1991 (9) TMI 160 - AT - Income Tax

Issues Involved:

1. Refusal of registration due to non-contribution of capital by two lady partners.
2. Absence of a specific order under section 185(1)(b) by the ITO.
3. Lack of opportunity for the firm to be heard by the ITO.
4. Determination of the genuineness of the partnership firm.
5. Consideration of mutual promises and sharing of losses as adequate consideration.
6. Impact of partners' prior assessment on the firm's registration status.

Issue-wise Detailed Analysis:

1. Refusal of registration due to non-contribution of capital by two lady partners:

The primary ground for refusing registration was the non-contribution of capital by two lady partners. The ITO concluded that the firm was not genuine because these partners did not contribute capital or work for the firm. The AAC upheld this view, stating that the lady partners neither contributed capital nor participated in the business, thus lacking consideration for the partnership contract.

2. Absence of a specific order under section 185(1)(b) by the ITO:

The firm argued that no specific order under section 185(1)(b) was passed by the ITO refusing registration. The AAC observed that the ITO's reasons for refusing registration were discussed in his order under appeal, which he treated as a combined order under sections 143(3) and 185(1)(b).

3. Lack of opportunity for the firm to be heard by the ITO:

The firm contended that the ITO did not provide an opportunity to be heard before concluding that the firm was not genuine. The AAC disagreed, stating that the ITO was not required to examine the partners personally and that the appellant's representative could not establish the involvement of the lady partners in the firm's activities.

4. Determination of the genuineness of the partnership firm:

The ITO's conclusion that the firm was not genuine was based on the non-contribution of capital and lack of participation by the lady partners. The AAC supported this conclusion, stating that there was no consideration for the partnership contract from the lady partners. The AAC referred to various case laws to support the view that mere non-contribution of capital does not invalidate a partnership, but in this case, there was a total absence of consideration.

5. Consideration of mutual promises and sharing of losses as adequate consideration:

The firm argued that the promise to contribute capital and share losses constituted adequate consideration. The AAC did not consider this aspect, focusing instead on the absence of actual capital contribution and participation by the lady partners. The Tribunal referred to the Gujarat High Court's decision in Achalsinghji Keshrisinghji & Co. vs. CIT, which held that a promise to contribute capital and share losses is valid consideration.

6. Impact of partners' prior assessment on the firm's registration status:

The firm contended that the assessments of the partners were completed before the firm's assessment, precluding the ITO from treating the firm as unregistered. The Tribunal noted that this fact was not known to the revenue authorities earlier and needed to be examined by the ITO.

Conclusion:

The Tribunal found several procedural lapses by the ITO, including the failure to pass a specific order under section 185(1)(b), lack of proper enquiry into the genuineness of the firm, and not providing an opportunity to the firm to be heard. The Tribunal emphasized the need to consider mutual promises and sharing of losses as adequate consideration for the partnership contract. Consequently, the Tribunal set aside the AAC's order and remanded the matter to the ITO for fresh consideration of the firm's registration application in light of the observations made. The appeal was allowed for statistical purposes.

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