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TMI Blog2001 (3) TMI 230X X X X Extracts X X X X X X X X Extracts X X X X ..... tners with profit sharing ratio as follows: (1) Shri H.J. Patel 25% (2) Shri A.H. Patel 30% (3) Shri Lalit Bhanjibhai 25% (4) Smt. Meenaben D. Manek 20%. The business of the partnership was construction of shopping centre named as Atul Shopping Centre near Jayshree Talkies on the land owned and contributed by one of the partners viz., Shri H.J. Patel. 3. There was a search at the business premises of the assessee-firm and the residence of the partners on 30-8-1988. During the course of search statements of partners were recorded. In their statements the three partners viz., Smt. Meenaben D. Manek, Shri A.H. Patel and Shri Lalit Bhanjibhai could not give the exact particulars about the partnership concern. Smt. Meenaben D. Manek did state that she was a partner with H.J. Patel in construction activities and that construction activities were carried out near Jayshree Talkies and the name of the building was Atul Apartments but she could not state anything about the partnership i.e. her capital investment and name of other partners of the firm and also regarding her profit sharing ratio in the firm. Similarly, Shri Lalit Bhanjibhai could not state hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en D. Manek could not give the details of the partnership, will not lead to the conclusion that the firm is not genuine. The learned CIT (Appeals) goes on to state "that it is a matter of common knowledge that search being a sudden and rare action causes disturbance to males who are actively involved in business. It, therefore, can be believed that Smt. Meenaben D. Manek was frightened at the time of search on 30-8-1988 and could not give proper replies. There is no reason to reject her statement recorded in the course of assessment proceedings merely on the ground that she has not given similar replies in the course of statement recorded at the time of search". The learned CIT (Appeals) further held that the partnership firm was not benami concern of Shri H.J. Patel observing as under:- "The A.C. (IT) has not brought any positive evidence to suggest that the appellant's business is benami business of Shri H.J. Patel. The factors taken into consideration by the A.C. (IT) to come to the aforesaid conclusion are all irrelevant factors. In a partnership firm there are working as well as financial partners. It cannot be concluded that the business of partnership firm is benami of wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having been assessed on substantive basis in the past and in future the firm cannot be treated as unregistered firm in view of the following authorities: (i) Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747(1) (Guj.), (ii) CIT v. Imperial Textiles [1993] 201 ITR 555 (Pat.) and (iii) CIT v. B.R. Constructions [1993] 202 ITR 222 (AP) (FB). The learned counsel for the assessee further submitted that Shri Lalit Bhanjibhai one of the partners of the firm brought in his own capital. He was in the subsequent years repaid capital with his share of profit. In other words, income in fact was received by the partner. The details of capital contribution were submitted during the assessment proceedings. The learned counsel further drew our attention to preliminary statement under section 131 during the search proceedings of Shri Atul H. Patel who had confirmed his being a partner in the firm. The learned counsel submitted that the basic principal of partnership is that one or more partners may work for the firm and carry on its business. The other partners may be sleeping partners or financial partners. They may not be aware of the day-to-day, business of the firm. The major part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rried on by all or any of the acting for all, within the meaning of the definition of 'partnership' under section 4 of the Partnership Act. The fact that the exclusive power and control, by agreement of the parties, is vested in one partner or the further circumstance that only one partner can operate the bank accounts or borrow on behalf of the firm are not destructive of the theory of partnership provided the two essential conditions, mentioned earlier, are satisfied." On the facts of the case the Supreme Court concluded that all the ingredients of partnership are satisfied under the partnership deed in that case and that the assessee-firm had to be granted registration. We accordingly hold that the Assessing Officer was not justified in refusing registration to the assessee-firm. 8. On the same analogy, we hold that the Assessing Officer is not justified in holding that Shri H.J. Patel is the sole proprietor of Atul Shopping Centre. He was a working partner, managing the affairs of the firm and that should not lead to the conclusion that the other three partners were not the partners of the firm. There is nothing wrong if the major part of the business is handled by one or m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made and many discrepancies, omissions, deviation and inconsistency are noticed.' But the A.C. (IT) has not stated or given one single example of discrepancy, omission, deviation and inconsistency. I am constrained to observe that the writing assessment order and writing essay are two different things which A.C. (IT) ought to have known. The A.C. (IT) has failed to substantiate his charge against the appellant, that the cost of construction is understated and that there are discrepancies, omissions, deviations and inconsistencies. (b) On perusal of A.V.O.'s report I find that he has not given break up of cost of construction estimated by him. Similarly, the A.V.O. has described his estimate as estimate of probable cost of construction. The A.V.O. has nowhere made any adverse remarks of non-furnishing of information by the appellant and has also not pointed out any defect in appellant's actual cost of construction for which full details were furnished to him. With these facts, I hold that the addition of Rs. 2,58,930 under section 69 is not justified and the same is required to be deleted." 