TaxTMI 
TaxTMI 
1988 (4) TMI 125
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....by him with the assessee : (a) that one Shri Sirehmal Chopra who was doing the business of precious and semi-precious stones brought in as capital on the start of the business on 1-2-1979 in the from of goods valued at Rs. 40,990; (b) Shri Sirehmal Chopra is son of Smt. Bhanwar Devi and is brother of Smt. Vimla Patni who are partners in the partnership firm, who allowed the partners (sic), who in fact did not bring any capital whatsoever, except the amount of Rs. 1,000 which was deposited in the account of Smt. Bhanwar Devi much afterwards; (c) that Smt. Bhanwar Devi is aged about 57 years having little experience of trade of precious and semi-precious stones. Moreover, she could not contribute any skill and experience to the carrying on of the business of the alleged partnership firm; (d) that her statement was recorded on 15-12-1982 and confronted vide notice dated 5-2-1983, wherein it was revealed that Smt. Bhanwar Devi did not know about the profits so received from the assessee partnership firm; (d) that her statement was recorded onm 15-12-1982 and confronted vide notice dated 5-2-1983, wherein it was revealed that Smt. Bhanwar Devi did not know about the profit so receiv....
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....p; --------- --------- 33,845.24 33,845.24 --------- --------- Capital Account for 1982-83. Rs. &....
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.... no contribution, whatsoever, on her part to carry on her business; that the position of her capital account appearing in the books of the assessee for the year under assessment and the next two years is reproduced in his order at page 3, which is as under : Capital Account of Smt. Vimla Patni for 1981-82 Rs. Rs. To Income-tax 161.00 By balance 7,824.03 To Balance C/F 19,157.10 By profit 11,494.07 --------- &....
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....nbsp; --------- Thus from the above facts, the Income-tax Officer came to the conclusion that Smt. Vimla Patni, neither contributed any share capital, nor withdrew any amount towards her maintenance or pocket expenses. He further observed that she was not in a position to contribute anything to carry on the business which is a must for the partner, who had not invested any capital share in the business. Her statement was recorded by the Income-tax Officer and it was confronted to her that how much share of profits was received by her, who was not able to part with any information, except stating that she could tell only after looking into the books of account. 4.2 In view of the above facts, the Income-tax Officer dealt with the claim of the assessee that the partners had agreed to share the profits of business carried on by all or any of them, carrying for all (sic) and as such.the registration should be allowed to the assessee observing as follows : that it was not a partnership amongst the strangers but the partners are closely related with each other being members of one family; moreover, it was only in the case of family concern that such an arrangeme....
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.... execution of the firm and the partnership deed is not held by the Income-tax Officer as non-genuine and, therefore, non-granting of registration to the firm by the Income-tax Officer and the Appellate Assistant Commissioner is unjustified. He, further, contends that contribution of capital share for running the business by the firm by all partners is not a must and, therefore, if the lady partner (sister) has not contributed any capital share, then it cannot be basis for holding the firm non-genuine or such partnership resulting in refusal of the registration to the firm. He further contends that it is not essential that all the partners should contribute personally and physically for running of the business of the firm, since the partners, in the firm can be sleeping partners or dormant. He further contends that when the partners are sharing loss and the ration of sharing of the partnership is there, then there is a consideration for the partnership among the partners and as such if no share is contributed by the partner, then it cannot be held that the partnership deed is non-genuine. He further contends that there is no ban to enter into partnership for the family members, viz.....
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.... Tax. Sec. 4-384 (sic) (e) D. L. F. United Ltd. v. CIT [1984] Tax. 75(3)-135 (Delhi) (f) CIT v. Rama Transport Co. [1982] 137 ITR 11 (Cal.) (g) K. D. Kamath & Co. v. CIT [1971] 82 ITR 680 (SC) (h) Agarwal & Co. v. CIT [1970] 77 ITR 10 (SC) (i) P. C. Kapoor v. CIT [1973] 90 ITR 172 (All.) (FB) (j) CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC) (k) Himalaya Engg. Co. v. CIT [1965] 57 ITR 762 (Pat.) (l) United Patel Construction Co. v. CIT [1966] 59 ITR 424 (MP) (m) Subhash Medical Stores v. CIT [1984] 147 ITR 486 (Raj.) and the paper book containing pages 38. 7. On the other hand, Shri Ruhela, the learned senior departmental representative contends that the partnership deed is not genuine and he is within the powers to raise it before the Tribunal because he is representing the responded-revenue and, therefore, can raise any contention to support the impugned order. He further contends that for genuine firm its constitution and execution of partnership deed is to be genuine and the onus is upon the assessee to prove it that contribution of share capital is a must by the partners for holding the constitution of partnership deed as genuine. Relying on clauses 4 and 6 of t....
