| SooperKanoon Citation | sooperkanoon.com/67756 |
| Court | Income Tax Appellate Tribunal ITAT Patna |
| Decided On | Jun-22-1995 |
| Judge | V Sinha, A Razack |
| Reported in | (1996)56ITD544(Pat.) |
| Appellant | Ruhee Enterprises |
| Respondent | income-tax Officer |
They are being disposed of by this common order for the sake of convenience.
2. For Assessment Year (A. Y.) 1979-80 the assessee submitted Form No.11 alongwith original Partnership Deed. The claim for registration was found to be within time and in order. It is stated in the order under Section 185 that the partners appeared and were examined. It is also stated that there was nothing to doubt the genuineness of the firm. The registration was accordingly allowed to the firm for Assessment Year 1979-80.
3. Subsequently in the assessment order for Assessment Year 1980-81 it was stated that there was some delay in filing declaration in Form No.12, which was condoned and the firm was allowed continuation of registration for Assessment Year 1980-81.
4. Subsequently the Assessing Officer noticed that there were two agreements or contracts with regard to the cinema halls known as Jamshedpur Talkies and Karim Talkies at Jamshedpur. The two cinema halls were being run by M/s Karimia Trust. On 3-1-1978 there was an agreement between M/s Karimia Trust, Jamshedpur and M/s. Kapoorchand (P.) Ltd., Calcutta, according to which, M/s. Karimia Trust agreed to rent out the two cinema halls to M/s Kapoorchand (P.) Ltd. on weekly theatre hire basis. The rent was fixed at Rs. 6,000 weekly payable by M/s Kapoorchand (P.) Ltd. to M/s Karimia Trust.
5. In this agreement, M/s Karimia Trust agreed to incur certain expenses, which were related to ownership of the premises such as renewal of the licence, payment of municipal taxes, insurance for building, furniture and machineries. However, the running expenses were payable by M/s Kapoorchand (P.) Ltd. such as. payment of entertainment tax, show tax, repairs of building, machineries, furnitures, etc., staff salary, electric charges, cost of carbons, stationery costs etc., Bihar Amusement Tax. There was a clause, according to which, the permanent employees of the cinema house would be taken over by M/s Kapoorchand (P.) Ltd. The arrangement was to remain in force for a minimum period of 52 weeks w.e.f. 6-1-1978. In return for the above expenditure and management, M/s Kapoorchand (P.) Ltd. were entitled to all proceeds and incomes from the two cinemas including the income from advertisements, through display and slides and film shorts etc.
6. On 6-1 -1978 M/s Kapoorchand (P.) Ltd. entered into another contract with the assessee i.e. M/s Ruhee Enterprises, Jamshedpur. It was stated therein that it was inconvenient for M/s Kapoorchand (P.) Ltd. to carry on the management of the two cinemas from Calcutta and, therefore, they have accepted the assessee's offer to run the management of the cinemas on their behalf. It was agreed that M/s. Kapoorchand (P.) Ltd. will pay the assessee Rs. 10,500 per week for meeting all expenses with regard to running the management of the two cinemas. Thereafter, the assessee would be responsible for all expenses including staff salary, overtime, electricity charges, carbon costs, show tax, maintenance expenses, repairs and maintenance of building, furniture, fee etc., entertainment tax and Bihar Amusement Tax as far as the income out of the cinema business was concerned, it was agreed that it would go to M/s.
Kapoorcahnd (P.) Ltd. except for morning show, which would go to the assessee. Income from advertisements and film shorts would also go to the assessee. The assessee agreed to take over all permanent employees of the cinemas. It is significant that it was stipulated in para 19 that M/s. Kapoorchand (P.) Ltd. would be solely and wholly responsible for supply of programmes for exhibition in the said cinemas. This arrangement was also followed initially for a period of one year from 6-1-1978 and was subject to confirmation by M/s. Karimia Trust, Jamshedpur, which was subsequently given. After noticing the above two agreements, the Assessing Officer sent a notice to the assessee dated 17-2-1984 to show cause why the registration should not be cancelled under Section 186(1) of the Act for Assessment Years 1979-80 and 1980-81. He referred to the above mentioned two contracts and also noted that the partners of the assessee firm, Mrs. Samshu Nisa Begum and Mr. Sayed Ashfaq Karim were the wife and son respectively of Mr.
