1986 (3) TMI 143 - AT - Income Tax

Summary

Issues Involved:
1. Whether the income earned in the name of M/s U.P. Engines and Machines should be included in the income of the assessee firm.
2. Whether the findings of the AAC in favor of the assessee were correct and whether the ITO's order should be restored.

Detailed Analysis:

Issue 1: Inclusion of Income Earned by M/s U.P. Engines and Machines in the Income of the Assessee Firm

The Revenue contended that the AAC erred in law and on facts by deleting the income earned by M/s U.P. Engines and Machines from the income of the assessee firm. The AAC had previously upheld the ITO's finding that the income from M/s U.P. Engines and Machines, owned by Smt. Manbir Sondhi, should be clubbed with the income of the assessee firm because Smt. Manbir Sondhi was considered a benami of the assessee firm. However, the Tribunal, Delhi Bench 'D', in its order dated 24th June 1975, held that the income from M/s U.P. Engines and Machines belonged to Smt. Manbir Sondhi and was not a benami concern of the assessee firm. This led to the constitution of a Special Bench of the Tribunal to resolve the apparent conflict between the two benches regarding the quantum and penalty proceedings.

The Special Bench observed that fresh material considered in the penalty appeals should have been considered by the AAC before arriving at a conclusion. The Special Bench directed the AAC to reconsider the entire material and arrive at a conclusion. The AAC, in compliance with the directions, re-evaluated the evidence and held that the business of M/s U.P. Engines and Machines carried on by Smt. Manbir Sondhi was not the business of the assessee firm. The AAC's reasoning included the following points:
- The appellant firm was a genuine firm, duly registered and recognized by the ITO.
- The firm never declared that the business of Smt. Manbir Sondhi was its business.
- The dealership with M/s Kirloskar was on a principal-to-principal basis, not requiring any technical qualifications.
- Smt. Manbir Sondhi made her own investments in the business and was assessed to wealth-tax on the profits earned.
- The ITO did not provide evidence that the income earned by Smt. Manbir Sondhi was enjoyed by the assessee firm or its partners.

The AAC concluded that the ITO's findings were incorrect and that the business of M/s U.P. Engines and Machines belonged to Smt. Manbir Sondhi.

Issue 2: Correctness of the AAC's Findings and Restoration of the ITO's Order

The Revenue argued that the AAC's order was erroneous and should be set aside, and the ITO's order should be restored. The Revenue's representative, Shri Gujjar Mal, raised several points, including:
- The business premises and employees of the assessee firm and M/s U.P. Engines and Machines were common.
- Major sales by M/s U.P. Engines and Machines were to the assessee firm.
- The business of M/s U.P. Engines and Machines was managed by Shri Rahul Sondhi, a partner in the assessee firm.
- The bank account of M/s U.P. Engines and Machines was operated by Shri Rahul Sondhi.
- The agreement with M/s Kirloskar was signed by Shri Rahul Sondhi as manager of M/s U.P. Engines and Machines.
- The investment by Smt. Manbir Sondhi was minimal and the income diversion was a device to reduce tax liability.

The Revenue relied on various case laws to support their contention that the income of M/s U.P. Engines and Machines should be included in the income of the assessee firm. However, the Tribunal, after considering the arguments and evidence, upheld the AAC's findings. The Tribunal noted that the investment in M/s U.P. Engines and Machines was made by Smt. Manbir Sondhi, who enjoyed the income and retained control over the business and its assets. The Tribunal also observed that the relationship between Smt. Manbir Sondhi and Shri Rahul Sondhi did not imply that the business was a benami of the assessee firm. The Tribunal concluded that the apparent state of affairs was the real state of affairs, and the Revenue had not discharged the onus of proving otherwise.

Conclusion:

The Tribunal dismissed all the appeals by the Revenue, upholding the AAC's order that the income earned by M/s U.P. Engines and Machines belonged to Smt. Manbir Sondhi and should not be included in the income of the assessee firm. The Tribunal concurred with the AAC's reasoning and concluded that the business of M/s U.P. Engines and Machines was genuinely owned and operated by Smt. Manbir Sondhi.