Judgment:
This appeal by the revenue is directed against the order of the Commissioner (Appeals)-II, Rajkot. The first two grounds read as under : (1) On the facts and In the circumstances of the case and in law, the learned Commissioner (Appeals) erred in directing that the firm should be treated as genuine one and thereby allowing registration to the firm.
(2) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that the business of the partnership firm is not a Benami concern of Shri H.J. Patel.
The assessee is a partnership firm and was engaged in the business of construction. The previous year relevant to the assessment year 1987-88 was the first year of business of the assessee-firm. The partnership was constituted on 28-10-1985. Form 11 with partnership deed had been filed on 9-10-1986. As per the deed there are four partners with profits-sharing ratio as follows : The business of the partnership was construction of shopping centre named as Atul Shopping Centre near Jaysharee Talkies on the land owned and contributed by one of the partners viz., Shri H.J. Patel.
There was a search at the business premises of the assessee-firm and the residence of the partners on 30-8-1988. During the course of search statements of partners were recorded. In their statements the three partners viz., Smt. Meenaben D. Manek, Shri A.H. Patel and Shri Lalit Bhanjibhai could not give the exact particulars about the partnership concern. Smt. Meenaben D. Manek did state that she was a partner with H.J. Patel in construction activities and that construction activities were carried out near Jayshree Talkies and the name of the building was Atul Apartments but she could not state anything about the partnership i.e., her capital investment and name of other partners of the firm and also regarding her profit-sharing ratio in the firm. Similarly, Shri Lalit Bhanjibhai could not state his share in the firm and the name of other partners except Shri H.J. Patel. Further, he could not explain the source of investment in the firm.
Similarly, the third partner Shri A.H. Patel was not found to be aware of the business affairs of the firm. Later on, their statements were recorded under section 131 during the course of assessment proceedings on 30-3-1990. Smt. Meenaben D. Manek then explained that she was a non-working partner and due to nervousness caused by search operations, she could not reply properly to some of the questions asked during the search. In her said statement under section 131, she gave all the details regarding the partnership firm and her capital contribution (copies of her statements during the search operations and subsequent under section 131 are placed at pp. 19 to 23 and 28 to 30 of the paper book). The same was the position with Shri Lalit Bhanjibhai and Shri Atul H. Patel whose statements were recorded under section 131 during the course of assessment proceedings. From this the Income Tax Officer, inferred that all the partners except Shri H.J. Patel were merely name-lenders as they did not know anything about the business affairs of the firm. He further noted that Shri H.J. Patel was dominating hand in arranging the important deals and agreement of business. He further noted that in the balance sheet of M/s Atul Shopping Centre Shri H.J.Patels capital account showed highest capital in comparison to capital contributed by other partners. He further noted that the business affairs of M/s Atul Shopping Centre were conducted from the office of Ship H.J. Patel. He further found that all customers had negotiated with Shri H.J. Patel only and, therefore, it was very much clear that no other partners were actively engaged in the sales, negotiations and other affairs of the business. On the basis of these observations the assessing officer held that Shri H.J. Patel was proprietor of M/s Atul Shopping Centre. He accordingly included the total income of M/s Atul Shopping Centre in the hands of Shri H.J. Patel. Further he refused registration on the ground that the partnership firm was not found to be genuine. He, however, completed the assessment on protective basis in the status of unregistered firm.
On appeal, the learned Commissioner (Appeals) held that the firm was constituted by a partnership deed. That mere fact that other three partners especially Smt. Meenaben D. Manek could not give the details of the partnership, will not lead to the conclusion that the firm is not genuine. The learned Commissioner (Appeals) goes on to state "that it is a matter of common knowledge that search being a sudden and rare action causes disturbance to males who are actively involved in business. It, therefore, can be believed that Smt. Meenaben D. Manek was frightened at the time of search on 30-8-1988, and could not give proper replies. There is no reason to reject her statement recorded in the course of assessment proceedings merely on the ground that she has not given similar replies in the course of statement recorded at the time of search". The learned Commissioner (Appeals) further held that the partnership firm was not Benami concern of Shri H.J. Patel observing as under : "The Assistant Commissioner has not brought any positive evidence to suggest that the appellants business is Benami business of Shri H.J.Patel. The factors, taken into consideration by the Assistant Commissioner to come to the aforesaid conclusion are an irrelevant factors. In a partnership firm there are working as well as financial partners. It cannot be concluded that the business of partnership firm is Benami of working partner on the ground that the entire affairs are managed by the working partner. The Assistant Commissioner has not doubted the capital contribution of financial partners. Therefore, there is adequate consideration from financial partners in the form of contribution capital. The financial partners are repaid capital with share of profit in subsequent years. These facts are also on record." The learned Departmental Representative took us through the order of the assessing officer and the statements of the partners recorded during the search and submitted that the partners were completely unaware about the partnership firm and were mere Benami partners and real show was being run by Shri H.J. Patel. He accordingly prayed that the order of the assessing officer should be upheld and that the Commissioner (Appeals) reversed.
Shri Dilip H. Vadodaria, the learned counsel for the assessee, submitted that there is no justification for the impugned action of the assessing officer in holding that the assessee-firm was not a genuine one and the business under the name and style of Atul Shopping Centre was proprietary concern of Shri H.J. Patel. He submitted. that the firm is constituted of four partners. Their statements were recorded during the search operations and they being sleeping partners could not give the exact details about the partnership concern. But in these statements they never denied that they were not partners of the firm.
