1987 (3) TMI 136 - AT - Income Tax

Summary

Issues Involved:
1. Entitlement to registration u/s 184/185 of the Income-tax Act, 1961.
2. Genuineness of the respondent firm and its constitution.
3. Applicability of legal principles to the facts and circumstances of the case.

Summary:

1. Entitlement to Registration u/s 184/185:
The common question was whether the respondent firm was entitled to registration u/s 184/185 of the Income-tax Act, 1961. The Income-tax Officer (ITO) denied the registration, while the Appellate Assistant Commissioner (AAC) granted it. The controversy was brought before the Tribunal.

2. Genuineness of the Respondent Firm and Its Constitution:
- ITO's Findings: The ITO scrutinized the partnership deed and noted that all partners were in representative capacities as managers of their respective Association of Persons (AOP), which included minors. The ITO found the AOPs had 95% determinate and 5% indeterminate shares. He doubted the genuineness of the firm, suspecting it was created to reduce tax liabilities without doing actual business.
- AAC's Findings: The AAC examined various legal principles and concluded that AOPs are legal entities capable of forming partnerships. He dismissed the ITO's findings as based on undue suspicion and conjectures, asserting that the respondent firm was genuine and legally constituted.
- Tribunal's Findings: The Tribunal found that the respondent firm was part of a larger scheme involving multiple AOPs and partnership firms created on the same day to minimize tax liabilities. The Tribunal concluded that the formation of these entities was a colorable device to evade taxes, and thus, the respondent firm was not genuinely constituted.

3. Applicability of Legal Principles:
- AAC's Legal Principles: The AAC cited various legal principles to support the genuineness of the respondent firm, including the capacity of AOPs to form partnerships, the inclusion of minors in AOPs, and the validity of representative partnerships.
- Tribunal's Analysis: The Tribunal acknowledged the soundness of the legal principles but emphasized their inapplicability to the facts of the case. The Tribunal stressed that the entire scheme was a device to avoid tax, and isolated legal principles could not validate such a scheme. The Tribunal cited the Supreme Court's decision in McDowell & Co. Ltd. v. CTO, emphasizing the need to depart from the principle that tax avoidance is acceptable.

Conclusion:
The Tribunal set aside the AAC's order and restored the ITO's decision, holding that the respondent firm was not genuinely constituted and was part of a scheme designed to evade taxes. The appeals were allowed.