Shafiq, Trustee of M/s Karimia Trust. He observed that the agreements were a subterfuge to reduce the incidence of tax by this device. The two agreements were stated to be not genuine but sham transactions. He also stated that there was no change in the management of the two talkies and all the employees including the Manager remained the same.
7. Thereafter, the Assessing Officer stated that both the partners were merely benamidars of M/s. Karimia Trust and this fact was known to both the them. Such knowledge or belief had not been communicated by either of the partners to the Income-tax Officer in the prescribed manner. It followed that there was never a genuine firm in existence and he, therefore, proposed to cancel the registration.
8. We may notice at this stage the provisions of Explanation below Section 185 of the Act as it stood at the relevant time : Explanation - For the purposes of this section and Section 186, a firm shall not be regarded as a genuine firm if any partner of the firm was, in relation to the whole or any part of his shares in the income or property of the firm, at any time during the previous year, a benamidar- (b) 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.
9. Thereafter, the Assessing Officer passed orders under Section 186(1) of the Act for both the years, cancelling registration of the firm. The language of the two orders is identical. The Assessing Officer repeated the contents of the show-cause notice. A reply was received but it was stated that the assessee had nothing to say apart from the fact that cancellation was being done to circumvent the decision of higher appellate authorities. A proposal was sent to the IAC, Assessment Range, Jamshedpur, seeking his approval for the cancellation, which was given.
10. In his approval the IAC noted that the assessee managed only two properties viz., Jamshedpur Talkies & Karimia Talkies, both belonging to M/s. Karimia Trust. Due to insertion of Section 13(1)(bb) in the Income-tax Act, 1961, exemption granted to M/s. Karimia Trust under Section 11 of the Act was withdrawn since the Trust was carrying cinema business which was not for its primary purpose. It was because of the above that the two agreements, mentioned above, were entered into. The control and management of the cinemas was in the hands of the partners of M/s. Ruhi Enterprises. They had not other business. The control and management was, in fact, in the hands of the close relatives of the Trustee of M/s. Karimia Trust, Shri Shafiq. Reliance was placed on the decision of the Supreme Court in Sree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 where under similar facts it was held that it is open to the Department to reject such a contrivance as sham or bogus. The Assessing Officer thereafter, came to the conclusion that there was no genuine firm in existence and the registration was accordingly cancelled.
11. It was submitted before the AAC that the ITO's finding that the agreements were sham, was arbitrary and without any basis. A copy of the order of the CIT(Appeals) in case of M/s. Karimia Trust was filed in which it was held that the two agreements, mentioned above, were genuine agreements and the ITO's finding that they were sham transactions was not correct. The AAC however, did not find merit in the contention. She observed that the ITO had made a valid point that the management and control of the assessee firm remained with M/s.
Karimia Trust through its Trustee, Shri S.M. Shafiq. The ITO had given reasons in the show-cause notice for holding the partners of the firm as benamidars of the M/s. Karimia Trust. These findings could not be disputed before the AAC. The order of the ITO was, therefore, upheld.The assessee is now in appeal before us.
12. The Id. counsel for the assessee took us through the order under Section 185 for Assessment Year 1979-80 granting registration and the assessment order for Assessment Years 1980-81 granting continuation of registration and emphasised that the partners have been examined when the registration was granted and there was no further request by the Assessing Officer at any stage after the issue of show-cause notice under Section 186(1) to produce the partners again. He stated that it is difficult to see how any finding of a sham transaction or benami transaction could be given without ascertaining the facts from the partners directly. He also submitted that the income had been assessed in the hands of the assessee substantially and not on protective basis.
Tax had also been paid. This was inconsistent with the Department's stand that the partners were benamidars of M/s. Karimia Trust. There was no evidence to show that the profit earned by the assessee was diverted to M/s. Karimia Trust. On the other hand, the income of the M/s. Karimia Trust had increased as compared to earlier years and, therefore, there could be no allegation of diversion of income to reduce the incidence of tax.
