1980 (12) TMI 86 - AT - Income Tax

Summary

Issues Involved:
1. Genuine constitution of the firm.
2. Registration under the IT Act, 1961.
3. Validity of partners, including Smt. Shanti Devi and Smt. Sumitra Devi.
4. Inclusion of charity as a partner.

Issue-wise Detailed Analysis:

1. Genuine Constitution of the Firm:
The firm was initially constituted under an instrument dated 5th May 1958 with three partners. After the death of one partner, the firm was reconstituted multiple times, with the latest reorganization occurring on 1st January 1976. The partnership deed included six partners and specified profit-sharing ratios, with one paise out of every rupee allocated to charity. The AAC held that the firm was genuinely constituted and deserved registration under the IT Act, 1961.

2. Registration under the IT Act, 1961:
The ITO refused registration under section 185(1)(bb) of the Act, citing that charity was made a partner and some partners were dummies. The AAC, however, directed the ITO to grant registration, stating that the firm was genuinely constituted, and charity was not a partner. The Tribunal upheld the AAC's decision, emphasizing that the firm met all formalities for registration and charity was not considered a partner.

3. Validity of Partners:
The ITO questioned the validity of Smt. Shanti Devi and Smt. Sumitra Devi as genuine partners, labeling them as dummies. The AAC, after examining affidavits and statements, concluded that Shanti Devi was a working partner. The Tribunal agreed, noting that the historical background and detailed statements supported their genuine partnership status. The Tribunal found no evidence to disqualify Smt. Sumitra Devi as a genuine partner.

4. Inclusion of Charity as a Partner:
The ITO argued that charity was made a partner due to the allocation of one paise out of a rupee to charity. The AAC disagreed, interpreting the deed as merely allocating a portion of profits for charitable purposes, not making charity a partner. The Tribunal supported this view, referencing the judgment in Bhagwanchand S. Jain & Co. vs. Addl. CIT, which held that allocation of profits to charity does not make it a partner. The Tribunal concluded that the firm was genuine and charity was not a partner, thus registration could not be refused on this ground.

Conclusion:
The Tribunal upheld the AAC's order directing the ITO to grant registration to the assessee firm, dismissing the appeal by the Revenue. The firm was found to be genuinely constituted, with valid partners, and charity was not considered a partner.