1996 (1) TMI 143 - AT - Income Tax

Assessee-firm meets criteria for registration under Income-tax Act; Tribunal grants registration for all 3 assessment years.

The Tribunal concluded that the assessee-firm was validly constituted and met all requirements for registration under the Income-tax Act. It directed the ... A Firm, A Partner, Assessment Year Issues Involved:1. Refusal to grant registration to the firm under section 185(1)(b) of the Income-tax Act, 1961 for assessment years 1987-88, 1988-89, and 1989-90.2. Determination of whether adult members representing AOPs in the partnership firm can be considered benamidars.3. Validity of AOPs consisting of minors with a significant share in profits and losses.4. Whether a Karta or a coparcener representing HUF can be a partner without contributing capital.5. Frequent changes in the constitution of the firm and its impact on registration.6. Applicability of the Gujarat High Court judgment in Laxmichand Hirjibhai v. CIT regarding prior assessment of partners.Issue-wise Detailed Analysis:1. Refusal to Grant Registration:The core issue was the refusal to grant registration to the appellant-firm under section 185(1)(b) of the Income-tax Act, 1961. The Assessing Officer (AO) refused registration due to the involvement of two AOPs as partners without submitting Form No. 12A, as required by the Explanation to section 185. The AO argued that the adult members representing the AOPs were benamidars and that the minors in the AOPs were exposed to liabilities, making the AOPs invalid. The CIT(A) allowed the appeals for 1987-88 and 1988-89 but dismissed the appeal for 1989-90, confirming the AO's refusal.2. Determination of Benamidars:The Tribunal examined whether the adult members representing the AOPs could be considered benamidars. The term 'benamidar' implies a person who merely lends his name without any real interest in the property. The Tribunal concluded that the adult members representing the AOPs were not benamidars as they had a definite share in the income, losses, assets, and liabilities of the AOPs. The partnership deed clearly disclosed their representative capacity, and there was no undisclosed person as the real owner. Therefore, the firm was not obligated to file Form No. 12A.3. Validity of AOPs with Minors:The Tribunal addressed whether AOPs consisting of minors with a significant share in profits and losses were valid. It referred to Supreme Court judgments allowing minors to be members of an AOP with the consent of their guardians. The Tribunal concluded that the AOPs were validly constituted as the minors were made members with the consent of their legal guardians, and their mutual rights were governed by the Articles of Association.4. Karta or Coparcener as Partner without Capital:The Tribunal considered whether a Karta or coparcener representing HUF could be a partner without contributing capital. It referred to various judgments, including R. Subramania Iyer v. CIT, which held that a Karta could represent HUF in a partnership without contributing capital. The Tribunal noted that the partnership deeds specified the sharing of profits and losses, and the HUF properties were liable for the firm's liabilities. Therefore, the lack of capital contribution did not render the partnership illegal.5. Frequent Changes in Firm's Constitution:The Tribunal addressed the issue of frequent changes in the firm's constitution and its impact on registration. The AO argued that the changes were made to reduce the tax burden. However, the Tribunal found that the changes were supported by partnership deeds, and the partners were genuine. The Tribunal concluded that the changes did not justify the refusal of registration.6. Applicability of Gujarat High Court Judgment:The Tribunal considered the applicability of the Gujarat High Court judgment in Laxmichand Hirjibhai v. CIT, which held that registration could not be refused if the partners were assessed before the firm's assessment. The Tribunal noted that since the firm was validly constituted and fulfilled all conditions for registration, the issue of prior assessment of partners was not relevant in this case.Conclusion:The Tribunal concluded that the assessee-firm was validly constituted and complied with all legal requirements for registration under the Income-tax Act. It directed the AO to grant registration to the firm for all three assessment years. The appeals of the revenue for 1987-88 and 1988-89 were dismissed, and the assessee's appeal for 1989-90 was allowed.