During the course of search they were under spell of shock and completely nervous and hence little discrepancies/incoherence in their statements who were sleeping partners should not lead to the conclusion that they were not the partners of the firm. The learned counsel submitted that Smt. Meenaben D. Manek is regularly assessed to tax. He drew our attention to the assessment orders for assessment years 1986-87 and 1987-88 completed much prior to the search (pp. 34 to 38 of the paper book). These assessments have not been disturbed On the contrary, the assessments for subsequent years have also been completed on substantive basis in her cage. The learned counsel further submitted that in her case capital contributed by her was considered as unexplained investment and added to her income. This addition was deleted by the Dy. Commissioner (Appeals) as per copy of the order placed at pp. 39 to 41 of the paper book. The learned counsel submitted that Smt. Meenaben D. Manek having been assessed on substantive basis in the past and in future the firm cannot be treated as unregistered firm in view of the following authorities : The learned counsel for the assessee further submitted that Shri Lalit Bhanjibhai, one of the partners of the firm, brought in his own capital. He was in the subsequent years repaid capital with his share of profit. In other words, income in fact was received by the partners.
The details of capital contribution were submitted during the assessment proceedings. The learned counsel further drew our attention to preliminary statement under section 131 during the search proceedings of Shri Atul H. Patel who had confirmed his being a partner in the firm. The learned counsel submitted that the basic principle of partnership is that one or more partners may work for the firm and carry on its business. The other partners may be sleeping partners or financial partners. They may not be aware of the day-to-day, business of the firm. The major part of the business may be handled by one or more working partners. Such arrangements between the partners are not an uncommon feature. According to the learned counsel in the assessees case, the financial partners have contributed capital-and have enjoyed the fruits of partnership and have been repaid capital with share of profit in the subsequent years. This is adequate consideration for financial partners. Shri H.J. Patel who manages major portion of the firms business is a working partner of the firm and the two partners viz., Smt. Meenaben D. Manek and Shri Lalit Bhanjibhai are also not relatives of Shri H.J. Patel. He, therefore, submitted that the registration cannot be refused in view of the following authorities : (ii) Income Tax Officer v. Standard Auto Sales (1984) 18 TTJ (All-Trib) 393; (vii) Rameshwar Singh Rajendra Pratap Singh v. ITO (1980) 10 TTJ (All-Trib) 383; We have considered the rival submissions and perused the facts on record. We find that the firm is constituted of valid partnership deed.
The three partners viz., Smt. Meenaben D. Manek, Shri A.H. Patel and Shri Lalit Bhanjibhai were sleeping partners. They had contributed finance. They were found during the search to be not well conversant with the affairs of the partnership firm. That in our opinion is no ground for refusing registration because a sleeping partner is ignorant of the details of the partnership would not constitute evidence for a finding that the partnership is not genuine.
In support of this reliance is placed on the decision of Madhya Pradesh High Court in the case of United Patel Construction Co. v. CIT (1966) 59 ITR 424 (MP). Reliance is also placed on the decision of Honble Supreme Court in the case of K.D. Kamath & Co. (supra) wherein the Apex Court has observed at page 695 as under : "Two essential conditions to be satisfied are : (1) that there should be an agreement to share the profits as well as the losses of the business, and (2) the business must be carried on by all or any of them acting for all, within the meaning of the definition of "partnership" under section 4 of the Partnership Act The fact that the exclusive power and control, by agreement of the parties, is vested in one partner or the further circumstances that only one partner can operate the bank accounts or borrow on behalf of the firm are not destrictive of the theory of partnership provided the two essential conditions, mentioned earlier, are satisfied." On the facts of the case the Supreme Court concluded that all the ingredients of partnership are satisfied under the partnership deed in that case and that the assessee-firm had to be granted registration. We accordingly hold that the assessing officer was not justified in refusing registration to the assessee-firm.
On the same analogy, we hold that the assessing officer is not justified in holding that Shri H.J. Patel is the sole proprietor of M/s Atul Shopping Centre. He was a working partner, managing the affairs of the firm and that should not lead to the conclusion that the other three partners were not the partners of the firm. There is nothing wrong if the major part of the business is handled by one or more working partners. Such arrangement between the partners is not uncommon feature. We accordingly dismiss these two grounds.
In the third and the last ground the revenues grievance is that the Commissioner (Appeals) is not justified in deleting the addition of Rs. 2,58,930 made under section 69 of the Income Tax Act. The addition of Rs. 2,58,930 was made by the assessing officer as unexplained investment under section 69 on the ground that there was a difference of Rs. 2,58,930 being cost of construction as disclosed in the books of account and the probable cost of construction estimated by the Asstt.
Valuation Officer (hereinafter referred to as AVO). It is noted that during the year the construction of Atul Shopping Centre was not completed and the construction was contained in subsequent years also.
There were no sales during the year and therefore, the return of income declaring NIL income was filed. The assessing officer made the addition with the following remarks: (i) The appellant-firm had not furnished details of construction, floorwise, year wise and structurewise, specifications, quality of construction, etc.
(iii) There were various discrepancies, omissions, derivations and inconsistencies in the construction cost account of the appellant-firm and the appellant-firm had not explained the difference found in the cost of construction and the probable cost of construction as valued by the AVO.(iv) The appellant-firm had objected to the appointment of the Valuation Officer.
On appeal, the learned Commissioner (Appeals) deleted the addition observing as under : "(a) There is substantial force in the contentions of the appellant that the addition of Rs. 2,58,930 towards alleged unexplained investment under section 69 on the basis of difference between cost of construction as disclosed by appellant and probable cost of construction estimated by the AVO is not justified, There cannot be any addition merely because there is difference between appellants actual cost of construction and estimated probable cost of construction as estimated by the AVO. I find from the assessment order that the Assistant Commissioner had made observations about understatement of cost of construction by using ornamental language with free use of adjectives such as "verification of the details of assessee has been made and many discrepancies, omissions, deviation and inconsistency are noticed." But the Assistant Commissioner has not stated or given one single example of discrepancy, omission, deviation and inconsistency. I am constrained to observe that the writing assessment order and writing essay are two different things which Assistant Commissioner ought to have known. The Assistant Commissioner has failed to substantiate his charge against the appellant, that the cost of construction is understated and that there are discrepancies, omissions, deviations and inconsistencies.