13. The Id. counsel submitted further that M/s Karimia Trust was feeling genuine difficulty in running the cinema halls situated at Jamshedpur. This was so because the entire film distribution office of the Eastern Region was situated at Calcutta and M/s. Karimia Trust had to visit Calcutta frequently to negotiate with various distributors to obtain programmes. On the other hand, M/s. Kapoorchand (P.) Ltd. was an established business house at Calcutta who had taken several cinema halls and were feeding weekly programmes. It was for this reason that the cinema halls were let out on rental income to M/s. Kapoorchand (P.) Limited.
14. It was further explained that M/s. Kapoorchand (P.) Ltd. found it convenient to feed weekly programmes to the two cinema halls but being situated at Calcutta found it difficult to carry out the day-to-day management. It was for this reason that the day-to-day management was let out to the assessee-firm. There was nothing bogus or sham in the arrangement and it was perfectly genuine one. The partners of the assessee-firm were not benamidars of M/s. Karimia Trust. The department has failed to discharge its burden of proof in this regard. Reliance was placed on the following decisions: 5. Krishnanand Agnihotri v. State of MP AIR 1977 SC 796 (Reg.
Benami).
15. The Id. counsel for the assessee further invited our attention to the decision of the 3rd Member of the Tribunal in the case of M/s.
Karimia Trust for Assessment Year 1977-78 to 1980-81 dated 5-3-1993 in ITA Nos. 739 (Pat.) 82 and 220 & 221 and 1171 (Pat.) 83 where one of the questions referred to the 3rd Member for this opinion was whether on the facts and in the circumstances of the case, the claim of the assessee trust for exemption of its income from taxability was hit by the provisions contained in Section 13(1)(c)(zz). Our attention was invited to para 14 of the decision, which is reproduced below for convenience : 14. With regard to question No. 2, the factual controversy and the factual data required to be considered are elaborately stated in the two orders passed by the Id. Members. After hearing the representatives of both the sides, I am inclined to agree with the view expressed by the Id. Judicial Member, the view expressed in favour of the assessee. It is an admitted position that Section 13(3) is not applicable to M/s. Kapoorchand (P.) Ltd. who have taken on hire two chinema houses and, therefore, the income earned by M/s.
Kapurchand Pvt. Ltd. is not to be considered as income diverted to prohibited persons mentioned in Section 13(3). I also do not find any material on the basis of which it can be said that M/s Kapurchand Pvt. Ltd. were obliged further to give on hire these two cinema houses to a firm in which relatives of the trustees were interested. M/s. Kapurchand Pvt. Ltd. had free will either to run the cinema houses on their own to exploit the hired property in any manner it liked. Therefore, merely because it had chosen to exploit the property through some agency, in which the relatives of the trustees are interested, it cannot be said that income or property is diverted to the prohibited persons. Considering the factual data in respect of the income earned by the assessee as given on page 174 of the paper book, I find that in assessment year 1979-80, when the properties are rented, the income has increased from what it was earlier when the cinemas were run by the trust itself. Besides, grant of sub-lease by the lessees to a firm, in which relatives of the trustee are interested, can also be out of precaution to preserve and protect the trust property, from the adverse claims that might be apprehended in the present day circumstances and which might be put up by the lessees, who are not in any way, associated with the trustees. This aspect gains much more significance because the income of the trust has increased inspite of the relatives of the trustees having been involved. It was also submitted by the learned counsel for the assessee that no part of the amount of Rs. 6,000 received from the lessee was diverted to prohibited persons and the assessments of lessees as also sub-lessees are completed, and agreements are treated as genuine without there being any variation in the incomes declared. The learned Accountant Member has pointed out that one of the two partners of the sub-lessee firm was a lady and it was not known whether one or both of the partners possessed any special qualifications. This aspect is not relevant in view of the above findings. Moreover, it is not denied that they did engage themselves in attending to the business and devoted time and energy and also undertook the incidental risk that is normal in running the business of any type. It is further stated by him that the management and the control of the two cinemas is fully in the household of the trustee. This aspect alone on the face of the facts considered by the ld. Judicial Member, cannot advance the case of the revenue. Moreover realities of life have also to be kept in mind because even when the management and control is in the hands of close relatives, yet there are attendant risks which need not be elaborated.
