1991 (11) TMI 96 - AT - Income Tax

Summary

Issues:
1. Registration of a firm with sleeping partners.
2. Denial of registration under section 185(1)(b) of the Income-tax Act, 1961.

Analysis:
The judgment revolves around the registration of a firm with sleeping partners and the subsequent denial of registration under section 185(1)(b) of the Income-tax Act, 1961. The Revenue contended that two lady partners, who were sleeping partners, did not contribute capital to the firm, leading to the denial of registration. The ld. ITO refused registration based on the grounds that the lady partners did not invest capital and were not actively involved in business activities. However, the ld. DC (A) allowed registration, emphasizing that capital contribution was not mandatory for firm constitution, and as long as profit sharing and business operations were in place, registration should be granted. Various judicial precedents were cited to support this argument, including Ratanchand Darbarilal v. CIT and Himalaya Engg. Co.'s case.

The ld. counsel for the assessee argued that the conditions set by the ld. ITO for denying registration were not in line with the requirements under the Indian Partnership Act. The ld. ITO's decision was challenged on the basis that the firm's genuineness was not questioned, and the lady partners' lack of capital contribution should not be a barrier to registration. The ld. DC (A) found merit in these arguments and allowed registration, citing judicial precedents like Chitra Cinema v. CIT and United Patel Construction Co.'s case.

Upon careful consideration, the Tribunal found the ld. ITO's reasons for denying registration to be untenable. The Tribunal highlighted that non-contribution of capital by partners should not be a ground for refusing registration, as established in the case of Himalaya Engg. Co. Similarly, the argument that lady partners were not actively involved in business operations was dismissed, drawing on precedents like Chitra Cinema and United Patel Construction Co. The Tribunal concluded that the conditions for registration were met, as outlined in Ratanchand Darbarilal's case, and upheld the ld. DC (A)'s decision to allow registration.

In conclusion, the Tribunal dismissed the appeal by the Revenue, emphasizing that the reasons provided by the ld. ITO for denying registration were unfounded. The Tribunal upheld the registration of the firm, highlighting that the conditions necessary for registration were satisfied. Additionally, a cross objection raised by the assessee was rejected as it was not relevant to the year under consideration. The Tribunal also noted a procedural error by the appellant-revenue in filing the first appellate order, which should have pertained to the action under section 185(1)(b) of the Act.