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....try in the cash book is made-up entry. Thus, Shri Ranka, the learned counsel for the assessee in availing the right of rebuttal on the facts mentioned above contends that non-granting of the registration to the assessee-firm is an error in law and facts which is to be rectified by the Tribunal by setting aside the orders of the authorities below. 9. We have heard the rival submissions and have gone through the record before us. The partnership deed dated 16-3-1979 is kept on record as Annexure-A. The terms and conditions are mentioned therein in details. Clause 4 of it says that the capital shall be subscribed and brought by the parties to this deed by mutual consent and according to the exigencies of business. This clause consists of three parts, i.e., (a) that there will be contribution by the partners as share capital which is to be settled by the consent of the partners and to be to the extent as the exigencies of business demand. 9.1 Clause 6 says that the profit and loss of the trading of the firm shall be divided or borne in the following ratio : Shri Sirehmal Chopra 40% Smt. Bhanwar Devi Chopra&nbs....
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....rship. In this view of the matter, we hold that on the facts in this case, there is no consideration for entering into agreement or partnership on behalf of Smt. Vimla Patni. When clause 4 clearly says that there will be contribution by each partner, then it should be there either in cash or kind. In this case this condition is not satisfied. It cannot be disputed that it is a family concern. Therefore, we have to see the totality of the facts and circumstances of the case that whether partnership deed is a make-believe document which is a must for granting registration to this firm. As we have observed above, that there is no agreement for non-contribution of share capital among the partners mentioning categorically that partner No. 3 will not at all contribute any share capital in cash or kind which proves that she is there just to help her brother to reduce the liability of income-tax payment. This is supported from the fact that the whole of the capital is contributed by bringing the salable goods for the business. Smt. Bhanwar Devi is the mother of Shri Sirehmal Chopra who is an aged lady and she has not contributed the amount as required as per her share at 35 per cent. It is....
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....the division of the profit is there in the books of account, then it cannot be held that there is actual division of profits and share of profits in case of each partner has gone to the hands of such partners particularly, when unknown to the lady partners. Further the facts and circumstances of the business are such that exigencies are there for contribution of the share-capital by each partner per the share in their names, as is proved from the details hereinafter in regard to the trading position i.e., for 1980-81 Rs. 98,749, 1981-82 Rs. 53,898 and 1982-83 Rs. Nil. 12. Thus from the above facts, it is clear that the exigencies of business required the contribution of share capital by the partners. It cannot be held that in the assessment year 1980-81 there are sales amounting to Rs. 98,749 since the initial capital investment is amounting to Rs. 30,990 by way of goods value share brought by Shri Sirehmal Chopra, against the capital of Rs. 40,990 in the assessment year 1980-81 the sales are as we have mentioned above, which shows that the exigency of business demands more investment and as such the partners have to contribute move for running the business smoothly. Therefore, in....
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....of the firm is not genuine on the totality of the facts and circumstances of the case as mentioned above. 16. It is settled law that an agreement or contract to be valid, consideration is a must. The partnership is admittedly an agreement and, therefore, there should be consideration in case of each partner to the partnership. It may be in cash or king. In this case, there is no contribution of the share capital on behalf of partner No. 3 being an admitted position. She has not contributed to the working of the business by working in it. Similar is the state of affairs regarding another lady partner (mother) of Shri Sirehmal Chopra. Further, the whole of the capital has been brought out by the male partner. Moreover, the distribution or division of the profits in share as required by the partnership deed is not there, as we have observed above. Therefore, on these facts it can be held that the partnership is not genuine, in view of the fact that its constitution and execution is not genuine as is evident from the facts as stated above. 17. No doubt, Shri Ranka, relying on the decision in the case of K. D. Kamath & Co., the learned counsel for the assessee, contends that the contr....