(b) On perusal of AVOs report I find that he has not given break-up of cost of construction estimated by him. Similarly, the AVO has described his estimate as estimate of probable cost of construction. The AVO has nowhere made any adverse remarks of non-furnishing of information by the appellant and has also not pointed out any defect in appellants actual cost of construction for which full details were furnished to him. With these facts, I hold that the addition of Rs. 2,58,930 under section 69 is not justified and the same is required to be deleted." The learned Departmental Representative relied upon the Valuation Report of the AVO and submitted that the assessee could not explain the discrepancies/difference between the cost of construction estimated by the AVO and that shown in the books of accounts and accordingly the assessing officer had no alternative but to make the impugned addition of Rs. 2,58,930.
Shri Dilip H. Vadodaria, the learned counsel for the assessee, submitted that the details called for were duly submitted from time to time. In this connection he drew our attention to the letter dt 30-3-1990, addressed to the Assistant Commissioner placed at pp. 112 to 115 of the paper book. He further submitted that as the department had seized the assessee-firms records, the assessee-firm submitted whatever details were available with it and pointed out that the required details are available in the seized records. The learned counsel submitted that though the assessee-firm objected to the validity of commission appointed under section 131(1)(d), it gave full cooperation to the Commission. He further submitted that neither Assistant Commissioner nor AVO has found any defect in books of accounts or in cost of construction disclosed by the assessee-The learned counsel further submitted that contentions raised by the assessing officer in para 1 of the assessment order regarding alleged discrepancies, omission, deviations and inconsistencies are only of very general nature and also factually incorrect. The contention of the assessing officer that quantitative details of consumption, of cement, steel, bricks and other items as well as details of labour employed, quality of wood, etc. were not properly given, is not correct because these details were available in the seized books of accounts and vouchers and were also furnished to the extent available. The learned counsel further submitted that adequate opportunity was not given to explain the case before the AVO. As the Commission to the Valuation Officer was issued at the last moment on 2-3-1990, the AVO issued the questionnaire on 13-3-1990, and the assessee replied immediately on 15-3-1990, and the AVO hurriedly carried out the valuation on 27-3-1990. The whole exercise was done with undue haste with the result that AVOs report is very brief and cryptic.
The learned counsel further submitted that since no glaring defects were pointed out in the books of accounts the cost of construction as per books ought to have been accepted. In support of this contention he relied upon the following authorities :Sayar Engg. (P) Ltd. v. Income Tax Officer 4. Income Tax Officer v. Sagar Cold Storage & Ice Factory (1993) 113 Taxation 7 (Del)Sri Har Sarup Cold Storage & General Mills v. Income Tax Officer (1988) 27 ITD 1 (Del) (TM); 7. Income Tax Officer v. Pitamber Ind. (P) Ltd. (1942) 42 ITD 373 (Del); and 8. CIT v. Pratapsingh Amrosingh Rajendra Singh and Deepak Kumar (1993) 200 ITR 288 (Raj).
We have considered the rival submissions. In our opinion, the Commissioner (Appeals) is not justified in deleting the impugned addition simply on the ground that the assessee has maintained accounts in respect of the cost of construction especially when the report of the AVO estimating the cost of construction at Rs. 10,71,900 as against the declared cost of Rs. 3,55,162 was before him. There was a yawning difference of Rs. 2,58,930 between the cost of construction declared by the assessee in its books of accounts and that estimated by the AVO. If he was not satisfied with the format of the report of the AVO as pointed out by him in sub-para 1 of para 4 of his order (reproduced supra) he could have called for the AVO and examined him which he did not do. We do not agree with the contention of the learned counsel for the assessee that the assessing officer was not competent to refer the matter to the AVO. On commission under section 131(1)(d). It was a case where huge investments had been made in the construction of a multi-storeyed building and the assessing officer was justified in referring the matter to the valuation cell for their advisory opinion.
But we agree that the report of the AVO is very brief and cryptic.
Moreover, the whole exercise was done in undue haste without affording adequate opportunity to the assessee to rebut the case which was ultimately made out against it. The assessing officer issued commission on 2-3-1990, when the case was going to be barred by limitation on 31-3-1990. The AVO gave the report on 27-3-1990, and on the same date the learned assessing officer forwarded the same to the assessee for his comments. Though the period given to the assessee was very brief, the assessee cooperated with the department and submitted reply on 28-3-1990, along with the copy of report from its registered valuer.
The AVO neither considered the reply given by the assessee nor the report of the registered valuer of the assessee nor he called for the comments from the AVO. Perhaps, the AVO was helpless because the case was to be completed up to 31-3-1990, and he accordingly completed the same on 30-3-1990, without affording any opportunity to the assessee.
Under the circumstances we deem it fit to restore this issue to the file of the assessing officer. He is directed to forward the comments of the assessee along with the registered valuers report submitted by the assessee to the AVO who after considering the same and after giving adequate opportunity of being heard to the assessee, will determine the cost of construction. The assessing officer will further give an opportunity of being heard to the assessee after the receipt of the report from the AVO and the assessee will be free to advance arguments/evidence about the cost of construction before the assessing officer.
I have read the order written by my learned Brother I agree with him regarding restoration of matter to the file of the assessing officer in relation to the addition on the basis of report of the Assistant Valuation Officer (AVO) of the department and which addition came to be made by the assessing officer in terms of section 69 of the Act. I also agree and endorse the direction given by my learned Brother in this regard. However, with due respect to him I am unable to agree with his view regarding the other dispute relating to registration of the firm and the finding of the assessing officer that the remaining three partners were Benamidars of Shri H.J. Patel. The facts have been narrated by my learned Brother surrounding this dispute, I, therefore, refrain from repeating the facts. I held quite opposite view than that of my Brother for the reasons which I am discussing below : My learned Brother has given heavy weightage to the sworn statements of the three partners, viz., S/Shri A.H. Patel, Lalit Bhanjibhai and Smt.
