1. All these three appeals of the assessee are directed against the order of the CIT(A), Jodhpur, dt. 3rd November, 1997. As these are interlinked, the same are disposed of by a common order.
2. The only issue arising out of all the four grounds in ITA No.99/Jd/1994 relates to the registration of the firm.
3. In this case, original order under s. 185(1)(b) was passed on 17th March, 1987, by the AO wherein the assessee-firm not held to be genuine and finding was given that it was a Benami of original firm M/s.
Madadali Ansari & Co. of six partners. Accordingly, registration of firm was refused to the assessee-firm. The assessee preferred appeal to the learned CIT(A), Jodhpur, who vide his order, dt. 11th January, 1990, set aside the order of the AO with the direction to decide the issue of granting registration to the assessee-firm afresh after examining the partners of the assessee-firm and affording a reasonable opportunity of being heard to the assessee. In accordance with the directions of the CIT(A), the assessee was requested by the AO to produce the partners for examination. Out of the total 10 partners, only two could be produced by the assessee i.e., Mr. Syaid Ali & Mr.
Intezar Ali, sons of Abdul Majid and Modad Ali, respectively. It was claimed by the assessee through his letter dt. 5th August, 1991, that the six partners were those whose names appeared in the original firm enlisted with the MES authorities. It was further stated that out of the remaining four partners, one Mr. Mohd. Yusuf had expired a couple of years ago and the other partner Mr. Mohd. Ibrahim was ill for the last couple of years and hence both of them were not in a position to be produced. The remaining two partners Mr. Intezar and Syaid Ali were produced and duly examined under s. 131 of the Act. In his statement recorded by the AO, Mr. Syaid Ali stated that he did not contribute any capital to the assessee-firm. Further, he also stated that he was not a partner in the original firm of six partners. The AO also found certain contradictions in his statement on factual aspects. Shri Intezar Ali also stated in his statement that he was son of principal partner Shri Madad Ali Ansari. He also admitted that he was educated only upto 10th standard. In his statement also, the AO noticed certain contradictions on factual aspects. On the basis of these findings, the AO concluded that these persons were not the genuine partners and the actual work was effectively carried out by the original firm of six partners enlisted with the MES. He, therefore, reconfirmed the original order passed on 27th March, 1987, under s. 185(1)(b) refusing to grant registration considering that the firm was not a genuine one but was merely a Benami of the original firm of six partners.
4. The matter was carried before the CIT(A) who upheld the order of the AO. Aggrieved by the same, the assessee is before us in second appeal.
5. The learned counsel of the assessee submitted that the original firm of M/s. Madadali Ansari & Co. consisted of six partners. This firm was engaged in the business of execution of civil construction work and was getting regular contracts from MES as a registered contractor. He further submitted that to execute the different contracts allotted by the MES in which the original six partners were joined by the new partners as per the requirement of the business. He also submitted that in case of every firm, new partnership deed was executed, separate bank account was opened, independent contract was executed, separate books of account were maintained and the profit/loss was shared by the partners as per the partnership deed. He contended that nothing was brought on record to prove that the business of the assessee-firm was not in existence or the firm as constituted under the separate partnership deed was illegal. He further submitted that out of 10 partners of the assessee-firm, only four partners were sought to be examined as the remaining six partners were the partners in the original firm also. He also submitted that by that time, one partner had died and the other was seriously ill who also died subsequently.
He, therefore, submitted that the remaining two partners were produced before the AO for examination. He further submitted that the statements were recorded on 6th September, 1991, wherein they confirmed that they were partners in the assessee-firm and also shared the profits/losses of the firm. He also submitted that the statement was recorded in the year 1991 i.e., after more than seven years from the end of the previous year relevant to asst. yr. 1984-85 and, therefore, it was very difficult for the partners to recollect the factual details of business transactions which caused the contradiction. He, however, contended that such contradictions cannot be a ground for refusing registration.
