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TMI Blog1998 (7) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... granted to three firms was cancelled under section 186(1) of the Income-tax Act. The firms were treated as unregistered and the income of the two firms namely M/s. Industrial Fabricators and M/s. Mohit Steel Fabricators was brought to tax in the hands of M/s. Steel Steel Fabricators. Against the orders passed under section 186(1) of the Act by the concerned Assessing Officers the assessee filed appeals and the learned CITs(A) for the detailed reasons given in their orders, held that the concerned Assessing Officers were not justified in cancelling the registration in the case of three firms and directed the Assessing Officer to allow continuation of the registration under section 184(7) of the Act for assessment year 1989-90 in case of all the assessee. Aggrieved against these orders, the department is in appeal. 3. Relying strongly on the orders of the Assessing Officers the learned DR emphasised reasons leading to the cancellation of registration under section 186(1) of the Act in respect of the three concerned firms. It was submitted that while all the partners of three firms are closely related, the businesses of all the firms were carried on in the common premises. The bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remises, i.e. Plot No. 291, Sector 24; Plot No. 508,Sector 22; and Plot No. 293, Sector 24, the management was not concentrated in the hands of Shri V. B.Gulati as is the case made out by the department. While M/s. Steel Steel Fabricators carried on activity of heavy lathe work as a speciality apart from fabrication, M/s. Industrial Fabricators did planner jobs.M/s. Mohit Steel Fabricators on the other hand, dealt in purchase and sale of raw materials. There was nothing brought on record to show that Shri V. B. Gulati had any control on the functioning of M/s.Industrial Fabricators or M/s. Mohit Steel Fabricators. The surrender made was by respective partners of all the firms as borne out from the statement of Shri V. B. Gulati. In any case the joint declaration so made was not questioned by the ADI or for that matter DDI at the time of searches. Discovery of books of account and cash in the same premises by no means proved that other firms were not genuine. List of debtors and creditors of three firms clearly showed that very few creditors and debtors were common which is normal in any business. There were no frequent transactions between the three concerns as pointed out by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituting the same. Distribution of profits showed that usufruct was enjoyed by respective partners. In this backdrop the writing of books of account by one accountant who was in the employment of M/ s. Steel Steel Fabricators and the availability of cash at one place is not sufficient to show that the business was common and was managed by only one person. Then the transactions between the firms are not uncommon while carrying on any business. The inter-relationship of the partners in no way affect the genuineness of the firm. 6. In the case of Ladhu Ram Taparia (supra) relied upon by the revenue the facts were that Shri Ladhu Ram and Ganpat Rai along with their sons carried on business in the name of following six firms :- ----------------------------------------------------------- Sr. No. Name of the firm Date of business ---------------------------------------------------------- 1. Ladhu Ram Taparia 28-2-41 2. Jagannath Hanuman Bux 28-6-41 3. Jagan Nath Har Narain 11-8-41 4. Ganpat Rai Jorawar Mull 21-10-43 5. Seth Ladhu Ram Taparia 8-3-43 6. Ladhu Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be refused when the validity or genuineness of the firm is questioned. What is valid in law is distinct from what is genuine in fact. The validity of the partnership is to be decided with reference to the express provisions of Partnership Act. Genuineness on the other hand, is to be examined from the angle whether the firm is fraudulent or bogus. On reading section 185 of the Act as it was there at the relevant period of time, it is found that amongst other pre-requisite conditions, before the registration is to be granted, the Assessing Officer is required to enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership. Since enquiry into the constitution of the firm has been separately provided for, the same would be an additional factor for granting or refusing registration to the firm. Genuineness on the other hand, is one of the pre-requisite conditions for both grant and continuance of registration. Though commonly and properly understood as something real, the expression 'genuine' had not been defined as such. What is genuine then ? The expression 'genuine' as defined in Chambers 20th Century Dictionary - reads as natural, nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever be drawn." In the case of assessee, the partners though related have appropriated their own profits as per the material brought on record. There is no clause that the bank account is to be operated upon by only one of the partners. Furthermore there was no provision in the partnership deed that one of the partners or Shri V. B. Gulati for that matter had a power to employ, remove or dismiss any person. The facts available in the aforesaid case are not there in the case of the assessee. 10. In the case of CIT v. S. S. A. M. Shanmugha Nadar Financing Corpn. [1983] 141 ITR 656 / 14 Taxman 481 (Mad.), the facts were that one of the partners of the firm alongwith the wives of other 8 partners entered into the partnership and constituted the financing corporation. The eight ladies had to their credit certain amounts in other firm which were withdrawn and credited as capital contribution to the firm. On the same date the firm advanced the same amount to another firm from where the 8 ladies had withdrawn their sums. Similar Act was repeated by the other partners of the firm. The entries were made by book adjustments and no cash actually passed in these transactions. While the ITO he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... four partners were dummies and that they had signed the deed mechanically. Deed was executed merely as a cloak to secure registration. It was however, held that four new partners being benamidars was no bar to a registration, did not preclude the High Court from confirming the refusal of registration. While holding so, reliance was placed on the decision of Supreme Court in the case of CIT v. A. Abdul Rahim Co. [1965] 55 ITR 651 (SC).' Amendment to this effect has been made in the Act to provide that in case any partner of the firm is benamidar in relation to whole or any part of profit of the firm, the firm is to be treated as ingenuine. As regards other factors we find that they are not present in the case of the assessee. 12. In the case of Arya Confectionery Works v. CIT[1983] 143 ITR 814 (MP), the facts are that the assessee firm derived income from manufacture and sale of confectionery and biscuits. The assessee's accounts were rejected and it was held that the assessee's income could not be properly deduced from the accounts as maintained. It was further found that (Head Note)-"(i) a business in the name of G agencies was carried on from the assessee's business premises; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he non-disclosure of the income is not one of the grounds for cancellation of registration under section 186(1) of the Act. Similar decision was taken by the Andhra Pradesh High Court in the case of Variety Hall Ramakrishna Textiles v. CIT [1972] 84 ITR 202. In this context we find that in the case of Khanjan Lal Sewak Ram v. CIT [1972] 83 ITR 175 (SC) their Lordships held that in case the firm had earned the profits in the black market and though it had distributed its book profit amongst the partners according to instrument of partnership deed but in case it had not distributed the profits earned by it in the black market amongst the partners according to the Partnership Act, the firm was not entitled the renewal of registration for the concerned assessment year. This decision however, was considered by their Lordships of Delhi High Court in the case of Addl. CIT v. Chanderbhan Harichand Co. [1980] 126 ITR 709 / [1981] 5 Taxman 178. They took note of the observations of their Lordships that the legal position under the Act of 1922 was contained in the Rules and not in the Act. Application had to be in particular form and the ITO had the power to reject the application for ren ..... X X X X Extracts X X X X X X X X Extracts X X X X
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