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TMI Blog1988 (1) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the capital contribution of the partners was a necessary requirement of the partnership ? " The facts, in brief, are that a partnership firm in the name and style of M/s. Virendra Kumar Avinash Kumar was constituted by Sri Jagat Narain with his two sons, namely, Sri Virendra Kumar and Sri Avinash Kumar, under the partnership deed dated October 17, 1972. The share of each partner in the profit and loss was 1/3rd. The said partnership applied for registration by filing Form No. 11 before the Income-tax Officer on June 14, 1973. The original partnership deed was filed with the Income-tax Officer. It is stated in the partnership deed that Sri Jagat Narain constituted a joint Hindu family with his two sons and his wife, Smt. Chanda Devi, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efused. The dispute was carried in appeal to the Appellate Assistant Commissioner and further to the Appellate Tribunal. The Appellate Tribunal was, however, of the view that the partnership could not be said to be not genuine merely on the ground that the erstwhile business was the business of Sri Jagat Narain, that no capital of the Hindu undivided family was invested therein and that no partition of such capital was possible since the business belonged to Sri Jagat Narain individually. The Tribunal was of the view that even if the business belonged to Sri Jagat Narain individually, he could have made a gift of the amount, invested by his two sons in the partnership business, to them and at the most their contribution to the capital of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in addition to that there should be a valid consideration for the agreement. Section 185(1) of the Act, 1961, states that on receipt of an application for the registration of a firm, the Income-tax Officer shall enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and if he is satisfied that there is or was during the previous year in existence genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year. The Explanation following sub-section (1) to section 185, so far as relevant, states that for the purposes of the section and section 186, a firm shall not be regarded as a genuine firm if any partner of the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interests of the firm's business." The above clause shows that none of the partners was dormant and each one of them was to endeavour to his best to promote the interests of the firm's business. Clause 7 of the said deed clearly shows that each partner agreed to share the loss of the firm to the extent of 1/3rd. So, the sons of Sri Jagat Narain had taken upon themselves the burden of working partner and they agreed to share the losses to the extent of 1/3rd share each to their detriment. So, in this case, the agreement is not sans consideration. Then the question is whether capital contribution is a necessary ingredient of a valid and genuine partnership. In our view, capital contribution is not a necessary element of a genuine partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. In every benami transaction, the intention of the parties is the essence. " Let us see whether the authorities below have applied the aforementioned criteria to judge the true character of the two sons of Sri Jagat Narain. Decision of benami character will not be confined to the facts as they stood on the date when the partnership agreement was formed. The Income-tax Officer passed the order under section 185 on October 4, 1976, and the partnership started from October 17, 1972. So the authorities below ought to have taken into consideration the facts that preceded and followed the deed. The totality of the facts and circumstances has not been taken into consideration and the Tribunal on the second round erroneously unduly stressed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gift from Sri Jagat Narain. When, according to the Tribunal, the capital belongs to Sri Jagat Narain individually, he either could gift the whole or part of it to his sons or invest the same in the names of his sons to reduce his tax liability. There is no material on record, nor has any been pointed out by the authorities below that Sri Jagat Narain resorted to a device of partnership to reduce the tax liability and, therefore, the only inference of gift, at the most, could have been drawn and for that no additional evidence was required. Viewing the matter from any angle, the approach of the Tribunal taken on second round appears to be erroneous. On the facts and circumstances of the case, we are of the view that the Tribunal was wrong ..... X X X X Extracts X X X X X X X X Extracts X X X X
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