1965 (4) TMI 3 - HC - Income Tax

Firm - registration - entitled - once ITO comes to the conclusion that the partnership is genuine and a valid one, he cannot refuse registration on the ground that one of the partners is a benamidar of another

Issues Involved:
1. Entitlement to registration of the assessee-firm for the assessment year 1958-59.
2. Genuineness of the partnership.

Detailed Analysis:

1. Entitlement to Registration:
The primary question referred to the court was whether the assessee-firm was entitled to registration for the assessment year 1958-59 under section 26A of the Indian Income-tax Act, 1922.

The assessee-firm was constituted under a deed of partnership dated December 6, 1956, and was duly registered with the Registrar of Firms on June 10, 1957. The application for registration under section 26A was made on October 8, 1957, and the Income-tax Officer granted the registration on March 16, 1959. However, the Commissioner of Income-tax cancelled this registration on March 15, 1961, under section 33B, stating that the order was erroneous and prejudicial to the interests of the revenue.

The Commissioner found that only the working partner, Baburao Narayanrao Phatak, was a genuine partner, while the remaining interest in the business was held by one Jagannath Darak in the names of the other five partners. The Commissioner based his conclusion on several facts, including the capital contributions, operational control, and financial transactions involving Jagannath Darak.

2. Genuineness of the Partnership:
The Appellate Tribunal reviewed the Commissioner's findings and considered each fact individually. It concluded that the partnership was genuine and allowed the appeal of the assessee-firm. The Tribunal's reasoning included:

- Capital Contribution: The Tribunal held that the capital emanating from Jagannath Darak did not justify a refusal of registration, citing the precedent in *Sundar Singh Majithia v. Commissioner of Income-tax* which emphasizes the real effect of the partnership instrument in governing liabilities and rights inter se.
- Operational Control: The Tribunal found it acceptable for partners to agree that one or more could operate the bank account.
- Personal Drawings: The Tribunal accepted the explanation that the partners were in affluent circumstances and did not need to draw money for personal expenses immediately.
- Non-Appearance and Evidence Discrepancies: The Tribunal accepted the reasons for Narayanlal Darak's non-appearance and considered the discrepancies in Godavari Devi's evidence as minor.
- Ante-dated Entries: The Tribunal regarded the corrections of dates in the account books as irrelevant.
- Monopoly Rights and Financial Transactions: The Tribunal found no issue with the monopoly rights transfer and financial transactions involving Jagannath Darak, considering them as normal business operations given the close family relations and interest charges.

The Tribunal concluded that the first five partners were not mere dummies for Jagannath Darak and that the partnership was genuine.

Legal Precedents and Principles:
The judgment referred to several legal precedents and principles:

- R. C. Mitter & Sons v. Commissioner of Income-tax: The Supreme Court outlined the essential conditions for a firm to be entitled to registration, including the genuineness of the partnership.
- Commissioner of Income-tax v. Sivakasi Match Exporting Co.: The jurisdiction of the Income-tax Officer is confined to ascertaining whether the application for registration is in conformity with the rules and whether the firm is genuine or bogus.
- Commissioner of Income-tax v. A. Rahim & Co.: The Supreme Court held that the mere fact that a partner is a benamidar does not preclude registration if the partnership is genuine and legal.
- G. Venkataswami Naidu & Co. v. Commissioner of Income-tax: The court can challenge a conclusion of fact if it is not supported by legal evidence or is perverse.
- Omar Salay Mohamed Sait v. Commissioner of Income-tax: The Tribunal must consider all relevant evidence and not base its findings on suspicions or conjectures.

Conclusion:
The court held that the Appellate Tribunal's conclusion that the partnership was genuine was rationally possible and supported by the evidence. The answer to the question referred was in the affirmative, in favor of the assessee-firm, and the firm was entitled to its costs fixed at Rs. 500. The judgment emphasized that the Tribunal's findings were based on a careful consideration of all relevant evidence and were not influenced by conjectures or suspicions.

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