16. Lastly, the Id. counsel for the assessee invited out attention to a letter dated 2-3-1984 from the ITO to the assessee that the assessee's case had been fixed for hearing under Section 263, on 7-3-1984 at the CIT's Camp Office at Jamshedpur for Assessment Year 1979-80 and 1980-81. He informed the Bench that limitation was available till 31-3-1984 only but no order under Section 263 was passed. This also showed that the Department was satisfied with the income disclosed by the assessee.
17. For the above reasons, it was stated that the order under Section 186(1) should be cancelled.
18. The Id. D.R., on the other hand, relied strongly on the order of the AAC. He submitted further that diversion of the income of M/s.
Karimia Trust under Section 13(1)(c), which was the subject-matter of the Tribunal's order, extracted above, was not material to the assessee's case. This was a clear case of subterfuge where ration laid down by the Supreme Court in the cases of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 as well as Sree Meenakshi Mills Ltd.'s case (supra) were fully applicable. He submitted further that the procedure laid down in Section 186(1) had been followed and opportunity had been given to the assessee as provided therein. It was not a requirement of that section that the partners should be examined once more and therefore, it was not done.
19. The Id. D.R. further submitted that the entire income had been assessed in the hands of M/s. Karimia Trust for Assessment Years 1979-80 and 1980-81 as if M/s. Kapurchand (P.) Ltd. did not exist.
Copies of the assessment orders were also filed before us subsequently.
He submitted further that in the assessment proceedings copy of the account of M/s. Ruhee Enterprises was asked for but it was never produced and so the Assessing Officer was compelled to obtain information from the Commercial Tax Officer.
20. The Id. D.R., thereafter, submitted that all the tests laid down by the Allahabad High Court in the case of Prasakh Narain (supra) regarding benami transactions were satisfied in this case. The source of purchases of the properties was M/s. Karimia Trust who remained the owners and no amount of capital was provided by the assessee. Regarding the nature and possession of the property, there was a provision that after expiry of the duration of the Deed, the property would be handed over to M/s. Karimia Trust. Thirdly, regarding position and relationship of the parties, it had already been shown that the partners of the assessee were wife and son of the main Trustee of M/s.
Karimia Trust. Fourthly, regarding motive, M/s. Ruhee Enterprises was brought into existence because Section 13(1)(bb) was introduced. Since the income was from business, exemption under Section 11 was denied to M/s. Karimia Trust. After the two agreements, M/s. Karimia Trust claimed that the weekly hire charges constituted income from other sources. This contention was rejected and the income from hire charges was treated as income from business. In the circumstances, after two years, M/s. Ruhee Enterprises was discontinued and so was the agreements with M/s. Kapoorchand (P) Ltd. Sixthly, the Id. D.R.submitted that the sales of tickets were nearly Rs. 16 lacs and M/s.
Ruhee Enterprises were paid Rs. 10,500 per week but had no right in the sale proceeds of the tickets. M/s. Ruhee Enterprises paid nearly Rs. 83,000 back to Karimia Trust for salaries etc. This showed that the management and control remained with M/s. Karimia Trust.
21. The Id. D.R. also relied on the following case laws in-support of its arguments: 22. For the above reasons, the Id. D.R. stated that the order under Section 186(1) should be confirmed.
23. We have considered the rival submissions carefully. Two reasons have been given in the order under Section 186(1) for cancelling the registration. The first reason is that the agreements between M/s.
Karimia Trust and M/s. Kapurchand (P.) Limited and also between M/s.
Kapurchand (P) Ltd. and M/s. Ruhee Enterprises were sham or bogus transactions and not genuine transactions. In the result, the entire income actually belonged to M/s. Karimia Trust and it had actually been assessed in its hands in its assessment orders. The second reason it that the two partners of M/s. Ruhee Enterprises, Mrs. Shamsun Nisa Begum and Syed Ashfaque Karim were wife and son respectively of the Managing Trustee, Syed Mohamed Shafiq of Karimia Trust and were actually benamis of M/s. Karimia Trust. In the regard, evidently, Explanation (b) below Section 185(1) of the Act has been invoked, according to which, for the purpose of Section 186, a firm shall not be treated as a genuine firm if any partners of the firm was 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. We shall discuss these two reasons separately.
