1976 (7) TMI 45 - HC - Income Tax

Partnership Deed Deemed Not Genuine; Firm Income Assessable in Partner's Hands

The Tribunal found that the partnership deed did not render the partnership void but deemed it not genuine, leading to disqualification for registration. ... Debts And Incumbrances, Estate Duty, Principal Value Of Estate Issues Involved:1. Validity of the partnership deed and entitlement to registration under section 26A of the Indian Income-tax Act, 1922.2. Status of partners in the firm and whether they were more than dignified employees.3. Individual assessment of Shri Dhanji Lalji and whether the income of the firm was rightly assessable in his hands.4. Liability of Shri Dhanji Lalji to be taxed on the entire profits of the firm.Detailed Analysis:Issue 1: Validity of the Partnership Deed and Entitlement to RegistrationThe primary question was whether the partnership deed dated November 12, 1958, rendered the partnership void in law, thus disqualifying the applicant-firm for registration under section 26A. The Tribunal found that the firm was not genuine and deemed the other three partners as mere dummies. This conclusion was based on the examination of the terms of the partnership deed and the oral evidence of the three alleged partners. The Tribunal emphasized clauses 12 and 14 of the deed, which vested significant control in Shri Dhanji Lalji alone, suggesting that the other partners had no real authority or role in the business. The Tribunal's finding was that the partnership was a sham and not entitled to registration.Issue 2: Status of PartnersThe Tribunal concluded that the status of the partners was no more than that of dignified employees. This conclusion was drawn from the oral evidence of the partners, who admitted to having no significant experience or role in the business operations. The Tribunal noted that the partners did not contribute capital and continued to perform the same duties as before, with no additional responsibilities or powers. The terms of the partnership deed further supported this conclusion, indicating that the partners had no say in critical business decisions and that their roles were limited.Issue 3: Individual Assessment of Shri Dhanji LaljiThe Tribunal upheld the Income-tax Officer's decision to assess the entire income of the firm in the hands of Shri Dhanji Lalji. The Tribunal found that since the partnership was not genuine, the income could not be attributed to the other partners. The Appellate Assistant Commissioner's decision to grant registration and assess only the 7 annas share of profit to Shri Dhanji Lalji was reversed. The Tribunal's decision was based on the cumulative effect of the evidence and the terms of the partnership deed, which indicated that the firm was not a genuine partnership.Issue 4: Liability to be Taxed on Entire ProfitsThe Tribunal confirmed that Shri Dhanji Lalji was liable to be taxed on the entire profits of the firm. This conclusion followed from the finding that the partnership was not genuine and that the other partners were merely dummies. Consequently, the entire income of the firm was rightly assessable in the hands of Shri Dhanji Lalji.Conclusion:1. The partnership deed did not render the partnership void by itself, but the restrictions, along with the facts and circumstances, indicated that the partnership was not genuine.2. There was sufficient evidence to support the Tribunal's finding that the partners were no more than dignified employees and that the agency of the partners inter se had not been established.3. The income of the firm was rightly assessable in the hands of Shri Dhanji Lalji.4. Shri Dhanji Lalji was liable to be taxed on the entire profits of the firm.Costs:The assessees were ordered to pay the costs of the reference.