Minaben D. Manek on 30-3-1990, when they were summoned by the assessing officer under section 131 of the Act during the course of assessment proceedings. In their those depositions three partners could give details regarding the partnership firm and its business activities and to various other questions put by the assessing officer. But the question is what about the sworn statements given by these very three persons on the search day i.e., to say on 30-8-1988, to the authorised officers during the course of search operations. On that day none of them knew (i) names of the other partners of the firm, (ii) their respective capital investments and sources from where such investment was made, (iii) their profit-sharing ratio, and (iv) details of business activities of the firm. Most intriguing is the sworn statement of the partner Shri A.H. Patel who did not even know what was the business of the firm and from where it was carried on. Can these sworn statements given by these very three alleged partners given on the search day be wholly discarded and disbelieved on the specious plea that on the search day they were all frightened and mentally upset.
Does it mean to say that on 30-3-1990, when they appeared before the assessing officer, in reply to summons issued under section 131 they were all mentally well and, therefore, whatever is stated at that time should be believed and accepted as true Is it to say or suggest that on search day authorised officers coerced those 3 persons or used some third degree methods generally used by Police Officers and extracted involuntary statements. If that is so then they should lawfully establish it by cogent and reliable legal evidence. Mere bald allegation against government officers is not adequate, It is well settled in law now that if a sworn testimony is retracted subsequently by a person (deponent) then he has to establish satisfactorily with cogent reasons supported by strong legal evidence why the earlier testimony is untrue and unreliable, and why the later testimony is true, trustworthy and reliable. Nothing is on record in this regard. A person who gives different statements at different times before the different authorities is a liar and his testimony cannot be believed or relied upon for evaluation in judicial or quasi judicial proceedings.
It is noteworthy to be mentioned at this stage that whatever is stated/deposed on search day is very credible and reliable because such statement/deposition is spontaneous and given without any kind of tutoring or guidance from any other person. Any statement given later or during the course of assessment proceedings loses its weight and credibility because there are chances of such person being tutored by other interested person to state in a particular manner or the deponent may realise the adverse consequences in law which may fall upon him on the strength of earlier true statement. It is, therefore, not correct to say, believe or hold that the statement/deposition given on search day by the aforementioned three alleged partners is unreliable and hence no credence is to be placed because those persons were scared owing to search operations. No doubt search operation is an invasion on a persons privacy and liberty and does cause some embarassment, hardships and inconveniences. But to say or believe that a person loses his mental faculties or capabilities so as to give untrue statement on search day is unacceptable. I repeat if the statement given by a person on the search day is not true and the statement given on subsequent occasion is stated to be true then the burden lies on such a person, though heavy, to prove as to why the earlier statement is untrue or non-believable and why the subsequent statement is true and trustworthy. I, reiterate, I do not find any such evidence on record nor the assessees counsel was able to draw our attention to any such evidence on record.
The assessing officer found that partnership to be not genuine mainly on the basis of the admissions made on search day by the aforesaid three alleged partners establishing beyond doubt that all three of them were mere name-lenders or Benamidars of Shri H.J. Patel and they were not the real partners of the firm stated to be constituted as per partnership deed dated 28-10-1995. All the three partners clearly and voluntarily/confessed on search day that the entire business was carried on and managed by Shri H.J. Patel. only from his own business premises and they denied having any knowledge about the affairs and business activity of the firm. It is, therefore, amply and indubitably clear from the commulative study of the sworn statements of those three alleged partners that it was only Shri H.J. Patel who was the real man behind the entire business activity which was cleverly given the colour of partnership firm.
From the sworn statement of the said three partners on the search day, it is further clear that a partnership as contemplated under section 4 of the Indian Partnership Act has not been constituted. The definition of the partnership in section 4 of the Indian Partnership Act contains three elements, viz., (1) there must be an agreement entered into by all the partners concerned (2) the agreement must be to share the profits of the business; and (3) the business must be carried on by all or any of the partners concerned acting for all. The third element is absent in the present case since the business was not carried on by all the partners. The said three alleged partners have stated that they had no knowledge whatsoever of the business carried on by the so-called partnership firm and each contended that he (she) was a sleeping partner. In law there may be some partners active and some inactive.
Those inactive partners are called in commercial parlance as "sleeping partners". I do agree that the sleeping partners or inactive partners do not indulge or interfere in the day-to-day affairs of the partnership business. But to admit or accept that the sleeping partners are not even aware of their capital contributions; their own sharing ratios; the share ratio of other partners; the main business activity of the firm; the place from where firms business is carried on and so on and so forth. Can it be said that a sleeping partner does not have any knowledge to such basic and rudimentary matters of the P.S. firm which affect and concern him? To my mind No. And if it is so then it amply gives an indication or rather establishes that those persons are "not partners" but are "mere name-lenders" for some third person or persons who is either a partner or an outsider.
Only a partnership firm is entitled to present an application for registration under section 184(1) of the Act. Since the firm constituted is not a partnership firm as defined under the Indian Partnership Act the request for registration has to be refused for that reason. Furthermore, the assessing officer has found the partnership to be not genuine which finding ought to have been confirmed by the Commissioner (Appeals) on first appeal by the assessee. On receipt of an application for registration of the firm, the assessing officer has to enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership. He shall grant registration only if he is satisfied that a genuine firm has come into existence. If not, he has to pass an order refusing registration. Section 185(1) of the Act which deals with the procedure to be adopted by the assessing officer and contains an Explanation. According to clause (b) of that Explanation a firm shall not be regarded as genuine one, if any partner of the firm was in relation to whole or any part of his share in the income or property of the firm at any time during the previous year a Benamidar of any person not being a partner of the firm and any of the other partners knew or had reason to believe that the first mentioned partner was such Benamidar and such knowledge or belief had not been communicated by such other partner to the assessing officer in the prescribed manner. From the sworn testimony of the three partners tendered on search day the assessing officer inferred that the remaining partners were Benamidars of Shri H.J. Patel. Case records do not show that such knowledge had been communicated to the assessing officer in the prescribed manner. In the circumstances the assessing officer was right in regarding the firm as not genuine and in refusing registration and further coming to the conclusion that the business of the partnership of the firm belonged to Shri H.J. Patel in his individual capacity. The Commissioner (Appeals) in my view ought to have confirmed that view taken by the assessing officer. He did not do so. In my view he committed a grave error in law in finding that the firm is genuine and in directing the assessing officer to grant registration and further holding that the business or income of the said firm did not belong to Shri H.J. Patel. In my view the finding and conclusion of the Commissioner (Appeals) is wholly fallacious in law and deserve to be reversed and I reverse the same. The view taken by the assessing officer is right and correct view in law and the same is therefore, affirmed by me.