23. There is distinction between a benami transaction and a sham transaction which has been explained by their Lordships of the Supreme Court in Sree Meenakshi Mills Ltd's case (supra) at p. 52 in the following words:- In this connection, it is necessary to note that the word 'benami' is used to denote two classes of transactions which differ from each other in their legal character and incidents. In one sense, it signifies the transaction which is real, as for example, when A sells properties to B but the sale deed mentioned X as the purchaser. Here the sale itself is genuine, but the real purchaser is B, X being the benamidar. But the word 'benami' is also occasionally used, perhaps not quite accurately, to refer to a sham transaction, as for example, when A purports to sell his property to B without intending that his title should cease or pass to B. The fundamental difference between these two classes of transaction is that whereas in the former there is an operative transfer resulting in the vesting of title in the transferee in the latter there is none such, the transferor continuing to retain the title notwithstanding the execution of the transfer deed. It is only in the former class of cases that it would be necessary, when a dispute arises as to whether the person named in the deed is the real transferee or B, to enquire into the question as to who paid the consideration for the transfer, X or B. But in the latter class of cases, when the question is whether the transfer is genuine or sham, the point for decision would be not who paid the consideration but whether any consideration was paid.
24. The modus operandiai the sham transaction under consideration, in the above case, was described in the judgment as under at p. 32 : Suppose the company sold 25 bales of yarn to X for Rs. 50,000 at the then market rate and received the full amount of the price. The books of the company would show neither the sale to X nor its receipt of Rs. 50,000. In stead, there will be an entry in its books showing the sale of these very bales to A for Rs. 20,000 which will be about the cost price and in the books of A these goods will be shown as sold by it to X for Rs. 50,000. If the sale by the company to A and the connected sale by A to X were genuine, the company would have made no profit on the sale, whereas A would have made a profit of Rs. 30,000 on it. But in fact, both these sales were sham transactions, the only sale that took place was that by the company to X and the price actually received by its was not Rs. 20,000 but Rs. 50,000. As a result of these paper transactions and manipulation, the profits of Rs. 30,000 made by the company was suppressed. This process was reversed when the company purchased cotton. The appellant purchased, let us say, 100 bales of cotton from X for a price of Rs. 5,000 and paid that amount to X. Neither this purchase from X nor the payment of Rs. 5,000 to him would appear in the books of the company. Instead, the books of A will show these goods as purchased by it from X for Rs. 5,000 and the books of the appellant will show a purchase from 'A' of those very goods for Rs. 8,000. Both these sales were fictitious, the only real transaction was the sale by X to the company and the price actually paid therefor by the company was only Rs. 5,000. By the device of sale by X to A and A to the company, the cost price had been inflated by Rs. 3,000 and the real profit had been concealed to that extent. The accounts of the company, therefore, did not reflect the true position as to profits actually made by the appellant.
25. We may mention that both these extracts have been given in the assessment order of M/s. Karimia Trust for Assessment Year 1980-81 which has been placed before us. It is stated in that assessment order that in case of Karimia Trust, attempts were made by the assessee "for splitting up its profits by introducing dummies or bogus intermediaries". The facts and circumstances of the assessee's case were stated to be very similar to the facts in the extracted case given above, and hence the transactions entered into by the Trust through intermediaries, M/s. Kapoorchand (P) Ltd. and M/s. Ruhee Enterprises, should be treated as sham transactions. We have referred to the above arguments on the case of M/s. Karimia Trust, because no specific arguments have been given in the order under Section 186(1) in the assessee's own case apart from the fact that the partners were actually relatives of the Managing Trustee of M/s. Karimia Trust.
26. Let us now take a closer look whether the facts in the present case are really similar to the facts in the case of M/s. Sree Meenakshi Mills Ltd. (supra). M/s. Karimia Trust were the owners of the two cinema halls, including the building, furniture and fixtures. They continued to remain so even after the agreements. It was the running of the two theatres which was let out on weekly rent of Rs. 6,000 to M/s.
Kapurchand (P) Ltd. For this arrangement, the income from the cinema shows went to M/s. Kapurchand (P) Limited and they also incurred the management expenses. M/s. Karimia Trust only incurred some fixed expenses relatable to the building etc. such as water taxes, ground rent, municipal tax and insurance of building, furniture and machinery.
