TaxTMI 
TaxTMI 
1987 (3) TMI 136
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....e partners of the respondent firm were partners in their representative capacities as managers of their respective Association of Persons (AOP) which among others, consisted of certain minor members as well. The ITO further noted that in all such AOPs, 95 per cent share of the members was determinate while the rest 5 per cent was indeterminate going to a ' Reserve Fund ', as it was named. The ITO was of the view that these representative partners were not independent in their working in the firm and had to seek instructions and guidance from their respective AOPs from time to time. Doubting the genuineness of the constitution of the Respondent firm, the ITO called upon it to explain the above matters. 3. Relying mainly on the ratio of Supreme Court decision in the cases of CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660 and Agarwal & Co. v. CIT [1970] 77 ITR 10, the Respondent firm asserted that its representative partners may successfully hold dual capacities without affecting their rights and liabilities in the firm. It was claimed that by their becoming partners in the firm as representatives of their respective AOPs, all the members of such AOPs, including minors, do not become ....
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....titution as specified in the instrument of partnership, authorised and sanctioned by the express provisions of section 185(1) of the Act, that the ITO had found it as a matter of fact that the members forming the constituent AOPs, were in fact the members of one family and that the AOPs were created with the sole object of reducing income-tax liability. The ITO had further categorically found that the respondent firm had in fact not done any business as such save that of undertaking the construction ---contract from one entity and passing the same to another. Thus, having scrutinised the matter from legal as well as factual aspects, the ITO refused registration to the respondent firm u/s 185(1)(b) of the Act. The aggrieved respondent approached the learned AAC in appeal. 7. Before the learned AAC the case appears to have been argued more on legal points than on factual position. After examining a number of English & Indian cases, relevant to the legal points involved, the learned AAC recorded the following principles of law in para 20 of his order : " 20. The above discussion shows that : (a) The AOPs are artificial juristical persons and are legal entity and comes under d....
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....nt should be to share profits and losses of business or profession ; (iii) the business must actually be carried on--- As per Supreme Court in cases of Phulchand Ratanlal v. CIT [1976] 103 ITR 174 and Agarwal & Co. v. CIT [1970] 77 ITR 10. (i) The ITO has duty to scrutinise and satisfy himself that a firm is genuinely constituted. But it is not proper on his part to display undue skepticism--- As per Supreme Court in case of A.M. Abdul Rahaman Rowther & Co. v. CIT [1965] 56 ITR 556. (j) The registration should not be refused on bare suspicion. If the partnership exists in accordance with the deed then it cannot be held as not genuine even though there may be minor deviations from the deed. The registration should not be refused on surmises and conjectures--- As per Supreme Court in case of Umacharan Shaw & Bros. v. CIT [1959] 37 ITR 271. (k) In considering the applications for registration the ITO should not consent to determine in whom the beneficial interest in the share in the partnership vests--- As per Supreme Court in case of CIT v. Sir Hukamchand Mannalal & Co. [1970] 78 ITR 18. (l) It is open for partner to give apportion of his share to another b....
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....closely held concerns carrying on business in the same line under different names and in the facts and circumstances attending on the creation of a large number of AOPs and partnership firms on the same day and on the same manner it was not much difficult to read colourable devices to defraud the Revenue. Therefore, in understanding the true impact and the legal nature of the documents evidencing the creation and/or constitution of the member AOPs and the resultant agreement of partnership, it would not be enough, urged Mr. Shukla, to take each and every act of the Respondent in that direction in isolation and judge the validity thereof at the altar of the principles of law enunciated by the learned AAC in Para 20 of the order. But the question of genuineness of the respondent firm and its constitution as specified in the instrument of partnership shall have to be examined as a whole along with all the relevant facts and circumstances attending on the creation and constitution of the present firm and the like firms of the same group with a view to seeing what was the object and true intent of the parties concerned in entering upon such transactions. Judged in that way, argued Mr. S....
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....t the decision of the appeals rests on the factual position. For the soundness of the principles of law, as summarised by the learned AAC in para 20 of his order, are not in dispute. What could be and in fact is in dispute is their applicability to the facts and circumstances of the present case. If on appreciation of the evidence on record it is found that the Respondent firm was one of the concerns of a larger group of concerns, brought into existence to serve as a tool to avoid tax no number of isolated pieces of legal principles would be helpful as no court can accord its approval to an attempt to defeat the law. Thus, in the context of the question before us it became all the more necessary to acquaint ourselves with the relevant facts. We must record our thanks to Mr. Shukla for Revenue and to Mr. Shah for the assessee who were kind enough to place the relevant facts before us through their respective voluminous paper books, containing some charts and annexures also. 15. A study of the material placed before us discloses that five different families of Ahmedabad (as described in Annexure A1 to Annexure A5) comprising of more than 60 members, thought of a scheme, sometimes ....
