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TMI Blog1988 (4) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... m with the assessee : (a) that one Shri Sirehmal Chopra who was doing the business of precious and semi-precious stones brought in as capital on the start of the business on 1-2-1979 in the from of goods valued at Rs. 40,990; (b) Shri Sirehmal Chopra is son of Smt. Bhanwar Devi and is brother of Smt. Vimla Patni who are partners in the partnership firm, who allowed the partners (sic), who in fact did not bring any capital whatsoever, except the amount of Rs. 1,000 which was deposited in the account of Smt. Bhanwar Devi much afterwards; (c) that Smt. Bhanwar Devi is aged about 57 years having little experience of trade of precious and semi-precious stones. Moreover, she could not contribute any skill and experience to the carrying on of the business of the alleged partnership firm; (d) that her statement was recorded on 15-12-1982 and confronted vide notice dated 5-2-1983, wherein it was revealed that Smt. Bhanwar Devi did not know about the profits so received from the assessee partnership firm; (d) that her statement was recorded onm 15-12-1982 and confronted vide notice dated 5-2-1983, wherein it was revealed that Smt. Bhanwar Devi did not know about the profit so receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Devi, except petty deposits of Rs. 5,800 during the assessment year relevant to the assessment year 1981-82, the accumulation in her account aggregated to Rs. 32,902 as on the last day of the accounting year, relevant to the assessment year 1982-83. From it, he observed that in fact when a person has so much balance, she would like to spend from her own sources of income for maintenance, etc., but nothing whatsoever was withdrawn in her account except payment towards income-tax, etc., which could have been on her saving to her son to deposit out of his income because of having common measure. 4.1 The Income-tax Officer similarly discussed another lady partner, Smt. Vimla Patni, observing therein that she is aged about 37 years, having 4 kids, who is matriculate and in a household lady, had no experience in the line of business of precious and semi-precious stones and accordingly there was no contribution, whatsoever, on her part to carry on her business; that the position of her capital account appearing in the books of the assessee for the year under assessment and the next two years is reproduced in his order at page 3, which is as under : Capital Account of Smt. Vimla Patni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent, and the sister had been allowed a share of 25 per cent without any capital contribution in the form of skill and business activities whatsoever. In view of these facts, the Income-tax Officer came to the conclusion that the two lady partners, lent their names to Shri Sirehmal Chopra, just to minimise the incidence of tax in his case, when it was seen that he was being assessed on a higher income group. Hence the Income-tax Officer came to the conclusion that in fact, there had been no genuine partnership; rather it was an arrangement to divert the income and minimise the incidence of tax in collusion with the lady partners, who are mother and sister. Since, without such relations no partner will share the profit with such partners, who have not contributed any share capital as well as labour, experience and only to run the business of the partnership. 4.3 In view of the above facts, the Income-tax Officer held that it was Shri Sirehmal Chopra alone who had masterminded the affairs of business and execution of instrument of partnership which is merely a make-believe document and, therefore, it is Shri Sirehmal Chopra alone, who all the time financed, controlled and manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the lady partner, Smt. Vimla Patni has not contributed any capital share, then it is allowed by clause 4 of the partnership deed. He, further, contends that the firm is registered under the Indian Registration Act vide registration No. 1229/79 Rajasthan Sales-tax Act and Central Sales-tax. Therefore, the genuineness of the partnership firm and its execution cannot be held as invalid by the Income-tax Officer and particularly when his conclusion regarding it, is based upon surmises and conjectures. He further contends that the department cannot raise the issue at this stage that the partnership among the partners is not genuine, in view of the fact that the authorities below nowhere doubted the constitution of the firm and execution of the partnership deed is non-genuine. He further contends that no doubt the Income-tax Officer recorded the statement of Smt. Bhanwar Devi, the mother, who did not confirm it to her. Therefore, the principle of natural justice is violated. He further contends that to prove or say that the transaction is benami, the onus is upon the party, who alleges it and, therefore, it is for the department to prove that the business of the firm is benami and act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm is not genuine and the partnership deed is a make-believe document. Reliance is placed on the decision in the case of Krishna Flour Mills v. CIT [1962] 44 ITR 501 (SC). 