1987 (10) TMI 74 - AT - Income Tax

Issues Involved:

1. Whether the business of the new firm could be considered as part and parcel of the business of the old firm.
2. Whether the income shown by the new firm could be considered as the income diverted by the old firm.
3. Whether the finding of the Commissioner (Appeals) on the basis of provisions contained in sec. 40A(2) that only 10 percent of the income of the new firm is required to be added to the income of the old firm helps the assessee's case.
4. Whether the new firm is required to be treated as genuine for the purpose of grant of registration.
5. If the registration is granted to the new firm, whether the income of the new firm can be added to the income of the old firm.

Issue-wise Detailed Analysis:

1. Business of the New Firm as Part of the Old Firm:
The Tribunal noted that there is no dispute regarding the formation of the new partnership firm being valid in law. The conditions required for the purpose of grant of registration were fulfilled. The partners of both firms are different, and the business of the new firm is not the same as that of the old firm. Both the partnership firms are distinct entities, as clarified by the intention of the partners and the constitution by which both firms are represented. Therefore, it cannot be said that the new firm is merely an extension of the old partnership.

2. Income Shown by the New Firm as Diverted by the Old Firm:
The Tribunal examined the factual aspects and noted the position regarding the carting activities before the formation of the new firm. The old firm was looking after the transportation of goods consigned by Tata Chemicals and was entitled to reimbursement of such expenses. The old firm had incurred carting and other expenses and had a surplus that was offered for taxation. However, when the new firm came into existence, the carting charges of the old firm increased significantly, and the new firm did not have the requisite paraphernalia to undertake the carting job fully. The Tribunal inferred that the income shown by the new firm, which was only from receipts from the old firm on account of carting charges, was actually income that belonged to the old firm and was diverted to the new firm.

3. Finding of the Commissioner (Appeals) on Sec. 40A(2):
The Tribunal opined that the finding of the Commissioner (Appeals) on the basis of sec. 40A(2) would not help the assessee. The Income-tax Officer had originally proposed the addition of the whole income of the new firm to the hands of the old firm independently of sec. 40A(2). The IAC had referenced sec. 40A(2) as an additional basis for clubbing the income. Therefore, if the original basis proposed by the Income-tax Officer is sustained, the additional basis becomes redundant.

4. Registration of the New Firm:
The Tribunal held that the new firm is a separate partnership and all legal attributes required for holding the partnership as valid are also existing. The new firm is registered with various authorities, and the profits were apportioned among the partners in specified shares. There was no finding that the profits were not enjoyed by the partners themselves. The Tribunal found no reason to deny the benefit of registration to the firm on factual aspects not acceptable to the Income-tax Officer. The decision of the Commissioner (Appeals) to grant registration was upheld because the partners of the new firm were separately assessed by the Income-tax Officer before the order passed for denying the registration to the firm.

5. Addition of Income Despite Registration:
The Tribunal accepted the revenue's stand that granting of registration cannot come in the way of deciding the issue regarding in whose hands the income is required to be taxed. Granting of registration to the new firm is separate and distinct from the issue regarding income required to be added to the old firm. The income is being added to the hands of the old firm on the basis of diversion of income. The Tribunal clarified that the business intended to be undertaken by the new firm is a new business altogether.

Conclusion:
The Tribunal upheld the decision of the Commissioner (Appeals) regarding the grant of registration to the new firm but set aside the decision on the issue of the addition of income of the new firm to the hands of the old firm. The whole income of the new firm is required to be added and taxed in the hands of the old firm. The Income-tax Officer is directed to pass appropriate orders in the case of the firm as well as the partners.

Result:
The appeal ITA No. 2267 is allowed, while the appeal ITA No. 2268 is dismissed.

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