1986 (1) TMI 2 - SC - Income Tax

Appeal raises the question of granting registration to the appellant firm (the assessee) under section 26A - some of the partners are benamidars - firm is held to be not a genuine one, hence registration cannot be granted

Summary

Issues Involved:
1. Validity of the partnership under section 26A of the Indian Income-tax Act, 1922.
2. Entitlement of the appellant firm to registration under section 26A.
3. Genuineness of the partnership and the impact of benami partners on registration.

Detailed Analysis:

1. Validity of the Partnership:
The appellant firm sought registration under section 26A of the Indian Income-tax Act, 1922, for the assessment year 1961-62. The partnership was initially between two partners, Pal Singh and Sadhu Singh, each holding a 50% share. Due to physical incapacitations, they entered into a new partnership deed on April 1, 1960, including four new partners: Surjit Singh, Gulzar Singh, Hari Singh, and Harbans Singh. The new deed allocated 25% shares each to Pal Singh and Sadhu Singh, and 12.5% each to the four new partners. However, the Income-tax Officer rejected the registration application, citing a lack of mutual agency and the new partners being dummies.

2. Entitlement to Registration:
The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal all refused registration, stating that the new partners were not genuine and were merely benamidars of the original partners. The High Court reframed the first question to focus on the genuineness of the partnership rather than its legal validity. It held that no genuine partnership had come into existence and upheld the refusal of registration.

3. Genuineness of the Partnership:
The High Court found that the new partners were not real partners but dummies, as evidenced by the clauses in the partnership deed and the statements of the new partners. Clauses 3, 5, 7, and 8 of the deed indicated that the new partners had no control over the business and could not alienate their shares. The new partners' statements revealed their ignorance about the partnership's workings, further suggesting they were not genuine partners. The High Court also noted that profits were not distributed among the partners, and the loose sheets indicating profit distribution were unauthentic.

Conclusion:
The Supreme Court upheld the High Court's decision, emphasizing that both legal validity and factual genuineness are required for registration under section 26A. The Court found sufficient material to support the adverse finding on the genuineness of the partnership and dismissed the appeal with costs. The case of CIT v. A. Abdul Rahim & Co. was distinguished, as it involved a genuine partnership despite one partner being a benamidar, unlike the present case where the firm was found to be not genuine.

Judgment:
The appeal was dismissed, and the refusal of registration was upheld.