1986 (4) TMI 131 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of income earned in the name of U.P. Engines and Machines from the income of the assessee firm.
2. Whether the order of the AAC was erroneous in law and on facts, and if the ITO's order should be restored.

Detailed Analysis:

Issue 1: Deletion of Income Earned in the Name of U.P. Engines and Machines
The primary contention was whether the income earned by U.P. Engines and Machines (UPEM) should be clubbed with the income of the assessee firm. The learned AAC initially upheld the ITO's finding that UPEM was a benami of the assessee firm, based on prior Tribunal orders. However, a conflicting view was later taken by another Tribunal Bench, which found the explanation provided by the assessee convincing and reasonable, concluding that UPEM's income belonged to Smt. Manbir Sondhi and not the assessee firm.

A Special Bench of the Tribunal was constituted to resolve this conflict. The Special Bench observed that fresh material considered during the penalty appeals should have been reviewed by the AAC. Consequently, the matter was remanded to the AAC for reconsideration of the entire material.

Upon reassessment, the AAC found that the ITO had not considered all the material on record and had wrongly concluded that UPEM's business was that of the assessee firm. The AAC's reasoning included:
- The appellant-firm was a genuine entity registered on 1-4-1969.
- The firm never declared UPEM's income as its own.
- Kirloskar's dealership was on a principal-to-principal basis, not an agency.
- The business was later converted into a firm and then transferred to a private limited company.
- Smt. Manbir Sondhi made investments and was actively involved in the business, with her husband managing without remuneration due to marital relations.
- The ITO failed to provide evidence that the firm's partners enjoyed UPEM's income.

The AAC concluded that UPEM's business belonged to Smt. Manbir Sondhi, and not the assessee firm.

Issue 2: Whether the Order of the AAC was Erroneous
The revenue challenged the AAC's order, arguing that:
- The business premises and employees of both concerns were common.
- Major sales by UPEM were to the assessee firm.
- The business was managed by Shri Rahul Sondhi, implying it was controlled by the assessee firm.
- The bank account of UPEM was operated by Shri Rahul Sondhi.
- The agreement with Kirloskar was signed by Shri Rahul Sondhi as manager.
- The arrangement was a device to divert income and reduce tax liability.

The Tribunal, after hearing both parties, upheld the AAC's order. It noted that:
- The investment in UPEM was made by Smt. Manbir Sondhi.
- The income and assets from UPEM were assessed as her wealth.
- The relationship between the parties and the conduct of business did not indicate a benami transaction.
- The Tribunal relied on the Special Bench's findings and the jurisdictional High Court's tests for determining benami transactions.

The Tribunal concluded that the revenue failed to dislodge the belief that the apparent state of affairs was real. Therefore, the AAC's order was upheld, and the revenue's appeals were dismissed.

Conclusion:
The Tribunal dismissed all the revenue's appeals, affirming the AAC's order that the income of UPEM belonged to Smt. Manbir Sondhi and was not the income of the assessee firm. The Tribunal applied the tests laid down by the jurisdictional High Court and found no evidence to support the revenue's claim of a benami transaction.