not to speak of the carrying on of its activities. She had not brought in any capital or investment. Smt.
Nimmi George, another lady partner did not have any immovable property or bank account or any independent source of income. Everything was looked after by Sri George Varghese and she did not even know the purpose for which a sum of Rs. 102,131.62 was given to Sri George Varghese on 31-3-1984 as per the firm's books. Therefore, the Income-tax Officer held that the firm existed only on paper and the partnership did not represent the real state of affairs and thus declined to grant registration. The assessee appealed. The Dy.
CIT(Appeals) after referring to the statements made by Smt. Sosamma Varghese and also the contentions of the assessee that the partnership is a genuine one entitled to be registered under the Income-tax Act, held that the partnership and the payment of Rs. 20,000 to Sri George Varghese towards goodwill were a cloak to divert the income to more than one person and as Sri George Varghese was controlling the management and finances of the business, it only belonged to him and, therefore, the income must be tagged in his hands only. Thus, the Dy.
CIT (Appeals) besides upholding the order of the Income-tax Officer in refusing to grant registration, had further held that the entire income should be assessed in the hands of Sri George Varghese. The assessee is in appeal and assails the order of the Dy. CIT(Appeals) on both the counts.
(iv) Subhash Medical Stores v. CIT [1984] 147 ITR 486 (Raj.), and (v) CIT v. Dhaniram Gupta & Co. [1986] 158 ITR 531 (Cal.).
Smt. Susie B. Varghese, the learned departmental representative supported the order of the first appellate authority and submitted that in Supreme Court's case one of the partners was given exclusive powers; whereas in the case of the assessee the power of attorney holder is closely related to the partners and, inasmuch as, the business belonged to him previously, the conclusion that the impugned partnership was only a sham transaction and the conclusion that Sri George Varghese is the real owner of the business were justified. Sri J. Krishnan, the learned Chartered Accountant submitted that it was the firm that was the appellant before the Dy. CIT(Appeals) and the issue was whether the firm was a genuine one or not, but the Dy. CIT(Appeals) has travelled beyond the subject-matter of appeal in holding that the entire income should be assessed in the hands of Sri George Varghese, who was not the appellant before him: Thus, the Dy. CIT(Appeals) has exceeded his jurisdiction.
4. We have heard rival submissions and perused the records. Smt.
Sosamma Varghese, aged about 75 years, in her deposition on 5-11-1986 had, among other things, stated as follows : A. The business was run by my husband. Now it is of my son George Varghese.
Q. It is found that you have filed an Income-tax return and other records stating that yourself and another person are partners in the business of Indian Coir Trades for the assessment year 1984-85.
Whether it is true? A. I have invested a sum of Rs. 20,000 in the business on different dates.
Q. You mentioned that there are three partners in the firm Indian Coir Trades but for assessment year 1984-85 as per partnership deed filed here it is found that yourself and Nimmy George are the only partners. Why this disparity? A. Previously the business was of George Varghese and now it is that of us.
Q. Have you paid any money to Sri George Varghese when you took over the business from him? A. As previously stated I had paid a sum of Rs. 20,000 and nothing more.
From the depositions it is clear that though in the first instance she has stated that the business is of her son, Sri George Varghese, she had later corrected it as one run by Sri George Varghese. It is also seen that she has stated that there are two partners in the firm and immediately contradicted it as a firm of three partners, yet way-down in her statement she has stated that previously the business was that of Sri George Varghese and now it is that of 'us', that the business activities of the firm were entrusted to Sri George Varghese and that she used to make enquiries with him. She had also stated that she had paid Rs. 20,000 to Sri George Vargese for taking over the business.
Again on 26-7-1991, when she was cross-examined, she has categorically stated that only Smt. Nimmi George and herself were the partners and that Sri George Varghese was not a partner.
