TaxTMI 
TaxTMI 
2001 (3) TMI 230
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....rtnership deed had been filed on 9-10-1986. As per the deed there are four partners with profit sharing ratio as follows: (1) Shri H.J. Patel 25% (2) Shri A.H. Patel 30% (3) Shri Lalit Bhanjibhai 25% (4) Smt. Meenaben D. Manek 20%. The business of the partnership was construction of shopping centre named as Atul Shopping Centre near Jayshree Talkies on the land owned and contributed by one of the partners viz., Shri H.J. Patel. 3. 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 anythin....
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....in the status of unregistered firm. 4. On appeal, the learned CIT (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 CIT (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 CIT (Appeals) further held that the partnership firm was not benami concern of Shri H.J. Patel observing as under:- "The A.C. (IT) has not brought any positive evidence to suggest that the appellant's business is benami business of Shri H.J. Patel. The factors taken into consideration by the A.C. (IT) to come to ....
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.... and added to her income. This addition was deleted by the Dy. CIT (Appeals) as per copy of the order placed at pages 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: (i) Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747(1) (Guj.), (ii) CIT v. Imperial Textiles [1993] 201 ITR 555 (Pat.) and (iii) CIT v. B.R. Constructions [1993] 202 ITR 222 (AP) (FB). 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 partner. 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 principal of partnership is that one or more par....
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....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 the 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 circumstance that only one partner can operate the bank accounts or borrow on behalf of the firm are not destructive 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. 8. 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 Atul Shopping Centre. He was a working partner....
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.... I find from the assessment order that the A.C. (IT) had made observations about understatement of cost of construction by using ornamental language with free use of adjectives such has Verification of the details of assessee has been made and many discrepancies, omissions, deviation and inconsistency are noticed.' But the A.C. (IT) 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 A.C. (IT) ought to have known. The A.C. (IT) 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 A.V.O.'s report I find that he has not given break up of cost of construction estimated by him. Similarly, the A.V.O. has described his estimate as estimate of probable cost of construction. The A.V.O. has nowhere made any adverse remarks of non-furnishing of information by the appellant and has also not pointed out any defect in appellant's actual cost of construction for which full details were furnish....
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.... result that A.V.O.'s report is very brief and cryptic. The learned counsel further submitted that since no glaring defects were pointed out in the books of account the cost of construction as per books ought to have been accepted. In support of this contention he relied upon the following authorities: 1. Babyland Hostel v. ITO [1988] 31 TTJ (Ahd.) 136, 2. ITO v. Tandel Automobiles [1990] 35 ITD 191 (Ahd.), 3. Sayar Engg. (P.) Ltd. v. ITO [1992] 43 TTJ (Jp.) 23, 4. ITO v. Sugar Cold Storage & Ice Factory [1993] 113 Taxation 7 (Delhi), 5. Sri Har Sarup Cold Storage & General Mills v. ITO [1988] 27 ITD 1 (Delhi) (TM), 6. Naresh Behal v. ITO [1992] 41 ITD 298 (Delhi), 7. ITO v. Pitamber Industries (P.) Ltd. [1942] 42 ITD 373 (Delhi) and 8. CIT v. Pratapsingh Amrosingh Rajendra Singh and Deepak Kumar [1993] 200 ITR 798(1) (Raj.) 13. We have considered the rival submissions. In our opinion, the CIT (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 A.V.O. estimating the cost of construction at Rs. 10,71,900 as aga....
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....he assessee will be free to advance arguments/ evidence about the cost of construction before the Assessing Officer. 14. In the result, the appeal is allowed in part. Per Shri Abdul Razack, Judicial Member-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 (A.O.) 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 hold quite opposite view than that of my Brother for the reasons which I am discussing below:- 2. My learned Brother has given heavy weightage to the sworn statements of the three p....
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....eedings. 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 person's privacy and liberty and does cause some embarrassment, 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 se....
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.... not indulge or interfere in the day-to-day affair 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 firm's 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. 5. 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 A/C on first appeal by the assessee. On receipt of an a....
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.... third Member in accordance with the provisions of sub-section (4) of section 255 of the Act and we request the Hon'ble President for making suitable reference:- "1. Whether on the facts and in the circumstances of the case, the firm of 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 HJ. Patel on the ground that the other partners were benamidars of the said person, Shri H J. Patel?" OPINION Vimal Gandhi, Vice-President- This case has been referred to me by the Hon'ble President, Income-tax Appellate Tribunal under section 255(4) of the Income-tax Act for resolving the difference which has arisen between the Hon'ble Judicial Member and the Hon'ble Accountant Member while disposing of the appeal. The issue involved relates to grant of registration to the assessee-firm Atul Shopping Centre. 2. The Assessing Officer treated the firm as non-genuine and, accordingly, refused to grant registration to it in the assessment....
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....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. Meenaben 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 30th March, 1990 when she gave proper answers regarding affairs of the firm. The Assessing Officer, however, rejected the latter statements as an afterthought. 5. 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. ....
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....ole in the affairs of the assessee-firm. It was pointed out that other partners have also made financial contribution. The learned AR of the assessee further drew attention of the learned CIT (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 CIT (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 CIT (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 con....
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....rdingly, he held that the Assessing Officer was not justified in refusing registration to the assessee-firm. On the above reasoning, the learned Accountant Member held that Shri H.J. Patel was wrongly treated as proprietor of 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 Atul Shopping Centre be assessed in the hands of the firm as constituted. 10. The learned Judicial Member did not agree with the view expressed by the learned Accountant Member 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 Judicial Member's 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 s....
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....ng it as wholly fallacious in law. The appeal was directed to be allowed. 11. I have heard both the parties in this case and examined the material available on record in the light of the above arguments. For constituting a valid partnership, as per decision of Hon'ble Supreme Court in the case of K.D. Kamath & Co. case , 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." [Emphasis supplied] 11.1 The other conditions for getting registration for a firm under the Income-tax Act are stated by the Hon'ble Supreme Court in the case of Agarwal & Co. v. CIT [1970] 77 ITR 10 as follows:- "The conditions of registration prescribed in this section and the relevant r....
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....ws, I deem it necessary to state one point on which both the Members agreed. Both the learned Members agree 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 Accountant Member, 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 Accountant Member relied upon decision of Hon'ble Madhya Pradesh High Court in the case of United Patel Construction Co. as also on decision of Hon'ble Supreme Court in the case of K.D. Kamath & Co. 11.4 The learned Judicial Member 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 Judicial Member did not agree "that the sleeping partners are not even aw....
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....knows? A. 18 My husband knows about the matters. Q. 21. Do you pay Income-tax or Wealth tax do you know the number? A. 21 Yes, I pay income-tax. I do not know the number. Q. 32. Who is the owner of the building in which you reside? A. 32 This building is of Ruparelben a resident of Africa. Q. 48. You were a partner in the above firm, do you have any income except that? A. 48 First I used to do sewing work now I have discontinued it." 11.7 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 advanced 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 fetc....
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.... Patel has been held to be in control of affairs of the 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. 11.10 In the case of K.D. Kamath & Co. , Shri K.D. Kamath 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 par....
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....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 Accountant Member. 12. Let this case be placed before a regular Bench for an appropriate order disposing of the case. ORDER Per Shri B.M. Kothari, Accountant Member-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 Accountant Member. Thereafter, a dissenting order was passed by the Hon'ble Judicial Member Shri Abdul Razack....