He further submitted that the facts that assessee-firm was in existence or the business was also carried on by the said firm have not been disputed by the Department. He further submitted that the Department treated all such sister concerns constituted under the identical names, as not genuine and registration was accordingly refused. Subsequently, all these firms challenged this action of the AO before the different authorities and in all the judgments delivered so far, the various appellate authorities including the Jaipur Bench of the Tribunal have decided the issue in favour of the assessee. He also submitted copies of the relevant orders in support and contended that the issue has, therefore, become substantive now. He also kept his reliance on the judgments reported as CIT vs. R. L. Mishra (1984) 147 ITR 424 (Bom) and Nelkole Udayar vs. S. P. Periasami Konar & Ors. AIR 1967 Mad 449 in support of his contention.
6. The learned Departmental Representative strongly supported the orders of the lower authorities and submitted that the business of the assessee-firm, in fact, was controlled and carried on by the partners of the original firm. He further submitted that all the four partners admitted to form the assessee-firm were directly related to the six partners of the original firm and their admission was not informed to the MES in spite of a specific requirement to do so as per the rules of MES. He also invited our attention to the various contradictions appearing in the statements of the two partners and contended that the very purpose of admitting these partners in the firm in terms of proving their skills and resources never appeared to be served. He, therefore, contended that the authorities below were quite justified in treating the firm as not genuine and accordingly refusing the registration and hence their orders may be upheld.7. We have considered the rival submissions and also perused the material on record to which our attention was invited during the course of hearing. It is observed that the registration has been refused by the AO considering that the assessee-firm was not genuine because of the contradictions noticed in the statement of the partners on some factual aspects and also on the basis of information obtained from MES about the rules preventing the assignment, transfer or subletting of a contract originally allotted to firm to any other firm without prior approval of the concerned authorities. Consequently the assessee-firm was treated as a Benami of the original firm consisting of six partners. It is observed that similar issue was involved in the case of other group concerns involving identical facts wherein the said firms were also treated as the Benami of original firm, consisting of six partners. These matters were ultimately carried before the Tribunal and this issue has been decided by the Jaipur Bench of the Tribunal in favour of the assessee in ITA Nos. 1401 to 1403/Jp/89, dt. 30th April, 1993, ITA Nos. 279 to 282/Jp/90, dt. 28th April, 1994, and ITA No. 1149 to 1154/Jp/91, dt. 19th February, 1998.
8. A resume of these decisions goes to show that there was no prohibition against forming a partnership for executing the contract work allotted by MES as also there was no assignment, subletting or transfer of the contract given by the MES to the original firm of six partners in favour of the assessee-firm. Consequently, the firms were considered as genuine firm with separate existence considering that the requirements prescribed under s. 6 of the Partnership Act had been duly complied with and all the partners shared the profit/loss as per the terms of the partnership deed.
9. In the present case, undoubtedly the firm was brought into existence by a separate partnership deed duly made and executed as per the legal requirements. The firm also carried on the business of execution of civil contracts allotted by the MES and all these transactions were recorded in a separate set of books of account maintained for the purpose. The profit/loss of the firm was also shared by the partners as per the terms and conditions of the partnership deed. A separate bank account of the firm was opened and operated. Therefore, as contended by the learned counsel of the assessee, the assessee-firm fulfilled the basic conditions of a genuine firm in terms of existence as well as running the business of the firm in accordance with the partnership deed. His further contention that non-intimation of change of constitution to MES though prescribed as per the relevant rules, does not render the business of the assessee-firm or its very existence illegal gets support from the decision of Hon'ble Madras High Court in the case of Nelkole Udayar vs. S. P. Periasami Konar & Ors. (supra) wherein it has been held that if a partnership is formed to carry on such a contract, even though the contract expressly prohibits assignment or subletting, it can never be termed as opposed to public policy and, therefore, illegal. In the other cases referred by the learned counsel of the assessee, reported at (1984) 147 ITR 424 (Bom) (supra) the Hon'ble Bombay High Court has also expressed similar views and held that where the contract work was originally undertaken by individual and subsequently he formed a partnership transferring the said contract and executing the same under firm's name, income from the said contract is assessable in the hands of the firm and not in the hands of the individual, accordingly firm was granted registration. The decision of the Supreme Court in Jer & Co. vs. CIT (1971) 79 ITR 546 (SC) where a similar question about partnership in the matter of licence for wholesale vending of foreign liquor came up for consideration, is also relevant in this context. In that case the assessee-firm had two partners, one of whom had obtained licence for the wholesale vending of foreign liquor. It was held by the Supreme Court that the licence does not prohibit the holder from entering into partnership by the holder of the licence, it merely provides that the licence shall not be sub-let or transferred. Since there is no prohibition against entry by the holder of the licence into a partnership the question whether the partnership was illegal does not arise. The firm was entitled on that account to registration.
