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TMI Blog1987 (10) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order passed in the case of old firm the Income-tax Officer held that part of the business of the old firm in carting was diverted to another concern started in the name of Dave Transport Co. (new firm). Besides, all the receipts of the new firm were from the old firm. Again, the new firm was not found to be genuine as per the order posed in the case of new firm u/s. 185(1) (b) of the Act denying registration to the new firm. Accordingly, income of the new firm, being Rs. 75,004 was added to the income of the old firm and accordingly. the assessment was completed on an income of Rs. 3,58,000 plus. 2.1 In the order u/s. 185(1) (b) of the Act passed in the case of new firm the Income-tax Officer brought on record following facts and findings regarding the constitution of the new firm the relevant extract from the order is reproduced below. "An application in Form No. 11 signed by : (1) Shri Ramesh R. Dave (Rasikchandra N Dave-HUF) (2) Smt. Saralaben R. Asti (3) Shri Jaswantlal Naginlal Doshi (4) Shri Natwerlal Becharlal Panchal (5) Shri Madaneshkumar Jaychand Dave was filed on 1/3/1975 together with an instrument purported to have been instrument of partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by an outside agency, viz., Shri Bansilal Patni who constituted the work of carting even after the formation of the new firm, that is to say, after the formation of the new firm the outside agency did the job of carting on behalf of the new firm. The principal business of the old firm was to deal in products of chemicals, etc., and carting of their products has been incidental to its main business was carried on by an outside agency. In the arrangement which was changed over the old firm had siphoned off its profit to the new firm. He also gave a finding that there was interlocking and interlacing of financial as well as business because the financial control of the business was retained by one Shri Ramesh R. Dave and his sister, who could normally operate book account. There was restriction regarding the withdrawal by the working partners to the extent of 40% of the profits. As the end of the accounting year, the old firm had retained an amount of Rs. 91,000 plus. Therefore, the business done in the name of the new firm was part and parcel of the business of the old firm. The new firm was not a genuine firm. 2.3 The matter was referred to the IAC u/s. 144B of the Act. Before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in respect of the carting job and it was found commercially expedient to hand over the job and it was found commercially expedient to hand over the job of carting to more reliable agency, i.e., the new firm. The Commissioner (Appeals) found that there was considerable strength in the above arguments and therefore, there was no diversion of any business by th old firm. 3.1 In respect of the alternative stand of the IAC regarding the provisions contained in sec. 40A (2) it was brought to the notice of the Commissioner (Appeals) that in spite of the old rates given to the new firm the old firm was left with substantial surplus to the extent of Rs. 61,000 plus. The Commissioner (Appeals) was of the view that there was commercial expendancy in handing over the carting job to the new firm and it was found that eventually the matador, trucks, etc., and also letting of godowns s of the consumers industries. Therefore, there was no device to reduce the tax liability of the old firm. The amounts outstanding against the old firm in the books of the new firm were in respect of the outstanding bills of the last month. There was no tangible proof to suggest that the profits of the old firm h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm was required to be granted registration the income was required to be clubbed with that of the old firm for which reliance was placed on Sohan Singh v. CIT [1986] 158 ITR 174 (Delhi). 5. The learned representative of the assessee strongly supporting the orders passed by the Commissioner (Appeals) highlighted the fact that the old fir never carried on the transport business and therefore, there was no question of diverting the business belonging to the old firm. The whole inquiry was directed and in fact had emerged because of the non-granting of registration to the new firm. Besides, the Commissioner (Appeals) had also given a finding regarding the fair market value of the services rendered by the new firm and therefore, only 10 per cent of the freight paid by the old firm to the new firm was considered as excessive and accordingly it was directed that excess amount could be added in the assessment of the old firm. The department had not preferred any appeal on this ground challenging the finding on the basis of provisions contained in sec. 40A (2). Besides, the partners had enjoyed the income earned from the new firm and this fact is not challenged. Again, the clause r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the old partnership - [see CIT v. A. W. Figgies Co. [1953] 24 ITR 405 (SC) as also decision in the case of K. K. Kelukutty]. 8. Coming to the second issues where the factual aspects have preponderance over the legal aspects, first of all, we shall to be clear on point as to what was the position with regard to the carting activities earlier to the formation of the new firm. The relevant clauses of the agreement entered into between the Tata Chemicals Ltd. and the old firm some time on 1st July, 1975 (which is said to be effective even during the year under consideration) read as under. "12. Punctually on or before the 7th day of each calendar month (hereinafter referred to as the due date), the Distributors shall remit to the Company the proceeds of sales of goods effected during the immediately preceding calendar month (including a sum equal to the amount of all sales on credit or otherwise not at the time collected) less the amount of deductible expenses and Distributors' commission and any amount paid as advance to the Company. If the Distributors shall fall to remit on the due date the amounts due the same shall be debate against their accounts with the company and carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 43,000 plus was offered for taxation. In asst. year 1975-76 the new firm was not in existence and therefore, no amount was paid to the new firm in respect of carting charges. However, in asst. year 1976-77 when the new firm came into existence, it is seen that the carting charges of the old firm increased to Rs. 11,57,000 plus though of course there is also a surplus to the extent of Rs. 61,000 plus because of hire reimbursement but this amount of Rs. 11,57,000 plus which is the expenditure of the old firm includes an amount of Rs. 1,37,447 paid to the new firm in respect of the carting charges. The carting job was undertaken by the same old outside agency, viz., Shri Bansilal Patni of course, now on behalf of the new firm for which the amount paid by the new firm is only Rs. 50,686. Therefore, the difference of Rs. 87,000 plus is nothing but the excess of carting charges paid by the old firm to the new firm. It is an admitted position that during the year under consideration the new firm did not have requisite paraphernalia, so as to under take transportation and carting job, etc., fully and that is why the new firm got the work done by Bansilal Patni. The new firm had any one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Officer regarding the diversion of the old firm, was required to decide upon the addition on the basis of provisions contained in sec. 40A (2). The fact that the revenue has not come up by way of appeal on such finding is not at all relevant to the issue under consideration, when we are deciding upon the larger issue. 10. Coming to the next issue regarding whether registration is required to be granted to the new firm, we have.already held that the new firm is a separate partnership. Besides, all the legal attributes required to exist for holding the partnership as valid are also existing. The new firm is also registered with various authorities under the various laws and rules. The profits supposed to have been earned by the new firm were apportioned among the partners in specified shares and there is no finding that the profits were not enjoyed by the partners themselves. Looking to the subsequent events also it is quite clear that the intention the partners in forming the partnership was real and the new firm had added to the assets of the firm. The factors like some of the partners not having contributed capital or son of the partner not having say in the managemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1966, there was deviation from the correct legal position on the part of the CBDT in stating that he provisions of the Act of 1961, were on the same lines as the provisions of the Act of 1922 and that the decision in Murlidhar Jhawar's case would apply equally to assessments made under the IT Act, 1961, the statements in the CBDT's circular would be binding on all officers functioning under the Act. (iii) That in view of the principle against double taxation in the hands of the same person and in the absence of any special provision enabling double taxation of income, once in the hands of the unregistered firm and again in the hands of its partners, the assessee could not be taxed as an unregistered firm after the assessment of a partner thereof." In view of the above position of law, we are unable to interfere with the decision taken by the Commissioner (Appeals). 11. Coming to the last issue regarding addition of income in the hands of the old firm despite the registration being granted to the new firm we accept the stand taken on behalf of the revenue that granting of registration cannot come in the way of deciding the issue regarding in whose hands the income is required ..... X X X X Extracts X X X X X X X X Extracts X X X X
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