1995 (6) TMI 91 - AT - Income Tax

Summary

Issues Involved
1. Cancellation of firm's registration under Section 186(1) of the Income-tax Act.
2. Allegation of sham transactions between the parties.
3. Allegation of partners being benamidars of M/s. Karimia Trust.
4. Burden of proof regarding the genuineness of the firm and transactions.

Detailed Analysis

1. Cancellation of Firm's Registration under Section 186(1)
The appeals were filed by the assessee against the orders of the CIT (Appeals) confirming the orders under Section 186(1) passed by the Assessing Officer (A.O.), which cancelled the registration of the firm. The Assessing Officer issued a notice to the assessee to show cause why the registration should not be cancelled, citing the agreements between M/s. Karimia Trust, M/s. Kapoorchand (P.) Ltd., and M/s. Ruhee Enterprises as sham transactions. The AAC upheld the ITO's decision, leading to the present appeal.

2. Allegation of Sham Transactions
The Assessing Officer observed that the agreements were a subterfuge to reduce the incidence of tax and were not genuine but sham transactions. The Tribunal noted the distinction between a benami transaction and a sham transaction as explained by the Supreme Court in Sree Meenakshi Mills Ltd. v. CIT. The Tribunal found that the agreements were genuine and not sham, as the income of M/s. Karimia Trust increased significantly after the agreements, and there was a valid business reason for the arrangement.

3. Allegation of Partners Being Benamidars of M/s. Karimia Trust
The Assessing Officer alleged that the partners of M/s. Ruhee Enterprises were benamidars of M/s. Karimia Trust and invoked Explanation (b) below Section 185(1). However, the Tribunal found no evidence to support this allegation. The Tribunal noted that the burden of proving that the partners were benamidars lay with the Department, which it failed to discharge. The Tribunal emphasized that the relationship between the partners and the Trustee of M/s. Karimia Trust raised suspicion but was insufficient to conclude that the partners were benamidars.

4. Burden of Proof Regarding the Genuineness of the Firm and Transactions
The Tribunal referred to several case laws, including Prakash Narain v. CIT, where it was held that the burden of proof was on the Revenue to show that the transaction was benami. The Tribunal found that the Department did not provide sufficient evidence to prove that the transactions were benami or that the firm was not genuine. The Tribunal also noted that the income of M/s. Ruhee Enterprises was not added to the income of M/s. Karimia Trust, contradicting the Department's own findings.

Conclusion
The Tribunal concluded that the Department failed to prove that the agreements were sham transactions or that the partners were benamidars of M/s. Karimia Trust. Therefore, the cancellation of the firm's registration under Section 186(1) was not justified. The Tribunal directed that the orders under Section 186(1) be treated as cancelled, allowing the assessee's appeals.