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.... 19. Since this is a case where the partners are brother, sisters and mother, the onus is upon the assessee to prove that the partnership deed is genuine. It is not genuine in view of the fact that share capital is not contributed as required. Further share of each partner in the profits is not physically distributed because the lady partners are not in the know how much profits they are getting in the previous year, relevant to the assessment year under consideration, as we have mentioned above. 20. It is clear that the total capital has been brought by male partner Shri Sirehmal and it is he, who is controlling the business and management of its affairs. It is further proved that the profits of the lady partners are also under his control, in view of the fact that the lady partners are not in the know of their profits of the year. Thus, the three factors for the benami business (have been proved ? ). viz., that the initial capital investment for running the business of the firm has come from Shri Sirehmal Chopra; secondly it is also proved that the control and the management of the business is in hands of Shri Sirehmal Chopra; thirdly it is further proved that the profits of th....
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....nterpreted the above said clauses and had come to the conclusion that there being no specific agreement amongst the partners that the other two lady partner are not required to contribute capital and that the amounts of profit though credited to the capital account of the partners not being withdrawn by the partners any amounts to the profit not going to the coffers of the partners physically, and due to the relationship of the partners as brother and son of the ladies the partnership was a sham. My learned brother is also impressed by the fact that the main capital in the shape of stocks was brought in by the male partner and the other partner that is the sister brought in Rs. 1,000 as her capital during the course of the year, which also made my brother to conclude that the partnership was a sham one. My learned brother had also referred to the statements that were recorded of the two lady partners, who were unable to state the amounts of profit that was received by them. Therefore, my learned brother came to the conclusion that there was no actual division of profits and the profits never reached the hands of the lady partners. My learned brother has also examined the requiremen....
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....te any capital to the firm, how did you become the partner of the firm ? Ans : At the start of the business, there was no requirement of cash and I, therefore, did not contribute capital at the beginning. Later, I did contribute capital, which remained with the firm and as of now it has got accumulated. Q. The next question was-Do you pay income-tax or not ? Ans : I have been paying income-tax for the last 8-10 years, but I do not remember the exact Ward where I as assessed. From the above answers, I am unable to come to the same conclusion as my learned brother had come that the lady partners were not genuine partners. Both the ladies were specifically asked the question as to who are the partners and what are their profit sharing ratios. The answers by both the ladies are categorical and to the point, which can be seen from the question and the answer given below : Q. Kindly tell us correctly as to who are the partners in the firm along with their profit-sharing ratios ? Ans : In this firm, my son Shri Sirehmal Chopra, Smt. Vimla Patni my daughter and I, are the three partners. Sirehmal Chopra has 40 per cent, Vimla has 25 per cent and my share is 35 per cent. Similar ques....
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....--------- --------- 11,953.64 11,953.64 --------- --------- Smt Vimla Patni To balance 7,824.03 By profit 7,824.03 --....
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....p; 19,318.10 --------- --------- Smt. Bhanwar Devi Chopra : To income-tax 2,512.00 By Balance 11,953.64 To H.B.T. 189.00 By Deposit 5,800.00 To Wealth-tax 2,230.00 By Profit 16,091.60 To Balance C/F 28,914.24 ....
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.... 23,249.72 23,249.72 --------- --------- 3. Smt. Bhanwar Devi Chopra : Rs. Rs. To Income-tax 1,741.00 ....
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....granting of registration of the firm. But, the ITO while exercising his powers under the statute mush examine the issue in entirety and should not pick and choose and decide the issue merely because the other two partners are ladies, who have not contributed the capital, have not withdrawn or made any drawings for the year under review cannot be the sole criterion to come to the conclusion that they are not partners. The examination of the statement shows that the ladies were also looking after the business as and when they were required to do so. The partner ship is an agreement between the partners and it is a known phenomenon that partners are responsible to the third parties in the same proportion in which they have agreed to share the profits or losses. This itself could be a sufficient consideration for a person to be a partner. For the mere reason that there was no capital contribution of the partner and that the main or the managing partner happens to be the male partner only does not also lead to the conclusion that the other two lady partners are benami of the male partner. Their Lordships in the K. D. Kamath & Co's. case had clearly held that contribution of a share capi....