For letting out the theatre M/s. Karimia Trust were assured of an income of Rs. 6,000 per week which amount to Rs. 3,12,000 for 52 weeks i.e. about a year.
27. If M/s. Kapurchand (P.) Limited had a similar arrangement in the agreement with M/s. Ruhee Enterprises and received of is a sum higher than Rs. 6,000 per week, then it could be said that the facts were similar to the facts in the case of Sree Meenakshi Mills Ltd. (supra).
However, this was not so. In the agreement, between M/s. Kapurchand (P) Limited and M/s. Ruhee Enterprises, only day-to-day management was handed over to M/s. Ruhee Enterprises. M/s. Kapurchand (P) Limited did not receive any fixed weekly amount from M/s. Ruhee Enterprises. On the other hand, they paid Rs. 10,500 per week to M/s. Ruhee Enterprises for meeting the day-to-day management expenses, such as the entertainment tax, show tax, repairs to buildings, machinery and fixtures, salaries to staff, electricity charges, Bihar Amusement Tax it is significant that the income from the shows continued to go to M/s. Kapurchand (P) Limited except for morning shows and income from advertisements which went to M/s. Ruhee Enterprises.
28. We also find some weight in the contention of the ld. counsel for the assessee that there was valid reasons for the above arrangements when he submitted that the entire film distribution of the Eastern Region was situated at Calcutta and M/s. Karimia Trust, in order to feed weekly programmes to its two cinema halls, had to visit Calcutta frequently and negotiate with the various distributors. M/s. Kapurchand (P) Limited was already situated at Calcutta and experience in such a business. However, since the cinema halls were at Jamshedpur, they hired" M/s. Ruhee Enterprises for running the day-to-day management.
29. We find it significant that in this arrangement the income of Karimia Trust increased admit three times compared to Assessment Year 1978-79. This fact has been noticed in the order of the ld. 3rd Member of the Tribunal extracted above. The relevant data is given below:------------------------------------------------------------------------------Asstt. year Gross receipt Expenditure Gross surplus as per Balance on Business available Charitable Sheet as per P/L Table & Religious Account Purpose as per-----------------------------------------------------------------------------1969-70 6,99,716.09 6,31,856.60 67,859.491970-71 8,11,871.92 7,04,529.89 1,07,342.031971-72 8,29,371.26 6,81,602.21 1,47,769.051972-73 9,06,763.40 7,92,155.07 1,14,608.331973-74 11,93,763.32 9,24,292.09 2,69,471.231974-75 13,07,392.08 10,67,206.04 2,40,186.041975-76 13,87,722.42 11,63,818.15 2,23,904.271976-77 16,42,859.59 13,63,316.94 2,79,542.651977-78 9,00,868.26 7,45,895.04 1,54,973.221978-79 7,56,744.50 6,55,950.86 1,00,793.641979-80 Rented No Expenditure 3,23,350.001980-81 Rented No Expenditure 3,00,808.00----------------------------------------------------------------------------- 30. In view of above, there is hardly any merit in the contention of the Id. D.R. that there was a device to reduce the incidence of tax and the ratio of the decision of the Supreme Court in McDowell & Co. Ltd.'s case (supra) is applicable.
31. We have also noticed the observations of the Id. 3rd Member in the order of the Tribunal in case of M/s. Karimia Trust, extracted above.
It was observed that M/s. Kapurchand (P) Limited had free will either to run the cinema halls on their own or to exploit the hired property in any manner it liked. It was also observed that the grant of sub-lease to M/s. Ruhee Enterprises, in which relatives of the Trustee were interested, can also be a precaution to preserve and to protect the Trust property from the adverse claim that might be apprehended in the present day circumstances and which might be put up by the lessees who are not in any way associated with the Trustees. It was further observed that it was not relevant that one of the two partners of M/s.
Ruhee Enterprises was a lady and it was not known whether one or both of the partners possessed any special qualifications. It was not denied that they did engage themselves in attending to the business and devoted item and energy and also undertook the incidental risk that is normal in running a business of any type. The Id. 3rd Member did not attach any importance to the- fact that the management and control was fully in the household of the Trustee.