As we have differed in our views on the controversy involved in the abovementioned Income Tax Appeal, we refer below given two points for determination by the Third Member in accordance with the provisions of sub-section (4) of section 255 of the Act and we request the Honble President for making suitable reference : "1. Whether, on the facts and in the circumstances of the case, the firm of M/s Atul Shopping Centre was a genuine firm and entitled to registration in accordance with the provisions of section 185 of the Income Tax Act, 1961 2. Whether, on the facts and in the circumstances of the case, the business and income of the alleged partnership firm has to be clubbed in the hands of Shri H.J. Patel on the ground that the other partners were Benamidars of the said person, Shri H.J. Patel ?" This case has been referred to me by the Honble President, Tribunal under section 255(4) of the Income Tax Act for resolving the difference which has arisen between the Honble JM and the Honble A.M. while disposing of the Appeal. The issue involved relates to grant of registration to the assessee-firm M/s Atul Shopping Centre.
The assessing officer treated the firm as non-genuine and, accordingly, refused to grant registration to it in the assessment year 1987-88. On appeal, the learned Commissioner (Appeals) held that firm to be genuine and entitled to registration. The revenue being aggrieved, brought the matter in appeal before the Tribunal. While disposing the appeal, a difference of opinion arose between the Honble Members. The learned A.M. in his proposed order held that all the ingredients of a genuine partnership were satisfied in this case and the assessee-firm was entitled to registration. The learned JM, on the other hand, held that assessing officer was right in regarding the firm as non-genuine and in refusing to register it and in further coming to the conclusion that business of the partnership firm in fact belonged to one of the partners viz. Shri H.J. Patel in his individual capacity. The learned Commissioner (Appeals) should have confirmed the order of the assessing officer and in not doing so, he committed an error, the learned JM further observed.
Now, reverting to the basic fact, it is seen from record that assessee-firm was constituted on 28-10-1985. It drew up an instrument of partnership incorporating the terms and conditions of the partnership and applied in Form No-11 for getting registration under section 185 of the Income Tax Act as per its application dated 9-10-1986. The profit and loss was agreed to be apportioned among the partners in the following ratio : The business of the partnership was construction of shopping centre named as "Atul Shopping Centre", near Jayshree Talkies, Jamnagar, on the land owned and contributed by Shri H.J. Patel as a partner.
The revenue authorities carried search and seizure operations under section 132 on business premises of partnership as also on the residences of the partners on 30-8-1988. In the course of search operations, statements of three partners viz., Smt. Minaben D. Manek, Shri A.H. Patel and Shri Lalit Bhanjibhai were recorded. The assessing officer for holding the firm to be non-genuine, relied mainly on aforesaid, statements and held that Shri H.J. Patel was controlling all the affairs and management of the partnership. According to him, this partnership business was in fact, Benami business of above Shri H.J.Patel and three other persons were merely name-lenders.
Accordingly, he held that firm was not genuine and, therefore, not entitled to registration. In the body of the assessment order, the assessing officer had stated that Smt. Minaben D. Manek in her statement on 30-8-1988, could not state anything about the partnership.
She did not know the name of the firm or the share of capital she had contributed. She was also ignorant about the other partners and their profit-sharing ratio. She did not sign any cheque nor was able to give address of the firm. She was also examined during the course of assessment proceedings on 30-3-1990, when she gave proper answers regarding affairs of the firm. The assessing officer, however, rejected the latter statements as an afterthought.
The statement of second partner Shri Lalit Bhanjibhai taken in proceedings under section 132 was. also utilised by the assessing officer wherein the said partner had stated that he did not know his share in the firm or the name of the other partners except Shri H.J.Patel. The source of investment was also not explained by him.
According to the assessing officer, he appeared to be partner in Atul Shopping Centre and not Atul Construction Co. The assessing officer concluded that Shri Lalit Bhanjibhai also did not know anything about the affairs of the firm.
With reference to statement of third partner Shri Atul H. Patel, the assessing officer observed that he was only 20 years old when partnership was constituted. From his statement, it was found that he was unaware about the affairs of the firm.
To fourth partner had not communicated with the assessing officer.
According to the assessing officer, Shri H.J. Patel had admitted in his statement dated 13-3-1990, that he was conducting all the affairs of the partnership. It has been further observed in the order that generally Shri Patel had a dominating role in arranging all important deals and agreement of business. His capital in books of accounts was also the highest as compared to capital of three other partners. This shows that Shri H.J. Patel had been financially controlling the affairs of the partnership. The address of the firm was also address of the proprietary concern of Shri H.J. Patel. As no other partner was actively engaged in the affairs of the firm, the assessing officer treated income of the partnership as income of Shri H.J. Patel and assessed accordingly. The income in the hands of the firm from the construction activities was assessed on protective basis. The firm being held to be non-genuine was also refused registration.
The assessee challenged the above order in appeal before the learned Commissioner (Appeals) and contended that the assessee was a genuine firm and was wrongly deprived of benefit of registration under the Income Tax Act. The learned Commissioner (Appeals) noted the grounds (a) to (f) (which have been noted in the earlier part of this order) to hold that M/s Atul Shopping Centre was (sic-not) a Benami business of Shri H.J. Patel. The firm was also held to be entitled to registration.