10. Therefore, considering all the judicial pronouncements and the facts of the case, we agree with the contention of the learned counsel of the assessee that the activities or the existence of the partnership firm cannot be rendered illegal because of the restrictions prescribed in the relevant rules of MES because the question of illegality of a partnership must be distinguished from illegality of any acts done in the course of its business by the firm and in the absence of any statutory bar or in the absence of any terms in the licence itself prohibiting such a partnership, the partnership agreement cannot be said to be void.
11. It is also observed that the lower authorities below noticed certain contradictions in the statement of two partners deposed before the AO and accordingly objections were raised. In this respect also, we agree with the contention of the learned counsel of the assessee that such objections raised and contradictions observed by the AO in the statement of two partners cannot be considered as a sufficient material on the basis of which the authorities should record an adverse finding on the genuineness of the firm. The mere fact that there was no capital contribution by a partner is not sufficient to hold the partnership is not genuine and valid one. Further, the other objections raised by the lower authorities also get overruled by the various judicial pronouncements mentioned below : (1.) United Patel Construction Co. vs. CIT (1966) 59 ITR 424 (MP) : The fact that one of the partners had not at all withdrawn the share of profit and allowed them to accumulate is not ground for inferring that the partnership is not genuine.Narnauli Jewel Corpn. vs. CIT (1987) 163 ITR 293 (Raj) : When the lady who retired from the partnership in March, 1970, did not give satisfactory answers in reply to questions regarding the firm in a statement recorded in August, 1971, the same cannot be held to militate against the genuineness of the firm for the asst. yr.
1968-69.
(3.) K. D. Kamath & Co. vs. CIT (1971) 82 ITR 680 (SC) : As the control and management of the business can be left by an agreement in the hands of one partner to be exercised on behalf of all the partners, the other consequences by way of restriction on the rights of other partners loses all its significance.
(4.) United Patel Construction Co. vs. CIT (supra) : Partnership often may comprise of some partners who are not generally known to be interested in the conduct of the business. That being so they could not be expected to be aware of the details of the partnership business. It cannot reasonably be inferred from their ignorance about these details that the partnership is not genuine.
12. Therefore, considering all the facts of the case, and the various judicial pronouncements referred above, we hold that the CIT(A) was not justified in confirming the order of the AO refusing the registration to the assessee-firm by considering that it was a Benami firm and not a genuine one. The AO is accordingly directed to grant the registration to the firm.
13. At the time of hearing the learned counsel of the assessee informed us that ground No. 1 which is common in ITA Nos. 98 and 100/Jp/1994 stands decided by the Tribunal, Jaipur Bench and hence the same having become infructuous, may be treated as withdrawn. No order is, therefore, required on these grounds : Grounds No. 2 and 3, which are also common in ITA Nos. 98 and 100/Jp/1994 are consequential to the issue of registration of assessee-firm decided herein-above in ITA No. 99/Jp/1994 and the AO is directed to consider the same accordingly.