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....members of all these five families. These AOPs would send one or two of their members to one or more partnership firms as representative-members of the concerned AOPs. The partnership farms so constituted by the representative-members of those families would work in a definite line of succession. At the first level there were to be the organising concerns whose work would be to purchase land, to formulate the housing scheme and to mobilise the finances. At the second level there were to be certain concerns to work as First Contractors. The work of these First Contractors was to get contracts for construction work from the organising concerns only to pass on such contracts to yet another line of concerns who were to work as Second Contractors at lesser rates. In their turn the concerns forming second line of contractors were still to pass on the construction contracts to yet another line of concerns which may be called as Third Contractors at another lesser rates. This third line of contractors was to get the work done. It was in this way that the first and second lines of contractors were to do no work save passing over the construction contracts to the third line of contractors. ....
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....ed business." 18. In order to carry out their above objects all the AOPs, on the same 3rd day of June, 1980, passed certain resolutions. By one of such resolutions each of the AOPs resolved to become partner in one or the other partnership firm, named in the resolution as well as in the agreement deed forming the AOP, by contributing certain specified sum, say Rs. 1,000 less or more by way of preliminary investment. Annexure ' C ' shows the names of the members of these AOPs in the partnership firms to be constituted. 19. As a third and final step towards the fulfillment of their objectives, the group of the said five families constituted as many as 34 or more partnership firms again on the same 3rd day of June, 1980. A list of the firms so constituted is available in Annexure. D. The common salient features of the partnership deeds were that the firms were constituted only by the representative-members of the AOPs mentioned in Annexure-C, their declared nature of business was to carry on business as building contractors/material suppliers, society organisers, estate brokers and general merchants and commission agents, they were to be at will, none of their partner was to hav....
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....uthorised by resolution to join could not have been mentioned in the resolution until and unless the partnership firm to be joined by such representative member had already come into existence. But the resolution contained the name of ' then non-existent ' firm. All this shows that it was a drama of one day, one time and possibly one place being played by the members of the families in a most systematic and planned way with the oblique motive of avoiding taxes. A large number of AOPs and partnership firms were formed only to serve as a tool of a colourable scheme drawn out to play fraud on law, and to defraud the revenue by evading the payment of due taxes. This conclusion is amply fortified by the subsequent working of these partnership firms so constituted by this group of five families. 22. It has been pointed out above that the partnership firms were to work in a definite line of succession and in a most systematic and planned way. In order to understand and appreciate the modus operandi of this group of concerns, of which the Respondent Firm is one of the units, making simply a part of the whole, it would be worthwhile to refer to Annexures E to L, as submitted on behalf of....
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....l these concerns may conveniently be called as ' Second Contractors '. 24. The concerns forming the list of Second Contractors also did not do the job and transferred the work, again at lesser rates, to yet another line of concerns. These concerns were (1) M/s. Deep Builders, (2) M/s. Vishal Builders, (3) M/s. Anil Builders, (4) M/s. Pavak Builders, (5) M/s. Pragati Builders, (6) M/s. Vishwakarma Builders, (7) M/s. Hemal Builders, (8) M/s. Alpa Corporation, (9) M/s. Gayatri Corporation, (10) M/s. P.G. Constructions Co., (11) M/s. Sahajanand Constructions, and (12) M/s. L.R. Constructions. These concerns finally got the construction work done. 25. Annexures E, F & G show as to at what rates the various contracts of constructing various types of tenements were had by the three types of contractors. The difference in the contract moneys indicates the profit earned by 1st & 2nd lines of Contractors without doing any business same to transfer the contracts received from the organising concerns to other concerns of the same group. The difference between the contract moneys of the First Contractors and the Third Contractors comes to Rs. 33,10,340 in the construction of tenements und....
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....ing of a series of well-planned and pre-arranged steps. The Respondent-firm, as also others, was an integral part and a tool of this colourable scheme. It was all a device in the direction of avoiding tax. That being the true nature of the series of transactions, carried out by the members of the five families, dissection of their scheme and then considering the validity and genuineness of each individual transaction with the help of the isolated principles, pointed out by the learned AAC in para 20 of his order is not at all possible and even desirable. We hold that the Respondent firm was not genuinely and validly constituted and therefore no genuine firm with the constitution specified in the partnership deed dated 3-6-1980 existed in the years under consideration. 28. In his approach to the question involved in this case, the learned AAC seems to have been influenced by the doctrine propounded by Lord Tomlin in IRC v. Duke of Westminster [1936] AC 1 " that every man is entitled if he can to order his affairs so as that the tax attracting under the appropriate Acts is less than it otherwise would be " and followed in India in CIT v. A. Raman & Co. [1968] 67 ITR 11 (SC), CIT v....
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.... backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it." 29. Need we add that in presence of the above position of law today, the doctrine propounded in Westminster's case does not fit in the context of our socio-economic philosophy. That is why the Gujarat High Court stresses in CIT v. Smt. Minal Rameshchandra [1987] 30 Taxman 282 that in the context of developing economy of fast changing socio-economic conditions of people even the words occurring in a State are required to be interpreted differently. And the Kerala High Court....