Before the learned Commissioner (Appeals), it was submitted on behalf of the assessee that the assessing officer did not appreciate the basic principle governing relationships between partners., one partner could carry on business on behalf of the other partners as per their agreement. Therefore, the firm could not be treated as non-genuine as Shri H.J. Patel was playing a major role in the affairs of the assessee-firm. It was pointed out that other partners have also made financial contribution. The learned authorised representative of the assessee further drew attention of the learned Commissioner (Appeals) to statement of Smt. Meenaben recorded at the time of search wherein she has confirmed that she was a partner in the assessee-firm. It was further submitted that the assessing officer was not justified in not taking into account statement made during the course of assessment proceedings but relied upon only on the statement made during the course of search. The learned Commissioner (Appeals) observed that the assessing officer has not brought sufficient material on record to show that business of the assessee was Benami business of Shri H.J. Patel.
According to the learned Commissioner (Appeals), irrelevant factors were taken into account by the. Assessing Officer to deny registration to the firm. He observed that in a partnership, there are working as well as financial partners. Therefore, it could not be concluded that business. of partnership was Benami business of a working partner on the ground that affairs were being managed by the said partner. The assessing officer did not doubt the capital contribution of other partners which was quite adequate. The other partners had shared the profit and made withdrawals in the different years.
The learned Commissioner (Appeals) further observed that income considered to belong to Shri H.J. Patel has actually been enjoyed by other partners as per agreement between them. He further held that assessing officer should have given due weightage to the fact that financial partners were already assessed on their share of profit from the partnership. In his view, the assessing officer wrongly placed too much reliance on the statement of Smt. Meenaben D. Manek dated 30-8-1988, wherein she could not give names of partners or their ratio or details of common contribution. He observed that it is a matter of common knowledge that search being a rare action causes disturbances, to males who are actively involved in business. The statement of Smt.
Meenaben should be read in that background and if so done, there was no reason to reject her statement recorded during the course of assessment proceedings. Similar was the position of other two partners. Taking into consideration all the facts and circumstances of the case, the learned Commissioner (Appeals) held that the assessee was a genuine firm entitled to registration. He ordered accordingly.
The revenue challenged the above order in appeal before the Tribunal-The learned A.M. in the proposed order observed that the assessee-firm was constituted under a valid partnership. The three partners viz, Smt. Meenaban D. Manek, Shri A.H. Patel and Shri Lalit Bhanjibhai were sleeping partners. They had contributed finance. In the course of search, they were not found to be well conversant with the affairs of the partnership firm, but that in his opinion, was not a ground for refusing registration because sleeping partner is generally ignorant of details of partnership business. This would not constitute evidence for concluding that firm was not genuine. In support of above view, the learned A.M. placed reliance on decision of Honble Madhya Pradesh High Court in the case of United Patel Construction Co. v. CIT (1966) 59 ITR 424 (MP) and on decision of Honble Supreme Court in the case of K.D. Kamath & Co. v. CIT (1971) 82 ITR 680 (SC). In the view of the learned AM, all the criteria laid down by the Honble Supreme Court for granting registration to the firm were satisfied in this case.
Accordingly, he held that the assessing officer was not justified in refusing registration to the assessee-firm. On the above reasoning, the learned A.M. held that Shri H.J. Patel was wrongly treated as proprietor of M/s Atul Shopping Centre. The business belonged to the partnership concern validly constituted under a deed of partnership.
There was nothing wrong if major part of business was handled by one or more of the working partners. Accordingly, it was directed that income of M/s Atul Shopping Centre be assessed in the hands of the firm as constituted.
The learned JM did not agree with the view expressed by the learned A.M. and wrote a separate proposed order expressing the view that the assessee was not a genuine firm and as such was rightly denied registration. He further agreed with the view that other alleged partners were Benamidars of Shri A.H. Patel. The learned JMs conclusion was based on the statements of three partners recorded by the authorised officers during the course of search proceedings. In those statements, none of them knew (1) names of other partners of the firm; (2) their respective capital investments and source from which investments were made; (3) their profit sharing ratio; and (4) details of business activities of the firm. Shri A.H. Patel, partner, did not know even what was the business of the firm and from where it was carried on. Subsequent statements of these partners in which these persons gave proper answers were only tutored and unreliable statements. The heavy onus lay on these partners to show as to why statements recorded at the time of search should not be relied upon.
The above burden was not discharged with reference to any material available on record.
The learned JM held that partnership was rightly held to be non-genuine on the basis of admission made on search date by the aforesaid three alleged partners which established beyond any shadow of doubt that all the other three partners were name-lenders or Benamidars of Shri H.J.Patel and they were not real partners of the firm stated to be constituted as per partnership deed dated 28-10-1995. All the three partners clearly and voluntarily confessed on search date that entire business was carried on and managed by Shri H.J. Patel only from his own business premises and they denied having any knowledge about the affairs and business activities of the firm. The learned JM further observed that an important ingredient of partnership that business must be carried on by all or by any of the partners acting for all, was absent in the present case since business was not carried by all the partners. He disagreed with the contention that sleeping partners are inactive partners, did not indulge or interfere with the day-to-day affairs of the partnership business. It cannot be accepted that sleeping partners would not have knowledge of capital contribution., their names, profit-sharing ratio of other partners., business activities of the firm, etc. If they do not have such knowledge, the indication is that those persons are "not partners" but are merely "name-lenders". With the above observation, the learned JM, upheld the conclusion of the assessing officer that the three other alleged partners were only Benamidars of Shri H.J. Patel who was the real owner of the concern. In above view of the matter, refusal to grant registration was held to be fully justified. The learned JM, accordingly, set aside the order of learned Commissioner (Appeals) describing it as wholly fallacious in law. The appeal was directed to be allowed.
