1983 (3) TMI 126 - AT - Income Tax

Summary

Issues Involved:
1. Genuineness of the partnership firm.
2. Validity of capital contribution by Smt. Rukma Bai.
3. Control and management of the firm.
4. Destination of profits and capital.

Issue-wise Detailed Analysis:

1. Genuineness of the Partnership Firm:
The Income Tax Officer (ITO) questioned the genuineness of the firm for three reasons:
- Smt. Rukma Bai's lack of knowledge about the business activities.
- The vested interest of Shri Shyamsunder Dhoot in the capital contributed by Smt. Rukma Bai.
- The control and management of the firm being in the hands of Shri Shyamsunder Dhoot, with the ultimate destination of profits and capital being his children.

The Appellate Assistant Commissioner (AAC) referred to the Supreme Court decision in R.C. Mittre & Sons vs. CIT, concluding that a partner need not contribute capital or actively participate in the business. The AAC held that the partnership was valid and genuine, despite the close relationship between the partners.

2. Validity of Capital Contribution by Smt. Rukma Bai:
The ITO argued that the capital of Rs. 50,000 brought by Smt. Rukma Bai was in which Shri Shyamsunder Dhoot had vested interest, making her a benamidar (nominee) of Shri Shyamsunder Dhoot. The AAC countered this by stating that the contribution of capital is not an essential condition for a partner, and the capital introduced by Smt. Rukma Bai was her absolute property, despite the Will stating otherwise.

3. Control and Management of the Firm:
The ITO observed that the control and management of the firm were effectively in the hands of Shri Shyamsunder Dhoot, who managed the capital and income of Smt. Rukma Bai. The AAC, however, found that the partnership was genuine, noting that control and management by one partner on behalf of others is an essential ingredient of mutual agency, as held by the Supreme Court in K.D. Kamath & Co. vs. CIT.

4. Destination of Profits and Capital:
The ITO noted that the profits and capital in the name of Smt. Rukma Bai were ultimately gifted to the children of Shri Shyamsunder Dhoot, suggesting that the real beneficiary was Shri Shyamsunder Dhoot. The AAC found that the gifts made by Smt. Rukma Bai were an application of income, and she had the right to dispose of her assets as she wished. The AAC also observed that raising loans from the HUF of Shri Shyamsunder Dhoot did not make the partnership a sham affair.

Conclusion:
The Tribunal agreed with the AAC's findings, holding that:
- The partnership was genuine.
- Smt. Rukma Bai's capital contribution was her absolute property.
- Control and management by one partner on behalf of others is permissible.
- The gifts made by Smt. Rukma Bai were an application of income, not a diversion.

The Tribunal canceled the orders of the authorities below for all the assessment years under appeal, thus allowing all five appeals by the assessee.