The revenue emphasises on the seeming contradictions in her statement given on 5-11 -1986 as regards who are the partners. The assessee, on the other hand, emphasises the fact that even in that very statement she had also given the information that she and Smt. Nimmi George were the partners and that the business was previously that of Sri George Varghese and that she had paid Rs. 20,000 for the firm to take over the business. In our considered opinion if the statement of Smt. Sosamma Varghese is read as a whole, bearing in mind the advanced age of the deponent, it cannot be inferred that the partnership consisted of three partners with Sri George Varghese as one of them. Her advanced age is perhaps the cause for some little confusion in her mind, but then the confusion got cleared in the course of the statement itself. When her statement is read alongside the statement of the other partner, viz., Smt. Nimmi Varghese it cannot be said that Sri George Varghese was also a partner besides Smt. Sosamma Varghese and Smt. Nimmy Varghese. In this context, it is relevant to refer to the decision of the Madras High Court in the case of S.S.A. Gangamirthammal & Co. (supra). In that case, four ladies of the age group of over 55 years constituted themselves into a partnership and appointed two persons, one of whom was the son of one of the ladies, as agents to carry on the business of the partnership. The Income-tax Officer examined the four ladies on oath and came to the conclusion that their oral testimony disclosed that it was not a genuine partnership and hence refused registration.
This was confirmed by the Tribunal. It was observed by their Lordships at page 476 of the report as follows : There is an instrument of partnership; the instrument specifies the individual shares of partners; it was applied in proper and due form. It is highly uncharitable of the revenue to characterise this association as a figment of imagination and therefore non-genuine.
On the other hand, all the partners who were examined gave out material particulars concerning the business and its activities.
They did not hesitate to mention and furnish details on the normal working of the partnership. It should not be forgotten that all the persons examined were women who were considerably aged. Much has been made about the intervention of one of the partners when one other was being examined. This obviously is due to the faulty procedure adopted by the Income-tax Officer himself. If he wanted that he should get individual statements without the knowledge of the other, he ought to have examined them in the absence of the other three. After all, human nature being what it is, one old women interfers with another when, due to lapse of memory, the other witness is, according to the person intercepted, stating a fact which is incorrect. In our view, it is impossible to draw any inference from the mere fact of such interception in the course of the examination of a co-partner and not particularly for the purpose of correcting the witness in a material particular. As already stated, we have read the evidence in full and we are not impressed with the conclusion arrived at either by the Income-tax Officer or the Tribunal that the testimony can lead and leads only to one conclusion that the document is non-genuine and the enterprise is a myth. Such cannot be a conclusion which a reasonable and prudent person can draw in the circumstances of this case and in our view there is no evidence to support such a conclusion. We do not find any basis at all for the Appellate Tribunal to find that the partners were tutored before they allowed themselves to be examined.
One lapse on the part of the deponent to the effect that Rajendran and Chandrahasan were partners in the business, is again made the foundation for the conclusion. The Tribunal however forgets that even Sivagami Ammal, who deposed that Rajendran and Chandrahasan were partners in the business, at the end corrected herself to a specific question as follows: Therefore, it cannot be said that a lapse in the course of searching examination by the Income-tax Officer of an old lady should be made the basis for an unreasonable conclusion that what all the withness has said before the Income-tax Officer appears to be unreal. The Appellate Tribunal expects a lady indulging in business to know the state of affairs of the bank account and whether an overdraft has been granted by the bank or not. There is however evidence on record to show that such overdraft was granted and who the bankers were.
But the Tribunal taking portions of the testimony out of their context, comes to the conclusion that the absence of knowledge of what a bank account and what an overdraft account mean, is an indicia of the non-genuineness of a partnership. This appears to be a conclusion or an opinion which cannot bear scrutiny in the region of reality and reason. We are not persuaded to hold in this case that the instrument of partnership is a departure from the well-known principle that in a partnership all act for each and each for all.