I have heard both the parties in this case and examined the material available on record in the light of above arguments. For constituting a valid partnership, as per decision of Honble Supreme Court in the case of K.D. Kamath & Co. v. Income Tax Officer (supra), the following observations from the decision are relevant : "The legal requirements under section 4 of the Partnership Act to constitute a partnership in law are : (i) there must be an agreement to share the profits or losses of the business; and (ii) the business must be carried on by all the partners or any of them acting for all. There is implicit in the second requirement the principle of agency.
Control and management of the business of a firm can be left by agreement between the parties in the hands of one partner to be exercised on behalf of all the partners The other conditions for getting registration for a firm under the Income Tax Act are stated by the Honble Supreme Court in the case of Agarwal & Co. v. CIT (1970) 77 ITR 10 (SC) as follows : "The conditions of registration prescribed in this section and the relevant rules are : (1) on behalf of the firm, an application should be made to the Income Tax Officer by such person and at such times and containing such particulars, being in such form and verified in such manner as are prescribed by the rules-(2) the firm should be constituted under an instrument of partnership,. (3) the instrument must specify the individual shares of the partners, and (4) the partnership must be valid and genuine and must actually exist in the terms specified in the instrument. If all the above conditions are fulfilled, the Income Tax Officer is bound to register the firm unless the assessee has contravened section 23(4) of the Act." In the present case, the assessing officer has clearly recorded that instrument of partnership was drawn up among the partners and the same was filed along with the application in Form No. 11 on 9-10-1986, for getting registration of the firm.
Thus, prima facie all the conditions constituting a valid partnership are fully satisfied. Likewise, requirement of getting registration under the Income Tax Act are also fully complied with. In fact, no dispute has been raised at any stage of the proceedings regarding signing and submitting of the agreement by the partners which was done much before the search. No reference has been made by any authority to terms and conditions of agreement between the parties as are incorporated in the instrument of partnership.
The denial of registration by the revenue is based upon the statements of three partners recorded during the course of search under section 132(4) of the Income Tax Act. From the questions and answers given by the three partners it has been inferred that these alleged partners were in fact Benamidars of fourth partner Shri H.J. Patel who was exclusively controlling and running the business of M/s Atul Shopping Centre as its proprietor and the firm was constituted only on paper.
The firm was held to be non-genuine and, therefore, not entitled to registration under the Income Tax Act.
The above view of the assessing officer was reversed by the first appellate authority who held that partnership was genuine and was entitled registration. On a further appeal by the revenue before the Tribunal, the two learned Members took divergent views and this is how the matter has come before me. However, before concentrating on divergence of views. I deem it necessary to state one point on which both the members agreed. Both the learned Members agreed that three partners other than Shri H.J. Patel were "sleeping partners" not actively engaged in the activities of the partnership. According to the learned AM, the three sleeping partners had contributed finance. They were found to be not well conversant with the affairs of the partnership business. That in his view was no ground for refusing registration because sleeping partners might be ignorant of the details of partnership. This would not constitute evidence for finding that partnership was not genuine. For above view, the learned A.M. relied upon decision of Honble Madhya Pradesh High Court in the case of United Patel Construction Co. v. CIT (supra) as also on decision of Honble Supreme Court in the case of K.D. Kamath & Co. (supra).
The learned JM did not dispute that three partners were sleeping partners. He further agreed "that the sleeping partners or inactive partners do not indulge or interfere in the day-to-day affairs of the partnership business" but the learned JM did not agree "that the sleeping partners are not even aware of their capital contribution; their own sharing ratio,-the sharing ratio of other partners., the main business activity of the firm; the place from where the firms business is carried on and so on and so forth. " He was not prepared to accept that sleeping partners did not have knowledge of basic or rudimentary matters of the partnership. These views led to the point of difference between the learned Members.
In the light of above, the important question for consideration is what are the statements of the partners and their legal effect on the question of registration of partnership in the light of other material on record.
I would first like to refer to statement of Smt. Meenaben D. Manek, dated 30-8-1988, available at page 19 to 27 of the paper book. Question Nos. 3, 4, 5, 8, 9, 13, 14, 15, 16, 17, 18, 21, 32 and 48 with answers are relevant and are reproduced below: A. 3. First there was business in my name. I was in a partnership for building construction work with Hasmukhbhai of Mahavir Opticals.
Q. 4. What was your per cent of share What was the firms name and when did you join the firm A. 4. About 2-3 years ago, I was a partner and have left the partnership since about one year I do not know the firms name.
Q. 9. How much profits have received Also have you received back your capital A. 9. I do not know how much profit I earned and whether I received back the capital.
Q. 15. How many flats are there is Atul Apts How many floors are there When was the construction work started and when was it completed what was the value of one fiat Q. 17. What amount of capital you invested in the firm What was the source of the capital Q. 48. You were a partner in the above firm, do you have any income except that From the above, it is clear that she did not know much about the affairs of the firm, but she did give the name of the firm in which she was a partner and that construction of "Atul Apartment was the business of the partnership. She further stated that other details were known to her husband. She did not deny that she was a partner. In my considered view, from the above statement, it cannot be inferred that Smt.
Meenaben D. Manek was not partner of the concern. It is a matter of common knowledge that in India, Hindu ladies are not very advance and in most of the cases their business and properties are looked after by their parents, husband or adult son. The inference that she was a Benamidar of Shri H.J. Patel is far-fetched and could not be drawn from the material on record.
For the statement of other two partners, I would like to rely on the observations of the assessing officer which are as follows : "The second partners Lalit Bhanjibhai is a resident of Rajkot. During section 132 proceedings carried out at his residence, statement under section 131 was recorded on 30-8-1988. He stated that he did not know about his share in the firm and the name of the other partners except Shri H.J. Patel. Further, he could not explain his source of investment in the firm. He has also stated wrongly that he is a partner in Atul Construction Co. In reality he appears as a partner in Atul Shopping Centre and not in Atul Construction Co. Atul Construction Co. is a separate firm having two partners, Shri H.J. Patel and A.H. Patel only.
