1988 (8) TMI 129 - AT - Income Tax

Summary

Issues Involved:
1. Assessee's claim for registration under Section 185 of the IT Act.
2. Legality of partnership formation.
3. Non-production of partners and 'Karindas' for examination.
4. Admission of affidavit by the AAC.

Issue-wise Detailed Analysis:

1. Assessee's Claim for Registration under Section 185 of the IT Act:
The primary issue in these appeals was the assessee's claim for registration under Section 185 of the IT Act. The Income Tax Officer (ITO) observed that the partners of the assessee-firm had secured various liquor licenses from the Himachal Pradesh Excise authorities for both wholesale and retail sale of country liquor and English wine shops. The ITO referred to the decision in CIT vs. Hardit Singh Pal Chand & Co., which held that the assessee was not entitled to registration as it was not a legally constituted firm. The ITO's opinion was that certain partners were strangers to specific liquor vends, making the partnership illegal. However, the assessee contended that all partners were licensees and had joined hands for smooth operation of vends, with no outsiders taken as partners. The ITO rejected this contention and refused registration, stating that the partnership was not genuine.

2. Legality of Partnership Formation:
The AAC, in a detailed order, addressed the legality of the partnership formation. According to the AAC, the prohibition in the Excise rules applied when a license was granted to a firm, requiring approval from the Excise department for admitting new partners or retiring old ones. In this case, the licenses were given to individuals who were already conducting liquor sales, and the partnership was formed for business efficiency. The AAC noted that the Excise authorities had not imposed any fines for rule contraventions and that the business at each vend was conducted by licensed individuals, not strangers. The AAC concluded that the formation of the partnership was legal, as the partners pooled their resources to control various vends, which was not against public policy. The AAC also referred to the decision in CIT vs. Suraj Bhan & Co., where it was held that unlawful activities by partners did not make the firm non-genuine.

3. Non-production of Partners and 'Karindas' for Examination:
The ITO had issued a notice under Section 143(3) to produce the partners and furnish a list of 'Karindas' for examination. Despite various opportunities, the assessee failed to produce the partners or the list of 'Karindas'. The AAC, however, found that the non-production of partners due to their preoccupation was not fatal to the assessee's case. The AAC emphasized that there was no material evidence from the ITO to prove that the firm was not genuine. The intention of the partners was to run the liquor business in accordance with the terms and conditions of the Excise contracts, and there was no indication of any intention to infringe or violate the law.

4. Admission of Affidavit by the AAC:
The Departmental Representative raised an issue regarding the improper admission of an affidavit by one of the partners by the AAC, allegedly in contravention of Rule 46A. The AAC had admitted the affidavit, which stated that the Excise authorities had not imposed any fines for rule contraventions and that the business was conducted by licensed individuals. The Tribunal found that even if the affidavit was ignored, the position for the Revenue would not change, as the affidavit merely reaffirmed the assessee's statements before the ITO. The Tribunal also noted that the failure to produce partners or 'Karindas' was not a ground taken by the Department in its appeals, and there was no evidence against the genuineness of the firm.

Conclusion:
The Tribunal upheld the AAC's decision, concluding that the partnership was legally constituted, and the assessee was entitled to registration under Section 185 of the IT Act. The appeals by the Revenue were dismissed, as the Tribunal found no merit in the arguments presented by the Department. The Tribunal emphasized that the pooling of resources by licensed partners and the sharing of profits did not affect the legality of the partnership, which was formed in accordance with the Excise rules and contracts.