2001 (3) TMI 238 - AT - Income Tax

Summary

Issues Involved:

1. Refusal of registration to the firm under section 185(1)(b) for the assessment year 1984-85.
2. Refusal to grant continuation of registration for the assessment year 1985-86.
3. Validity of the partnership deed regarding the sharing of losses.
4. Genuineness of the partnership, particularly concerning the partner Ravi Sahdev.

Issue-wise Analysis:

1. Refusal of Registration for Assessment Year 1984-85:

The firm M/s. P.M.S. Enterprises applied for registration for the assessment year 1984-85 based on a partnership deed executed on 5-7-1983, effective from 1-4-1983. The Assessing Officer (AO) denied registration, citing that the deed did not specify how losses were to be shared between the partners for the period 1-4-1983 to 10-6-1983. The AO referenced the Supreme Court decision in Mandyala Govindu & Co. v. CIT, which required clear specification of loss-sharing ratios in the partnership deed. The CIT(A) upheld this decision, leading to the assessee's appeal to the ITAT.

2. Refusal to Grant Continuation of Registration for Assessment Year 1985-86:

Since the registration was refused for the assessment year 1984-85, the continuation of registration for the assessment year 1985-86 was also denied. The CIT(A) supported the AO's decision, stating that the firm was not genuinely constituted due to the lack of clarity on loss-sharing and the questionable genuineness of partner Ravi Sahdev.

3. Validity of the Partnership Deed Regarding Sharing of Losses:

The partnership deed mentioned that Ravi Sahdev, who was a minor admitted to the benefits of the partnership, would share profits but not losses. He attained majority on 11-6-1983 and elected to be a partner from 1-4-1983. The AO found the partnership deed silent on loss-sharing for the period 1-4-1983 to 10-6-1983, leading to the conclusion that the firm was not genuinely constituted. The CIT(A) agreed, distinguishing the case from other High Court rulings where loss-sharing was explicitly stated.

4. Genuineness of the Partnership, Particularly Concerning Ravi Sahdev:

The AO questioned the genuineness of Ravi Sahdev as a partner, noting his lack of awareness about the firm's affairs and significant details. This, combined with the legal issue of unspecified loss-sharing, led to the refusal of registration. The CIT(A) upheld this view, emphasizing the importance of a partner's active involvement and knowledge about the firm's operations.

Separate Judgments:

Accountant Member's View:

The Accountant Member agreed with the AO and CIT(A), stating that the partnership deed's silence on loss-sharing rendered the firm not genuinely constituted. He referenced the Supreme Court decision in Mandyala Govindu & Co., which required clear specification of loss-sharing ratios. The member also noted Ravi Sahdev's lack of awareness about the firm's affairs, supporting the refusal of registration.

Judicial Member's View:

The Judicial Member disagreed, emphasizing that Ravi Sahdev had attained majority before the deed's execution and agreed to share losses retrospectively. He cited several High Court decisions, including Jagadhri Electric Supply & Industrial Co. v. CIT, which allowed minors on attaining majority to share losses retrospectively. He also noted that the firm was assessed on a positive income, making the loss-sharing issue academic. He argued that the firm's genuineness should not be questioned based on Ravi Sahdev's lack of trivial details and non-production of a retired partner.

Third Member's Decision:

The Third Member sided with the Judicial Member, noting that the partnership deed was executed after Ravi Sahdev attained majority and agreed to share losses for the entire year. He emphasized that the accounts were to be closed at the financial year's end, making the loss-sharing issue for the minority period irrelevant. He concluded that the firm was genuinely constituted and entitled to registration and continuation of registration for the respective assessment years.

Conclusion:

The Third Member's decision upheld the Judicial Member's view, granting the firm registration for the assessment year 1984-85 and continuation of registration for the assessment year 1985-86. The decision emphasized the validity of the partnership deed and the genuineness of the partnership, despite the initial objections raised by the AO and CIT(A).