1989 (10) TMI 98 - AT - Income Tax

Assessment Year, Bona Fide, In Part, Partnership Deed, Rectification Of Mistakes, Registered Firm, Total Income, Two Partners, Unregistered Firm

Issues Involved:
1. Cancellation of registration allowed earlier by the ITO under section 186(1).
2. Consequential actions taken by the ITO under sections 154 and 158 of the Income-tax Act.

Detailed Analysis:

Issue 1: Cancellation of Registration under Section 186(1)

Facts and Background:
- The ITO had initially allowed the registration of a firm comprising eight partners.
- A search conducted on 30-8-1985 revealed discrepancies, including one partner's statement about having no income other than a government pension and bank interest, and significant variations in the signatures of three partners.
- The ITO requested the firm to produce all partners for examination to verify the genuineness of the firm. Only two partners were produced, leading the ITO to conclude that the firm was not genuine.
- The ITO cancelled the registration for the assessment years 1979-80 to 1982-83.

AAC's Findings:
- The AAC upheld the ITO's decision, noting that the assessee failed to produce all partners for examination, which was crucial to proving the genuineness of the firm.

Appellate Tribunal's Analysis:
- The Tribunal considered the arguments and evidence presented by both sides.
- The assessee argued that the ITO's decision was based on mere suspicion due to signature variations, which could naturally occur over time.
- The Tribunal noted that the ITO's decision was not solely based on signature variations but also on the failure to produce all partners for verification.
- The Tribunal upheld the ITO's decision, stating that the ITO was justified in concluding the firm was not genuine due to the lack of evidence proving the existence of all partners.
- The Tribunal also corrected the AAC's erroneous observation that some partners were benamidars, clarifying that the ITO did not make such a finding.

Issue 2: Actions under Sections 154 and 158

Facts and Background:
- Following the cancellation of registration, the ITO took action under section 154 to rectify assessments and tax calculations for the assessment years 1979-80 to 1982-83.
- The ITO also passed orders under section 158, allocating the income of the unregistered firm to two partners only, based on their verification.

AAC's Findings:
- The AAC upheld the ITO's actions, stating that the ITO merely gave effect to the cancellation of registration and computed the tax and allocation of shares correctly.

Appellate Tribunal's Analysis:
- The Tribunal examined the submissions and evidence presented by both sides.
- The assessee argued that section 154 was not applicable as the matter was debatable and that the ITO erred in allocating the income to only two partners.
- The Tribunal clarified that section 186(3) required the ITO to amend the assessments of the firm and partners, treating the firm as an unregistered firm.
- The Tribunal found that the ITO's allocation of income to only two partners was incorrect. The ITO should have allocated the income among all eight partners as specified in the partnership deed.
- The Tribunal cited various judicial precedents to support its conclusion that the ITO must allocate the income according to the partnership deed, and the real income of each partner should be determined during their individual assessments.

Conclusion:
- The Tribunal upheld the ITO's cancellation of the firm's registration for the assessment years 1979-80 to 1982-83.
- The Tribunal set aside the ITO's orders under section 158 for fresh disposal, directing the ITO to allocate the income among all partners as per the partnership deed and to amend the assessments accordingly.

Final Decision:
- The first set of appeals concerning the cancellation of registration is dismissed.
- The second set of appeals concerning the actions under sections 154 and 158 is partly allowed for statistical purposes.

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