1981 (7) TMI 106 - AT - Income Tax

Issues Involved:
1. Whether Smt. Koshalya Bai could be held 'Benamidar' of another partner, Shri Gopi Lal.
2. Whether Smt. Koshalya Bai was a partner in the firm in her independent capacity.
3. Whether the ITO was justified in refusing registration to the firm.
4. Whether the AAC was correct in directing the ITO to grant registration to the firm for the assessment year 1976-77.
5. Whether the AAC was correct in allowing the continuation of registration to the assessee firm for the assessment year 1977-78.

Detailed Analysis:

1. Whether Smt. Koshalya Bai could be held 'Benamidar' of another partner, Shri Gopi Lal:
The ITO refused registration to the firm for the assessment year 1976-77 based on the following findings:
- Smt. Koshalya Bai did not contribute any capital initially and the Rs. 10,000 she later deposited was a gift from Shri Gopi Lal, suggesting she did not contribute her own capital or skill.
- She was made a partner by reducing the share of another partner, Shri Vikya Mal.
- She made contradictory statements about the source of the Rs. 10,000 gift, indicating a lack of genuine ownership of the capital.
- She lacked business knowledge and skills, suggesting she was essentially a housewife and not an active partner.

The AAC, however, held that the department did not discharge the onus of proving that Smt. Koshalya Bai was a Benamidar of Shri Gopi Lal. The AAC emphasized that the reduction in profit share affected only Shri Vikya Mal, not Shri Gopi Lal, and that there was no fixed capital contribution required in the partnership deed. The AAC also noted that Smt. Koshalya Bai's capital account showed withdrawals for personal expenses, indicating she enjoyed the profits independently.

2. Whether Smt. Koshalya Bai was a partner in the firm in her independent capacity:
The AAC concluded that Smt. Koshalya Bai was a partner in her own right, based on her statements and the absence of any material evidence suggesting she was a Benamidar. The AAC relied heavily on her statement that the gift was given out of natural love and affection and that she used the profits for household expenses, not for Shri Gopi Lal.

3. Whether the ITO was justified in refusing registration to the firm:
The ITO's refusal was based on the belief that Smt. Koshalya Bai was a Benamidar of Shri Gopi Lal, as she did not contribute any initial capital or skill and received the Rs. 10,000 as a gift from Shri Gopi Lal. The ITO argued that the partnership was not genuine as she lacked business acumen and the financial capability to bear losses.

4. Whether the AAC was correct in directing the ITO to grant registration to the firm for the assessment year 1976-77:
The AAC directed the ITO to grant registration, asserting that the department failed to prove that Smt. Koshalya Bai was a Benamidar. The AAC's decision was based on the view that the partnership was genuine, with all necessary ingredients of a valid partnership present, including the sharing of losses.

5. Whether the AAC was correct in allowing the continuation of registration to the assessee firm for the assessment year 1977-78:
The AAC allowed the continuation of registration for the assessment year 1977-78, as the initial refusal for 1976-77 was overturned. The AAC held that since the firm was genuine and Smt. Koshalya Bai was an independent partner, the firm was entitled to the benefits of continued registration.

Separate Judgments:
- Majority Opinion: The majority held that Smt. Koshalya Bai was a Benamidar of Shri Gopi Lal, and hence, the firm was not entitled to registration under section 185 of the IT Act. They concluded that the partnership was a sham arrangement to divert profits.
- Dissenting Opinion: One member disagreed, asserting that Smt. Koshalya Bai was a genuine partner in her own right, having received the gift legitimately and using the profits independently. This member believed the ITO was not justified in refusing registration, and the AAC's decision to grant registration was correct.

Conclusion:
The appeals were allowed in favor of the revenue, reversing the AAC's order and restoring the ITO's decision. The matter was referred to a third member of the Tribunal due to the difference in opinion among the members on whether Smt. Koshalya Bai was a Benamidar and whether the firm was entitled to registration.

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