7.1 He further contends that the case of K. D. Kamath Co. is distinguishable, because the partnership deed was held as valid for the reason that the partners, who did not contribute the share capital were working partners therein; while in this case it is otherwise. Relying on the decision in the case of Brijlal Madanlal v. CIT [1980] 121 ITR 364 (Bom.), the learned departmental representative contends that the execution and constitution of the partnership deed must be genuine. In this case the constitution of partnership is not at all genuine, in view of the facts mentioned above. He further contends that the capital invested for running the business of the firm is belonging to the male partner, Shri Sirehmal Chopra, while the control and management of the business is in his hands and the profits are not divided and gone to the hands of the lady partners, but they are there with the male partner and, therefore, the three factors for holding the business as benami have been proved from these facts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the partnership deed and in particular from clauses 4, 6 and 7, it is clear to us that the contribution of share capital by the partners is a must, but it is to be as per the consent of the partners and exigencies of business. The profit and loss is to be divided and borne by the partners in the ratio mentioned above, per clause 6. From these clauses and terms and conditions of the partnership it is clear that there should be an agreement among the parties for contribution of share capital by each partner. There is no agreement in black and white to show that Smt. Vimla Patni, sister of Shri Sirehmal Chopra would not contribute her share capital, nor there is such consent among them that Smt. Bhanwar Devi, the mother of Shri Sirehmal Chopra would not contribute her share capital or would contribute merely a sum of Rs. 1,000 as is shown and alleged. It is clear that the profits to the firm are to be divided in each assessment year, i.e., there should be actual division of the profits of such year, which means that the share of profits should go to the coffers of each partner physically. In this case, this is not there. From the record it is not borne out that there is actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a was confronted with her statement and she was not able to state the amount of profit-share, as she told that she could do so on looking into the books of account. This fact shows and proves that both the ladies are not aware of their share of profits for the previous year, relevant for the assessment year under consideration. Therefore, from this fact it can be safely concluded that the profits of the firm in the previous year, relevant for the assessment year under consideration, were not actually divided and had not gone to the hands of the lady partners. 10. No doubt, it is contended by the learned counsel for the assessee that the lady partners were not given particular and proper opportunity of being heard and, therefore, principles of natural justice are violated in non-confronting the statement so recorded by the Income-tax Officer. This contention has no force at all in view of the facts as mentioned above. Furthermore, this issue is not seriously pressed before us and, accordingly, we reject it. 11. From the above facts, it is clear to us that non-contribution of capital share and distribution of profits among the partners is not there as is required by clause 4 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistered under the Indian Partnership Act vide Registration No. 1229 as well as under Central Sales-tax Act vide Registration certificate No. AA-158/72 JPA (RST) and A-49/50/JPA/CST, but the Income-tax Officer is within his power to satisfy himself regarding the genuineness of the firm. Therefore, if the firm has been registered and the partnership deed is taken as valid by the aforesaid authorities, then it cannot be held that the Income-tax Officer has no power to investigate and collect the facts to prove that the constitution of the firm is non-genuine. Accordingly, we reject the contention of Shri Ranka that when the registration has been granted by the sales-tax authorities mentioned above, then the Income-tax Officer has no power to question the genuineness of the firm. 14. The learned departmental representative is within his powers to raise this issue before the Tribunal as he is representing the respondent revenue in the appeal before the Tribunal and, therefore, he can support the impugned order by raising any argument which was not considered by the authorities below or which is new argument to support the impugned order. The argument of the learned departmental repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l reading of this case as a whole makes us clear that in the partnership which is an agreement or contract, consideration is a must on the part of the partners which may be in cash or kind. Therefore, we hold that this case is not in favour of the assessee; rather it proves the stand of the learned representative of the department. No doubt, the counsel for the assessee has cited aforesaid cases, but we do not deem it proper to discuss each case, in view of the fact that in deciding the issue regarding the genuineness of the firm the same is to be decided on the totality of the facts and circumstances of each case. The totality of facts proves that the alleged partners are there to reduce the liability of tax and, therefore, the partnership deed is a make-believe deed, particularly in view of the fact that the terms and conditions of the partnership deed are not fulfilled, as we have observed above. 