1973 (9) TMI 16 - HC - Income Tax

(1) Whether, on the facts and in the circumstances of the case, and on a true construction of the instrument of partnership dated 1st April, 1960, a valid partnership came into existence ? (2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to registration under section 26A of the Indian Incometax Act, 1922, read with rule 6 of the Income-tax Rules, 1922 ? (3) Whether, on the facts and in the circumstances of the case and in view of the fact that the parties of the second part have been found to be benamidars of the parties of the first part, the assessee-firm is entitled to the grant of registration ?

Summary

Issues Involved:
1. Validity of the partnership under the partnership deed dated April 1, 1960.
2. Entitlement to registration under section 26A of the Indian Income-tax Act, 1922.
3. Impact of benami partners on the grant of registration.

Issue-wise Detailed Analysis:

1. Validity of the Partnership:
The first issue revolves around whether a genuine partnership existed under the partnership deed dated April 1, 1960. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal concluded that no genuine partnership existed. The evidence showed that the new partners were not aware of their roles and did not contribute capital. Their ignorance about the firm's operations and the preparation of the partnership deed indicated that the partnership was a mere paper transaction. The court reframed the question to focus on whether the partnership was genuine and found ample material supporting the conclusion that it was not. The decision was based on substantial evidence, including the partners' statements and the terms of the partnership deed, which suggested that the partnership was created to reduce tax liability rather than to establish a genuine business relationship.

2. Entitlement to Registration under Section 26A:
The second issue addressed whether the assessee was entitled to registration under section 26A of the Indian Income-tax Act, 1922. The court examined whether the requirements of the rules, particularly the distribution and crediting of profits in individual partners' accounts, were met. The court found that the balance-sheet and profit and loss account were not signed by any partners and were not supported by the account books. The Income-tax Officer noted that profits were not credited to individual accounts, nor was there proof of actual distribution among partners. The court concluded that the balance-sheet must relate to the books of account, which were not produced. Therefore, the unsigned balance-sheet did not comply with the rules, and the assessee was not entitled to registration. The court answered this question in the negative, favoring the department.

3. Impact of Benami Partners on Registration:
The third issue concerned whether the presence of benami partners affected the firm's entitlement to registration. The Tribunal had concluded that the presence of benami partners was a ground for refusing registration. However, the court clarified that the presence of benami partners does not defeat an application for registration under section 26A, referencing the Supreme Court decision in Commissioner of Income Tax v. Abdul Rahimand Co. The court agreed with the assessee's contention that the mere presence of benami partners was not a valid reason to reject the registration application. The court answered this question in favor of the assessee but clarified that this did not imply a conclusion on whether the partners were benamidars or that registration was refused solely on this ground.

Conclusion:
The court answered the first and second questions in favor of the department, concluding that no genuine partnership existed and the assessee was not entitled to registration under section 26A. The third question was answered in favor of the assessee, stating that the presence of benami partners alone does not warrant the rejection of the registration application. The court awarded costs to the department, assessed at Rs. 250.