1998 (7) TMI 121 - AT - Income Tax

Registration Of Firm, Genuineness Of Firm, Search Operation, Cancellation Of Registration, Inter-relationship Of Partners

Summary

Issues Involved:
1. Legitimacy of the cancellation of registration under section 186(1) of the Income-tax Act for the three firms.
2. Examination of the genuineness of the firms.
3. Legal interpretation of the term 'genuine' in the context of partnership firms and registration.

Issue-wise Analysis:

1. Legitimacy of the Cancellation of Registration:
The revenue authorities conducted searches on the premises of three firms and discovered documents leading to the cancellation of their registration under section 186(1) of the Income-tax Act. The firms were treated as unregistered, and their income was consolidated under one entity. The Assessing Officers' orders were contested, and the learned CITs(A) directed the continuation of the registration under section 184(7) for the assessment year 1989-90. The department appealed against these orders.

2. Examination of the Genuineness of the Firms:
The learned DR emphasized the reasons for cancellation, highlighting that the firms were managed by closely related individuals, operated from common premises, and had their books of account and cash found in one location. The management and control appeared to vest in a single individual, leading to the conclusion that no genuine firms existed. In contrast, the learned AR argued that the firms had different partners, operated from different premises, and engaged in distinct business activities. The partners managed their respective firms independently, and there was no evidence of centralized control by one individual. The CIT(A) found that the conditions for cancellation under section 186(1) did not include non-disclosure of income by a genuine firm and upheld the genuineness of the firms.

3. Legal Interpretation of 'Genuine':
The judgment discussed various legal precedents to determine the meaning of 'genuine' concerning partnership firms. The term 'genuine' implies that the firm must be real, not fraudulent or bogus. The court examined cases where firms were found to be ingenuine due to factors such as lack of capital contribution by partners, control by a single individual, and non-compliance with the partnership deed terms. In the present case, the firms had different partners, maintained separate books of account, and conducted distinct business activities. The court concluded that the presence of one factor, such as common premises, was insufficient to declare the firms ingenuine.

Conclusion:
The revenue failed to prove that the firms were not genuine, and the registration granted was not required to be canceled. The appeals filed by the revenue were dismissed, and the orders of the learned CIT(A) for the assessment year 1989-90 were upheld.