1979 (7) TMI 5 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to registration of the assessee-firm for the assessment year 1972-73.
2. Determination of whether the transaction was collusive for the assessment year 1973-74.
3. Genuineness of the new firm constituted by the wives of the eight partners for the assessment year 1973-74.
4. Allowability of interest paid to the Financing Corporation for the assessment years 1972-73 and 1973-74.

Issue-Wise Detailed Analysis:

1. Entitlement to Registration for 1972-73:
The primary issue was whether the assessee-firm was entitled to the grant of registration for the assessment year 1972-73. The Tribunal concluded that the assessee-firm was a genuine entity that had carried on business and complied with all formalities required under the Income-tax Act, 1961. However, the High Court scrutinized the evidence and found that the firm did not actually come into existence for doing business. The transactions were merely book entries without actual cash passing. Consequently, the High Court held that the firm was not a genuine entity and thus not entitled to registration.

2. Determination of Collusive Transaction for 1973-74:
For the assessment year 1973-74, the issue was whether the transaction was collusive. The High Court examined the nature of the transactions, noting that the sums involved were merely book adjustments without actual cash passing. The artificiality of the transactions was evident, and the High Court concluded that the transactions were collusive, aimed at reducing the tax liability of the firm, M/s. S.S.A.M. Shanmugha Nadar.

3. Genuineness of the New Firm for 1973-74:
The High Court also examined whether the new firm constituted by the wives of the eight partners and another partner was genuine. The Tribunal had found the firm to be genuine based on the execution of a partnership deed and division of profits according to the deed. However, the High Court found that the firm did not carry on any real business activities, and the transactions were merely entries in the books. The absence of a manager, which was required under the partnership deed, further indicated that the firm did not conduct any actual business. Therefore, the High Court concluded that the new firm was not genuine.

4. Allowability of Interest Paid to the Financing Corporation:
The issue of whether the interest paid to the Financing Corporation was allowable as a deduction depended on the genuineness of the firm. Since the High Court concluded that the Financing Corporation was not a genuine entity, the interest payment could not be allowed as a deduction. The amounts were shown to have been paid only through book entries without actual cash transactions. Therefore, the High Court held that the interest payment was not allowable, and the Income-tax Officer (ITO) was correct in disallowing the deduction.

Conclusion:
The High Court answered the questions referred in T.C. No. 249 of 1975 and T.C. No. 485 of 1978 in the affirmative, in favor of the Revenue, indicating that the firm was not genuine and the transactions were collusive. Consequently, the questions in T.C. Nos. 809 of 1977 and 484 of 1978 were answered in the negative, also in favor of the Revenue, confirming that the interest payments were not allowable as deductions. The High Court emphasized that the genuineness of a firm cannot be established merely by executing a partnership deed and making book entries without actual business activities.