5. From the extracts of the deposition of Smt. Sosamma Varghese (seepara 4 above) it is clear that she used to make enquiries with her son as her son was looking into the accounts etc. It is not uncommon that partners appoint managers or agents who actually carry on the business and occasionally enquiries are made by the partners with such persons regarding the conduct and course of the business. Smt. Sosamma Varghese has chosen this path vis-a-vis her responsibilities with the firm. Questions regarding the bank account, the nature of the security offered and why the business was taken over by the firm from Sri George Varghese - searching question indeed - were put to Smt. Nimmy George (her deposition dated 20-12-1990) who had answered all the questions without evading the same and no adverse inference can be drawn from her statement. In fact, to a specific question as to why a power of attorney was executed in favour of Sri George Varghese, she had categorically answered that as it was difficult to look after everything her husband was "entrusted". So now it is a case of an old lady giving the requisite information but with some little confusion in her mind which got corrected subsequently in the course of her deposition and the case of another lady who had given very clear answers to the searching questions put by the learned Income-tax Officer. When the depositions are read as a whole, nothing adverse emerges against the firm. The learned Income-tax Officer had emphasised that Smt. Nimmy George had not brought in any capital. Nor does she even know the purpose for which Sri George Varghese was given Rs. 1,02,131.62 as per the firm's books. It is no doubt true she did not bring in any capital. But to say that she does not even know the purpose for which Sri George Varghese was given Rs. 1,02,131.62 on 31 -3-1984 is totally to ignore her statement given on 20-12-1990 with questions and answers as follows : Q. You had stated in the statement given on 5-11 -1986 that you did not know the purpose of the drawings which resulted in the debit balance of Rs. 1,02,131.62 in the name of Sri George Varghese. Is this debit balance arose after you took over the business or before that? This question and answer is pregnant with significance in that, inasmuch as, the debit balance arose before the take over of the business by the firm, obviously the partner cannot be imputed with the knowledge of how such debit balance arose when the business was a proprietary concern of Sri George Varghese. Still adverse inference was drawn for the alleged failure to explain a debit balance which was already existing at the time when the business was taken over by the firm. Smt. Sosamma Varghese had paid a sum of Rs. 20,000 to Sri George Varghese as goodwill. Such payment is not disputed, but the only complaint is that the amount was paid from out of the business income.
So long as the payment is not disputed, no adverse inference can be drawn. There is force in the contention of Sri J. Krishnan, the learned Chartered Accountant, that there was erosion of the capital of Gerorge Varghese, the proprietor, as reflected by the debit balance in the capital account in a sum of Rs.1,02,131.62 and in that context even the payment of Rs. 20,000 towards goodwill was a hefty sum for taking over the business. Thus, it is not without consideration that the business was taken over. Smt. Susie B.Varghese, the learned departmental representative sought to distinguish the Supreme Court decision cited supraon the ground that one of the partners alone was given exclusive powers in that case; whereas in the case of the assessee exclusive powers were given to a close relative who is not a partner as per the partnership deed. We do not find any material difference between the two. The partners have certain rights and duties. An agent can do under proper authorisation whatever the principal can do. The agent need not be a partner himself, he can be an outsider with the only limitation that he cannot exceed the powers granted to him. Thus, there is no substance in the objection of the revenue.
6. In the light of our discussion, we hold that the partnership is governed by an instrument of partnership. The transactions with the bank are in the name of the partners; and loans have been granted to the firm on the hypothecation of its stock-in-trade. The mere fact that Sri George Varghese had offered as collateral security certain properties of his and his son cannot clothe him with the ownership of the business. After all, he is not a stranger. His mother and wife are partners in the firm. The business is looked after by him. His offering of the collateral security in the circumstances of the case, is quite understandable, but such act on his part cannot militate against the genuineness of the firm in which his mother and wife are partners. The Dy. CIT(Appeals) besides holding that the firm is not a genuine one, had directed the Income-tax Officer to include the entire income in the personal assessment of Sri George Varghese, to which exception is taken by the appellant. Though the scope of the power of CIT(Appeals) is co-terminus with that of the Income-tax Officer and he can do whatever the Income-tax Officer can do or did not do, such powers can be exercised only with regard to the subject-matter of appeal and also with regard to the appellant and not with regard to any other person who was not in appeal before him. Therefore, his direction to the Income-tax Officer to assess the income in its entirety in the hands of Sri George Varghese, who was not the appellant before the Dy.
CIT(Appeals) has no legal legs to stand upon. The same is vacated.
7. In the result, the order of the Dy. CIT (Appeals) is set aside and the Income-tax Officer is directed to grant registration to the assessee-firm.