32. In view of above, we hold that the Department has not made out any case that the two agreements in question were sham transactions. On the other hand, the observation of the ld. 3rd Member, mentioned above, with which we fully concur, go to show that the two agreements were genuine agreements.
33. Before proceedings further we will take a look into the case law relied upon by the id. D.R. We have already held that the decision of the Supreme Court in case of McDowell & Co. Ltd. (supra) is not applicable. In Durga Prasad Candy Prasad's case (supra) the question was cancellation of registration under Section 23(4) of the Indian Income-tax Act, 1922 (corresponding to Section 144 of the Income-tax Act, 1961). It was held that the cancellation was in the nature of a penalty and the penalty can be imposed even against a genuine firm in case of default. In the case before us, the assessment was not completed under Section 144 and the registration was not cancelled in pursuance to an ex-parte order under Section 144. The ratio of the above decision is not applicable. In case of Durga Prasad More (supra) it was held that though an apparent statement must be considered real until it was shown that there were reasons to believe that the apparent was not real. In a case where a party relied on the self-serving recitals in document, it was for that party to establish the truth of those recitals. The Taxing Authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals.
Firstly, in the present case, the documents were not self-serving since they were between third persons who are not related. Secondly, the Department has power to go behind the documents which are in question.
Such a power is definitely available held by the Supreme Court, but the result of the exercise of the power will depend on the facts and circumstances of each case. Thus this decision does not also help the Department. In case of S.P. Gramophone Co. (supra) the assessment year concerned was Assessment Year 1961-62 and the question was granting of registration under Section 26A of the Indian Income-tax Act, 1922 (corresponding to Section 185 of the Income-tax Act, 1961 partly).
There was no provision in the Act of 1922 for holding that the firm was not genuine in case one of the partners was a benamidar either or another partner or of a third party. Earlier it had been held by the Supreme Court in CITv. A. Abdul Rahim & Co. [1965] 55 ITR 651 that the partners being benamidars did not convert the firm into a "non-genuine firm". Distinguishing the case, it was held that in this case, the firm was held to be not a genuine one independently, and the found new partners being benamidars was no bar to registration. The Supreme Court confirmed the refusal of registration. Thus the facts as well as the law were quite different from those in the present case and, therefore, the decision does not help the Department.
34. We will also look into the cases relied upon by the ld. counsel for the assessee. In the case of Prakash Narain (supra) there were purchases of properties and the question arose whether they were benamis. After reviewing a series of case laws it was held that the burden of proof was on the Revenue to show that the transaction was benami. No absolute formula or acid test can be laid down but generally the cases are guided by the circumstances as under- (iv) the position of the parties and the relationship between the claimant and the alleged benamidars ; and 35. it was observed that the above list is not exhaustive and its efficacy varies according to the facts of each case. Nevertheless, in case of sale, the source of the purchase money was the most important test.
36. In the present case, it is not a sale of property and, therefore, the factors to be examined will be different to that extent. The Id.
D.R. has submitted that the property continued to be owned by M/s.
Karimia Trust. This not important since the property was let out on hire. The agreement between M/s. Karimia Trust and M/s. Kapurchand (P.) Ltd. does not show any advance of funds from Krimia Trust for running the business. Similarly, there was no advance of funds from M/s.
Karimia Trust to the assessee. On the other hand, M/s. Kapurchand (P) Ltd. gave an advance at Rs. 50,000 to the assessee as per para 21 of the Agreement, which to be adjusted against weekly payment of Rs. 10,500. Thus the source of funds did not come from Karimia Trust.
37. Regarding the nature and possession of the property after letting out, there is nothing on record to show that the management continued to be run by Karimia Trust and not by M/s. Ruhee Enterprises. It is, however, a fact that there was a close relationship between the Trustees of Karimia Trust and the partners of the assessee-firm. The question of custody of title-deed does not arise in the present case.