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....the time of constitution of the firm on 1-2-1979 he brought in some precious stones valued at Rs. 40,990 as his capital in the firm. Shri Sirehmal Chopra was the son of Smt. Bhanwar Devi and brother of Smt. Vimla Patni, who joined as partners of the firm. The Income-tax Officer noted that the two lady partners had not brought in any capital except for a small amount of Rs. 1,000 brought in by Smt. Bhanwar Devi. He referred to the fact that Smt. Bhanwar Devi had no experience or skill in his business. The Income-tax Officer examined Smt. Bhanwar Devi and from her statement he inferred that she did not know much about the business and also the fact about the profit received by her. She had admitted that Shri Sirehmal was carrying on business and she was only signing the cheque sometimes. He referred to her capital account on the first three years and pointed out that except for the payment of taxes, there were no other withdrawals from the capital account. He noted that the deposit made in the year relevant for the assessment year 1981-82 was only Rs. 5,800 and the partner was shown to have earned a profit of Rs. 16,091 as a result of the business of the firm. From the absence of wit....
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....male partner. 6. Both the sides have addressed in favour of their respective claims. The learned counsel for the assessee submitted that the partnership deed had been duly executed and the application had been properly filed. The firm was registered under the Sales-tax Act and the partners were operating a bank account as envisaged in the partnership deed. It was pointed out that one of the lady partners was already an income-tax assessee and both the partners had been assessee prior to the assessment of the firm. Referring to the orders passed by the Judicial Member, the counsel for the assessee submitted that the inference drawn by the lower authorities as well as the Judicial Member from the statement of Smt Bhanwar Devi was completely wrong. It was submitted that she had accepted that she was a partner in this firm, which was deriving income from the business of a jeweller. She had also stated about her investment in the firm stating that in the beginning she had invested Rs. 1,000 but later on Rs. 5,000 to Rs. 6,000 were further invested. She had stated that her son and daughters were also partners in the firm and she correctly gave out the share of profit and loss agreed to ....
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....r. He also contended that one of the considerations of partnership is the sharing of losses and the partners had been taken for this consideration as well. The liability was not limited and the ladies were person with means and could be called upon to make up their share of losses or the loss suffered by the firm if such a situation arose. The learned counsel contended that there is nothing wrong if the members of the same family decide to carry on a business in a partnership. Smt. Bhanwar Devi had contributed Rs. 1,000 at the time of constitution of the firm and this entry in the books had been noted by the Sales-tax Inspector. The original of the books were produced to establish this position. The learned counsel also contended that there was no evidence or even a suggestion that the profit earned by the partners has gone to the coffers of the other partner or had been used for his benefit. 8. Relying on certain case laws, the learned counsel submitted that contribution of capital is not an essential requirement for establishing the genuineness of the firm and for this he relied on the decision of the Patna High Court in the case of Himalaya Engg. Co. He also contended that the ....
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....ringing the ladies was to divide the profits for the purposes of income tax. He contended that the factual genuineness was different from merely where being (sic) a legal entity of the firm. In support of his submission he relied on the decision of the Calcutta High Court in the case of CIT v. Lalit Trading Corpn. [1980] 125 ITR 586. He also relied on the observations made in the case of Mc Dowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) where the requirement of going behind the whole transaction has been approved. 10. The Departmental Representative also submitted that in this case there was no question of loss and, therefore, that could not be a consideration for taking two partners who were close relations of the male partner. It was also contended that while one lady partner had not contributed any capital, the other lady partner had withdrawal only that much money which she had contributed as her capital. Thus, she, in fact, has also not contributed any capital. 11. In reply, the learned counsel for the assessee submitted that Shri Sirehmal Chopra had received certain precious stones on the dissolution of a firm, in which he was a partner and he wanted to continue his busin....