18. It is pertinent to note that Shri Ranka refused to show the cash book to the learned departmental representative regarding the entry dated 1-2-1979 wherein it is alleged that the partner Smt. Bhanwar Devi, has deposited a sum of Rs. 1,000 which proves that the said entry in the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the business is benami business of the male partner on the totality of the facts and circumstances of the case. 21. In view of our above discussions and reasons thereto, we hold that the authorities below are justified in non-granting of registration to the fir, in view of the fact that the firm is not genuine as well as the execution of the partnership deed, which are the conditions precedent for granting the registration. Accordingly, we confirm the impugned order. 22. In the result, the appeal is dismissed. Per Shri A. Kalyanasundharam, Accountant Member - I have gone through the order passed by my learned brother, but even on facts I am unable to agree with the views of my learned brother. On pare 13, in para 9, he has reproduced clause 4, 6 and 7 of the partnership deed. These are reproduced again below for easy references : "Clause 4 of it says that the capital shall be subscribed and brought by the parties to this deed by mutual consent and according to the exigencies of business. This clause consists of three parts, i.e., (a) that there will be contribution by the partner as share capital which is to be settled by the consent of the partners and to be to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact, benami of the male partner. The reading of clause 4, which is reproduced above, to my mind, indicates that the partners may contribute capital as is required for the business by a mutual consent reached between the partners. If the partners had intended that all of them would contribute capital they would have provided for it in the capital contribution clause stating that each partner shall contribute capital in their respective profit-sharing ratios or by mentioning such specific amount to be contributed by each of the partners. This partnership deed has been signed by all the partners. This itself is sufficient enough, as otherwise there was no necessity of bringing in the words to be settled by the consent of the partners. The partners, thereafter, acted upon this partnership deed and when some capital was required, Smt. Vimla Patni contributed Rs. 1,000. Emphasis has been given to the fact that there has been no withdrawals by the two lady partners in the year under review. To my mind, this is totally irrelevant. The reference to pages 19 to 25 of the paper book, which contains the statement as was recorded by the ITO of the two lady partners clearly indicates that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther. The ladies have correctly stated the profit-sharing ratios and Smt. Vimla Devi Patni had gone to the extent of stating that profit was derived to the tune of Rs. 4,000. The statement was taken sometime in August 1982 and for assessment year 1982-83, the profit as was credited to her account was Rs 4,092. The Capital account of the lady partners for assessment years 1980-81, 1981-82 and 1982-83 which have been filed in the paper book on pages 16 to 18 are given below : ASSESSMENT YEAR 1980-81 Smt. Bhanwar Devi Chopra : Rs. Rs. To balance 11,953.64 By Deposit 1,000.00 By Profit 10,953.64 --------- --------- 11,953.64 11,953.64 --------- --------- Smt Vimla Patni To balance 7,824.03 By profit 7,824.03 --------- --------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the partnership deed. The profit derived from the business was distributed to the partners in accordance with the partnership deed and the distribution was correctly made. My learned brother has expressed that more running capital would be required for the firm, by recording the cost of the goods brought in which was to the tune of Rs. 30,990 to the sales of Rs. 98,749 and had come to the conclusion that more capital was required in order to make the sales to the rune of Rs. 98,000. It is for the businessman to decide what is the quantum of capital that is required and how much working capital would be necessary. Therefore, on the basis given about the requirement of the funds the same cannot be the basis for holding that the terms and condition of the partnership deed were violated. There is no denial that under the Income-tax Act, the ITO has all the powers to enquire into the genuineness of the partnership for the purpose of granting of registration of the firm. But, the ITO while exercising his powers under the statute mush examine the issue in entirety and should not pick and choose and decide the issue merely because the other two partners are ladies, who ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the firm is non-genuine and the partnership is a sham on account of the lady partners, the benamidar of male partner, Shri Sirehmal Chopra ?" 