Regarding the conduct of the parties, weed have already noticed the observation of the Id. 3rd Member that it is not denied that the partners of the assessee firm did engage themselves in attending to the business and devoting time and energy and also undertook the incidental risk that is normal in running a business of any type. We may add that there is nothing to indicate that the income of the assessee-firm went back* to M/s. Karimia Trust and was utilised by them. We may also mention that the income earned by the assessee-firm was very small, being only Rs. 33,920 in Assessment Year 1979-80 and Rs. 27,910 for Assessment Year 1980-81 as against the income of M/s. Karimia Trust which was Rs. 3,23,350 for Assessment Year 1979-80 and Rs. 3,08,008 for Assessment Year 1980-81, as per chart already reproduced above.
38. In Madura Knilling Co. 's case (supra), the assessee-company had 7 partners. The 4 married daughters on one of the partners formed themselves into a partnership to buy the goods of the assessee-company and derived large profits therefrom. The partnership was registered as a Firm. The profits of this partnership were included in the income of the assessee-company on the ground that this partnership was a benami or a sham concern. There was nothing to show that the moneys of the partnership were drawn by any one except the daughters themselves or any one other than the daughters. Profits were apportioned amongst the partners in the books. It was held that the burden was not on the assessee but on the Department to prove that what was apparent was not real both in case of benami or sham. In this particular case it was held that the burden had not been discharged. This case helps the assessee.
39. In case of Kirana Traders (surpa) facts were different. In that case, the Income-tax Officer did not form an opinion that there was, during the previous year, in genuine firm in existence and, therefore, it was held that the cancellation of registration under Section 186(1) was not valid. This case does not help the assessee because in the present case the Assessing Officer did form an opinion that there was no genuine firm in existence.
40. In case of Dhaniram Gupta & Co. (supra) it was held that registration could not be cancelled under Section 186(1) merely because there were internal arrangements made by the partners among themselves or with outsiders and the partnership deed showed that the partners were not precluded from forcing their agents to operate the firm's bank account on their behalf. This decision was given on the peculiar facts and circumstances of the case and does not lay down any principle which may support the assessee.
41. In case of Krishnanand Agnihotri (supra) it was held that the onus of establishing a transaction as benami is on the person who asserts it. This burden has to be discharged by legal evidence of a definite character. Suspicion, however strong, cannot take the place of proof.
We have noticed already that the same ratio has been laid down by some other High Courts also.
42. In the present case, the Assessing Officer has proceeded on an opposite presumption that the burden of proving that the partners were not benamidars of Karimia Trust lay with the assessee. We have already seen the contents of the show-cause notice. The two agreements were noticed and the relationship of the partners with the Trustee of Karimia Trust was noticed. Simply by mentioning the above, the assessee was asked to show cause why the partners should not be treated as benamidars of M/s. Karimia Trust. The fact that the partners of the firm were related to the Trustee of M/s. Karimia Trust may have raised suspicion but was not sufficient to come to the conclusion that the partners were benamidars. The Id. D.R. has tried to extend the argument with reference to the decision in the case of Prakash Narain (supra) but we have already noticed that the contention is not acceptable.
43. In the end, we will also like to state that the income of M/s.
Ruhee Enterprises was not even added to the income of M/s. Karimia Trust as such. It is stated in the assessment order of Assessment Year 1979-80 of M/s. Karimia Trust that the net income from Jamshedpur and Karim Talkies has to be computed and assessed. Net income from Profit & Loss Account, annexed to the order, was taken and certain disallowances were made. It is seen from this Profit & Loss Account that the credit side shows the amount received/receivable from Kapurchand (P) Ltd. Rs. 3,11,143 and expenses on repairs, salary, electricity charges, T.A.etc. were all debited therein leading to a net profit of Rs. 1,65,137 only. The income from cinema shows i.e. sale of tickets was not taken into consideration. We do not see how this amount to treating the two agreements as sham. In Assessment Year 1980-81 however, there is estimated receipt from cinema shows and slides and an estimated net profit rate has been applied, giving total income of the Rs. 3,80,060.
However, the assessment order for Assessment Year 1979-80 remains a contradiction to its own finding of benami.
44. For the above reasons, we hold that the Department has not discharged its burden of proof for a finding that the assessee-firm was a sham or that the partners of the assessee-firm were benamidars of M/s. Karimia Trust. It follows that the registration for the two years cannot be cancelled under Section 186(1). We hold accordingly and direct that the two orders under Section 186(1) be treated as cancelled.