1977 (10) TMI 47 - AT - Income Tax

Summary

Issues Involved:
1. Genuine partnership
2. Contribution of capital and skill by partners
3. Benami allegations
4. Admission of minor to the benefits of partnership
5. Disproportionate profit sharing
6. Reduction of tax incidence

Detailed Analysis:

1. Genuine Partnership:
The primary issue was whether the partnership formed by the deed dated 22nd October 1971 was genuine. The Supreme Court in Dulichand Laxminarayan vs. CIT outlined that a genuine partnership must have three elements: an agreement between two or more persons, an agreement to share profits, and the business must be carried on by all or any of those persons acting for all. The Tribunal found that all these conditions were met. The agreement was to share profits and losses, and the business was carried on by active partners on behalf of all. The Tribunal concluded that the mere absence of capital contribution by some partners did not invalidate the genuineness of the partnership.

2. Contribution of Capital and Skill by Partners:
The ITO and AAC questioned the genuineness of the partnership due to the lack of capital or skill contribution by some partners. The Tribunal referred to the Supreme Court judgments in Himalaya Engineering Co. vs. CIT and CIT vs. Central India Agencies, which supported the view that a partnership could still be genuine even if some partners did not contribute capital. The Tribunal emphasized that the law permits sleeping partners and that the disproportionate capital contribution does not render the firm non-genuine.

3. Benami Allegations:
The ITO and AAC alleged that some partners were benamidars (nominees) of the working partners, Sewa Ram and Hans Raj. The Tribunal noted that the onus to prove benami lies with the Department, as supported by several judgments, including Madura Knitting Co. vs. CIT and CIT vs. Daulat Ram Rawatmull. The Tribunal found no material evidence to support the claim that certain partners were benamidars. The relationship between partners alone was insufficient to prove benami, and there was no surrounding circumstance to substantiate the allegations.

4. Admission of Minor to the Benefits of Partnership:
A legal issue was raised regarding the admission of the minor Rajeev Kumar to the benefits of the partnership without the guardian's signature on the partnership deed. The Tribunal allowed the Department to raise this issue and referred to the Allahabad High Court judgment in Addl. CIT vs. Uttam Kumar Promod Kumar. However, the Tribunal also considered the CBDT circular, which directed that assessees should be given an opportunity to amend the partnership deed. The Tribunal directed the ITO to allow the assessee to obtain the necessary attestation and then grant registration.

5. Disproportionate Profit Sharing:
The ITO noted that the shares allotted to different partners were disproportionate to their capital contributions. The Tribunal held that the capital contribution and profit-sharing ratios are matters for the partners to decide and that disproportionate shares do not affect the genuineness of the partnership.

6. Reduction of Tax Incidence:
The ITO argued that the partnership was formed to reduce the tax incidence on the working partners. The Tribunal referred to the judgment in Central Talkies Circuit, which established that if a partnership genuinely exists as specified in the deed, the motive to reduce tax incidence is irrelevant and does not justify refusal of registration.

Conclusion:
The Tribunal concluded that the firm was a genuine partnership and entitled to registration. The ITO was directed to allow the assessee an opportunity to amend the partnership deed in compliance with the CBDT circular before granting registration.