2. The assessee, M/s Rajesh Corporation, had applied for registration in Form NO. 11. It was stated that there were three partners in the firm, which came into existence with effect from 1st February, 1979. The accounting year of the firm ended on 30-6-1979. The Income-tax Officer, however, held that the partnership was not genuine and the two lady partners, Smt. Bhanwar Devi and Smt. Vimla Patni, were not genuine partners but were benamidars of the male partner, Shri Sirehmal Chopra. He further held that the execution of the instrument of partnership was only a make-believe document. He, therefore, refused the registration of the firm and the assessment has been made in the status of an unregistered firm. 3. The Income-tax Officer had found that Shri Sirehmal Chopra was doing the business of precious stones and at the time of constitution of the firm on 1-2-1979 he brought in some precious stones valued at Rs. 40,990 as his capital in the firm. Shri Sirehmal Chopra was the son of Smt. Bhanwar Devi and brother of Smt. Vimla Patni, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not bringing in any capital worth the name. The Appellate Assistant Commissioner also noted that the precious stones were sold off by the year 1981-82, after which the firm had only income from interest and commission. Thus, according to him, this was merely a conversion of individual assets into the assets of partnership and thus diverting the income, which would have normally come to him. He also referred to the lack of experience of the lady partners, who could not have contributed to the commission income earned in later years. He, therefore, held that the registration had rightly not been granted. 5. Before the Tribunal there was a difference of opinion between the Members and whereas the Judicial Member held that the registration could not be granted to the assessee-firm, the Accountant Member held that the firm was genuine and the registration could not be refused to it. He also held that the two lady partners could not be termed to be benamidars of the male partner. 6. Both the sides have addressed in favour of their respective claims. The learned counsel for the assessee submitted that the partnership deed had been duly executed and the application had been properly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel submitted that there could be no inference that the ladies were benamidars of the male partner. 7. The learned counsel further submitted that the Income-tax Officer having held that the ladies were benamidars of the male partner has proceeded to accord the status of an unregistered firm to the assessee and he has not assessed the whole income in the hands of the male partner. He referred to the provision of the partnership deed about the contribution of capital and pointed out that it was not necessary for the partners to contribute capital and such capital could be contributed only if the firm required it. Clauses 15 and 16 stated that there was agency between the partners and each partner could act on behalf of the other. He pointed out that the order of the Judicial Member suffers from certain infirmities and he pointed out that the profit earned from year to year by the ladies have been assessed as a part of their wealth by the Income-tax Officer. He also contended that one of the considerations of partnership is the sharing of losses and the partners had been taken for this consideration as well. The liability was not limited and the ladies were person with m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the Appellate Assistant Commissioner and pointed out the circumstances under which the male partner, Shri Sirehmal Chopra, has brought in some precious stones and had formed a partnership to divide the profits from the transactions in respect of precious stones. He submitted that Shri Sirehmal Chopra was in total charge of the business and the ladies were there only to divide the profit. He also contended that after two years there was no business of the firm and only commission income was earned after that, where the ladies had no part to claim. The departmental representative admitted that the Income-tax Officer had not assessed Shri Sirehmal Chopra in respect of the whole income of the firm and he could not rebut the statement made by the counsel for the assessee that till today Shri Sirehmal Chopra has not been assessed in respect of this income. However, he submitted that from all the facts it was clear that the firm was not genuine and the whole purpose of bringing the ladies was to divide the profits for the purposes of income tax. He contended that the factual genuineness was different from merely where being (sic) a legal entity of the firm. In support of his submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ladies that they were unaware about the nature of the business of the firm and their relationship in respect of this firm. They were aware of the profit being earned by them and also the other details about the partnership business. The Income-tax Officer himself has held that the assessee was a firm though he has accorded the status of an unregistered firm. There has been no attempt on the part of the Income-tax Officer to assess the income of the firm in the hands of the male partner which should have been the obvious result if the two lady partners were bogus partners and benamidars of the male partners. There is no requirement in law about the capital contribution by a partner and in this case the capital as such was not required and all what had come in were precious stones in respect of which the business was carried on. The firm has carried on the business by making credit purchases from the Hindu undivided family and in view of this there was no requirement of cash for the business of the firm. The partners again had been debited with their taxes and insurance premiums and there is no requirement for withdrawing the profits for household expenses as the ladies had other res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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