These facts make it clear that Shri Lalit Bhanjibhai do not know the affairs of the firm. Third partner Shri Atul H. Patel was about 20 years old where he is stated to become partner. During section 132 proceedings it was noticed that he was not aware of the business affairs of the firm. Shri Atulkumar appeared before me and his statement was recorded on 8-3-1990. He has stated that before joining partnership he was studying in 12th standard and there was no source of income to him. Further, he was not able to give the. name of other partners or details of business affairs.
Further, as the other partner has not communicated in Form No. 12A to assessing officer that other partner is a Benami though this fact was in his knowledge, the firm cannot be treated as genuine one. Further, the assessee has objected that Shri H.J. Patel cannot be treated as proprietor of Atul Shopping Centre ........" From the copy of statement of Shri Atul placed on record, it is clear from answer question No. 9 that he gave correct names and shares ratio in profit and loss of different partners in the partnership. Even from the observation of assessing officer it is clear that none of the partners stated that he was not a partner in the partnership business or was not entitled to share as stated in the partnership deed of course, the three partners did not know much about the affairs of the partnership and have been termed by both the Members as "sleeping partners. The sleeping partner is one who is not actively engaged in the affairs of the partnership. The fourth partner Shri H.J. Patel has been held to he in control of affairs of partnership, but the assessing officer has not held that such activities were repugnant to the terms of agreement between the partners. There is absolutely no material to hold that Shri H.J. Patel was not acting as agent of the other partners. In my considered view, the firm could not-be treated as non-genuine if one partner was playing dominating or controlling role in the affairs of the partnership. The assessing officer has recorded no finding that what Shri Patel had violated any term or condition of the partnership agreement. In other words, there is no suggestion that agreement other than the one incorporated in the instrument of partnership was in operation. There is further no finding that Shri H.J. Patel was acting beyond the express or implied powers possessed by a partner to act for the partnership.
In the case of K.D. Kamath & Co. (supra), Shri K.D. Kamat who was proprietor of the business before it was converted into partnership, had the power even to remove a working partner. Admittedly, he was in full control of the partnership business, but these circumstances were not considered to be destructive of the partnership relationship which existed between the parties to the agreement. Likewise, in the case of Steel Brothers & Co. Ltd. v. CIT (1958) 33 ITR 1 (SC), one of the questions that arose before the Honble Supreme Court was whether the fact that control and management of the business was in the hands of one of the persons when there were three partners was not against the element of partnership. Their Lordships of the Honble Supreme Court answered the question by saying that principles of agency are not affected.
Again, at p. 694 of the report in the case of K.D. Kamath & Co. (supra) Their Lordships had referred to the following decisions : There are other large number of cases in which similar issue arose and the courts held that it did not affect the genuineness of partnership.
The principle of agency is in operation and one partner can act on behalf of all other partners and can control the affairs of the firm.
Therefore, on, above short ground, the partnership could not be treated as non-genuine. In my considered view, the revenue has to bring some material on record to that the person shown as the partner was not a partner of the firm and was in fact not given any share or instrument of the partnership was not acted upon. No such case has been made by the revenue. From lack of knowledge of affairs of partnership, an inference that such a person is a Benamidar of the other partner cannot be drawn.
In the present case, the revenue authorities have treated three.
partners as Benamidars of Shri H.J. Patel who was controlling and managing the affairs of the partnership but as noted earlier, this fact alone is not sufficient to hold that the firm was not genuine firm. The revenue could prove that the partner was not acting for other partners but was acting for his own benefit i.e., he was pocketing the profit shown to be due to others. In that case, an inference of Benami could be drawn if other tests as per settled law of Benami were satisfied.
However, in the present case, the revenue authorities had not placed any material on record to show that entire profit of partnership was being taken by Shri H.J. Patel and not by other partners as provided in the instrument of partnership. On the other hand, evidence has been brought on record to show that other partners contributed capital and withdraw their share of profit. Not only that, the respective share of profit was duly assessed in their hands by the income-tax authorities.
It is not possible to disregard unrefuted documentary evidence and draw an inference that firm was not genuine, In my view, the partnership firm had satisfied all the conditions of partnership and requirement of getting registration under the Income Tax Act. The firm was entitled to registration. With above observations, I agree with the view expressed by the learned AM.Let this case be placed before a regular Bench for an appropriate order disposing of the case.
The revenue has raised several grounds in this appeal which have been elaborately discussed in the order proposed by Shri B.L. Chhibber, the learned A.M. Thereafter, a dissenting order was passed by the Honble JM Shri Abdul Razack vide order dated 20-6-1995. He agreed with the finding given by the learned A.M. in relation to restoration of the matter to the file of the assessing officer in relation to the addition made on the basis of report of the Asstt. Valuation Officer (AVO) of the department and which addition came to be made by the assessing officer in terms of section 69 of the Act. He also agreed and endorsed the direction given by the learned A.M. in this regard. However, he passed a dissenting order in respect of the view regarding the other disputes relating to registration of the firm and the finding of the assessing officer that the remaining partners were Benamidars of Shri H.J. Patel.
As per order-sheet entry dated 6-1-2000, signed by the Registrar, Income Tax Appellate Tribunal, it is revealed that the Honble President nominated Shri Vimal Gandhi, the Honble Vice President as TM to hear and decide the aforesaid point.
The Honble Vice-President has expressed his opinion on the points of difference between the learned Brothers vide opinion dated 23-2-2001.
The Honble Vice-President has held that the partnership firm has satisfied all the conditions of the partnership and requirements of getting registration under the Income Tax Act. The firm was held to be genuine firm and is entitled to grant of registration. The learned Vice-President agreed with the view expressed by the learned A.M. on the points of difference.