1979 (2) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Refusal of registration under Section 185 of the Income Tax Act.
2. Genuineness of the partnership firm.
3. Legality of the firm's name under Act XII of 1950 (Emblems and Names (Prevention of Improper Use) Act).

Detailed Analysis:

1. Refusal of Registration under Section 185 of the Income Tax Act:

The Income Tax Officer (ITO) refused to grant registration to the partnership firm, citing that Bhagwandas operated the bank account solely without informing the bank about the conversion of the proprietary business into a partnership. The ITO also noted that the other partners, Umedmal and Gyaniram, did not contribute significantly to the capital and were not authorized to operate the bank account. The firm applied for registration under the Partnership Act but was advised to change its name due to the use of the word 'Bharat,' which led to prosecution proceedings and eventual dissolution of the firm in June 1976. The ITO concluded that the firm was not genuine and treated it as an Association of Persons.

2. Genuineness of the Partnership Firm:

The Appellate Assistant Commissioner (AAC) upheld the ITO's findings, emphasizing that the continued operation of the bank account by Bhagwandas without the involvement of the other partners indicated the absence of a genuine partnership. However, the counsel for the assessee argued that the failure to inform the bank does not invalidate the partnership if it is otherwise genuine. The counsel referenced several cases to support the claim that the partnership was genuine and that the assets and liabilities of the proprietary business were taken over by the partnership, including the bank account. The counsel also highlighted that the other partners were aware of the bank account and had agreed to its continuation.

The Departmental Representative countered that the business was essentially a one-man show, with Bhagwandas contributing the majority of the capital and the other partners having minimal involvement. He argued that the disproportionate allocation of profits and the lack of a new bank account indicated a non-genuine partnership. However, the tribunal found that the other partners were indeed involved in the business, and the continuation of the bank account did not negate the genuineness of the partnership. The tribunal concluded that the partnership was genuine and entitled to registration.

3. Legality of the Firm's Name under Act XII of 1950:

The tribunal examined the legality of the firm's name under the Emblems and Names (Prevention of Improper Use) Act XII of 1950. Section 3 of the Act prohibits the use of certain names and emblems without the previous permission of the Central Government. The firm had applied for registration under the Partnership Act, but the Registrar of Firms advised changing the name due to the use of 'Bharat,' which led to prosecution proceedings. The tribunal noted that there was no absolute prohibition on the use of the name 'Bharat,' and the firm could have obtained permission from the Central Government. The tribunal referenced several cases to support the position that the prohibition under the Act was not absolute and that the partnership agreement was not void ab initio.

The tribunal concluded that the partnership was legal and entitled to registration, as the prohibition under Act XII of 1950 was not absolute and the firm could have obtained permission for the use of the name.

Conclusion:

The appeal was allowed, and the tribunal held that the partnership was genuine and entitled to registration under Section 185 of the Income Tax Act. The tribunal also concluded that the partnership was not illegal under Act XII of 1950, as the prohibition on the use of the name 'Bharat' was not absolute and could have been regularized with the permission of the Central Government.