1983 (7) TMI 126 - AT - Income Tax

Summary

Issues:
Cancellation of registration of assessee-firm for assessment years 1973-74 to 1977-78 due to alleged lack of business activity, applicability of section 186 of the Income-tax Act, 1961, assessment of income earned through insurance commission, interpretation of partnership agreement with nominee, determination of business activity based on income source, renewal commissions as evidence of business activity.

Analysis:
The judgment revolves around the cancellation of the registration of an assessee-firm for the assessment years 1973-74 to 1977-78 on the grounds of purported lack of business activity. The firm, engaged in the manufacture and sale of steel articles, transitioned to earning income solely from insurance commissions. The Income Tax Officer (ITO) contended that the firm ceased its steel products business, and the insurance income was personal to an individual partner, leading to the cancellation of registration. The ITO invoked section 186(3) of the Income-tax Act, treating the firm as unregistered. The Appellate Tribunal disagreed, emphasizing that section 186 is inapplicable when a genuine registered firm exists without dissolution or constitutional changes.

For the assessment year 1977-78, the ITO revised the assessment as an unregistered firm, arguing that the income was solely earned by the individual partner's efforts. However, the Tribunal found the firm's continued existence and the partnership agreement with the nominee as evidence of ongoing business activity. The agreement clarified that the partner conducted insurance business on behalf of the firm, with income assessed as firm's revenue. The Tribunal highlighted that business activity does not require physical labor but includes control and direction exercised by the firm, as evident in the insurance transactions.

The departmental representative contended that post-1971, the income was from renewal commissions, suggesting a lack of business activity. However, the Tribunal reasoned that renewal activities necessitate efforts and persuasion, constituting business engagement. The Tribunal concluded that renewal commissions demonstrate business activity, and as a genuine registered firm existed, section 186 could not be invoked. Consequently, all appeals were allowed, and the cancellation of registration for the assessment years was revoked, with modifications to the assessment for 1977-78 directed.