1988 (4) TMI 88 - AT - Income Tax

Summary

Issues Involved:
1. Refusal of registration to the firm under section 185(1)(b) of the Income Tax Act.
2. Determination of the genuineness of the firm.
3. Allegation of the firm being a benami of another firm, M/s Vijeta Industries.
4. Clubbing of income of the assessee firm with M/s Vijeta Industries.
5. Examination of the partners' involvement and knowledge about the business.

Issue-wise Detailed Analysis:

1. Refusal of Registration to the Firm:
The appeals challenge the orders of the AAC confirming the ITO's refusal to register the firm under section 185(1)(b) of the Income Tax Act. The appellant firm came into existence on 14th Nov., 1974, via a partnership deed executed on 19th Nov., 1974. The ITO, after detailed enquiries and recording the statements of the three partners, disallowed the registration, opining that the firm was a benami of M/s Vijeta Industries.

2. Determination of the Genuineness of the Firm:
The AAC confirmed the ITO's action, stating that the business premises and factory building of both firms were situated in the same building, and the administration was managed by someone other than the partners. The statements of the lady partners showed ignorance regarding the business, and the male partner also lacked knowledge about the business operations. The AAC cited various judgments to support the decision, emphasizing that mere execution of a partnership deed does not entitle a firm to registration; the firm must be genuine and actively engaged in business.

3. Allegation of the Firm Being a Benami of M/s Vijeta Industries:
The ITO concluded that the assessee firm was a benami of M/s Vijeta Industries based on the relationship between the partners of both firms, the shared business premises, and the common accountant. The AAC upheld this view, noting that the agreement for the use of premises and machinery was signed by a partner of the old firm and kept with M/s Vijeta Engg. Works. The AAC also pointed out discrepancies in the statements regarding the capital contribution of one of the lady partners.

4. Clubbing of Income of the Assessee Firm with M/s Vijeta Industries:
The ITO assessed the income of the assessee firm on a protective basis and sent necessary intimation to the ITO assessing M/s Vijeta Industries, resulting in the entire income being taxed in the hands of M/s Vijeta Industries. The AAC supported this action, referencing the Supreme Court's decision in Ladhuram Taparia vs. CIT, which allows treating the aggregate income of firms as income of one group if they are found to belong to the same group of persons.

5. Examination of the Partners' Involvement and Knowledge about the Business:
The ITO and AAC found that the lady partners were unaware of the business affairs, and the male partner lacked detailed knowledge about the business. The AAC highlighted that the partners did not know about the profits or the turnover, and the managing partner did not remember details about the machinery or the scrap produced. The AAC concluded that the partners were merely benamidars of the old firm's partners.

Conclusion:
The Tribunal found no legal bar on closely related persons engaging in independent business activities. It noted that the new firm was also engaged in manufacturing "liner pistons" and had separate business transactions. The Tribunal observed that the AAC had erred in concluding that both firms operated from the same premises due to confusion in the names. It also found that the common accountant was a common practice in small businesses and did not indicate non-genuineness. The Tribunal emphasized that the depositions should be read as a whole and not lead to adverse conclusions based on minor discrepancies. It concluded that the ITO had not discharged the burden of proof to establish the firm as a benami of the old firm. The Tribunal held that the appellant firm was genuine and entitled to registration, and directed the ITO to modify the orders accordingly. The appeal for the assessment year 1977-78 was allowed, and the appeal for the assessment year 1978-79 was partly allowed.