11. The learned DR relied upon the Valuation Report of the A.V.O. and submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In support of this contention he relied upon the following authorities: 1. Babyland Hostel v. ITO [1988] 31 TTJ (Ahd.) 136, 2. ITO v. Tandel Automobiles [1990] 35 ITD 191 (Ahd.), 3. Sayar Engg. (P.) Ltd. v. ITO [1992] 43 TTJ (Jp.) 23, 4. ITO v. Sugar Cold Storage Ice Factory [1993] 113 Taxation 7 (Delhi), 5. Sri Har Sarup Cold Storage General Mills v. ITO [1988] 27 ITD 1 (Delhi) (TM), 6. Naresh Behal v. ITO [1992] 41 ITD 298 (Delhi), 7. ITO v. Pitamber Industries (P.) Ltd. [1942] 42 ITD 373 (Delhi) and 8. CIT v. Pratapsingh Amrosingh Rajendra Singh and Deepak Kumar [1993] 200 ITR 798(1) (Raj.) 13. We have considered the rival submissions. In our opinion, the CIT (Appeals) is not justified in deleting the impugned addition simply on the ground that the assessee has maintained accounts in respect of the cost of construction especially when the report of the A.V.O. estimating the cost of construction at Rs. 10,71,900 as against the declared cost of Rs. 3,55,162 was before him. There was a yawning difference of Rs. 2,58,930 between the cost of construction declared by the assessee in its books of account and that estimated by the A.V.O. If he was not satisfied wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y my learned Brother. I agree with him regarding restoration of matter to the file of the Assessing Officer (A.O.) in relation to the addition on the basis of report of the Assistant Valuation Officer (AVO) of the department and which addition came to be made by the Assessing Officer in terms of section 69 of the Act. I also agree and endorse the direction given by my learned Brother in this regard. However, with due respect to him I am unable to agree with his view regarding the other dispute relating to registration of the firm and the finding of the Assessing Officer that the remaining three partners were benamidars of Shri H.J. Patel. The facts have been narrated by my learned Brother surrounding this dispute I, therefore, refrain from repeating the facts. I hold quite opposite view than that of my Brother for the reasons which I am discussing below:- 2. My learned Brother has given heavy weightage to the sworn statements of the three partners, viz., S/Shri A.H. Patel, Lalit Bhanjibhai and Smt. Meenaben D. Manek on 30th March, 1990, when they were summoned by the Assessing Officer under section 131 of the Act during the course of assessment proceedings. In their those deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er person. Any statement given later or during the course of assessment proceedings loses its weight and credibility because there are chances of such person being tutored by other interested person to state in a particular manner or the deponent may realise the adverse consequences in law which may fall upon him on the strength of earlier true statement. It is, therefore, not correct to say, believe or hold that the statement/ deposition given on search day by the aforementioned three alleged partners is unreliable and hence no credence is to be placed because those persons were scared owing to search operations. No doubt search operation is an invasion on a person's privacy and liberty and does cause some embarrassment, hardships and inconveniences. But to say or believe that a person loses his mental faculties or capabilities so as to give untrue statement on search day is unacceptable. I repeat if the statement given by a person on the search day is not true and the statement given on subsequent occasion is stated to be true then the burden lies on such a person, though heavy, to prove as to why the earlier statement is untrue or non-believable and why the subsequent statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main business activity of the firm; the place from where firm's business is carried on and so on and so forth. Can it be said that a sleeping partner does not have any knowledge to such basic and rudimentary matters of the P.S. firm which affect and concern him? To my mind 'No'. And if it is so then it amply gives an indication or rather establishes that those persons are "not partners" but are "mere name lenders" for some third person or persons who is either a partner or an outsider. 5. Only a partnership firm is entitled to present an application for registration under section 184(1) of the Act. Since the firm constituted is not a partnership firm as defined under the Indian Partnership Act the request for registration has to be refused for that reason. Furthermore, the Assessing Officer has found the partnership to be not genuine which finding ought to have been confirmed by the A/C on first appeal by the assessee. On receipt of an application for registration of the firm, the Assessing Officer has to enquire into the genuineness of the firm and its constitution as specified in the Instrument of partnership. He shall grant registration only if he is satisfied that a genuine f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Centre was a genuine firm and entitled to registration in accordance with the provisions of section 185 of the Income-tax Act, 1961? 2. Whether, on the facts and in the circumstances of the case, the business and income of the alleged partnership firm has to be clubbed in the hands of Shri HJ. Patel on the ground that the other partners were benamidars of the said person, Shri H J. Patel?" OPINION Vimal Gandhi, Vice-President- This case has been referred to me by the Hon'ble President, Income-tax Appellate Tribunal under section 255(4) of the Income-tax Act for resolving the difference which has arisen between the Hon'ble Judicial Member and the Hon'ble Accountant Member while disposing of the appeal. The issue involved relates to grant of registration to the assessee-firm Atul Shopping Centre. 2. The Assessing Officer treated the firm as non-genuine and, accordingly, refused to grant registration to it in the assessment year 1987-88. On appeal, the learned Commissioner of Income-tax (Appeals) held the firm to be genuine and entitled to registration. The Revenue being aggrieved, brought the matter in appeal before the Appellate Tribunal. While disposing the appeal, a dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on 30-8-1988 could not state anything about the partnership. She did not know the name of the firm or the share of capital she had contributed. She was also ignorant about the other partners and their profit-sharing ratio. She did not sign any cheque nor was able to give address of the firm. She was also examined during the course of assessment proceedings on 30th March, 1990 when she gave proper answers regarding affairs of the firm. The Assessing Officer, however, rejected the latter statements as an afterthought. 5. The statement of second partner Shri Lalit Bhanjibhai taken in proceedings under section 132 was also utilised by the Assessing Officer wherein the said partner had stated that he did not know his share in the firm or the name of the other partners except Shri H.J. Patel. The source of investment was also not explained by him. According to the Assessing Officer, he appeared to be partner in Atul Shopping Centre and not Atul Construction Co. The Assessing Officer concluded that Shri Lalit Bhanjibhai also did not know anything about the affairs of the firm. 6. With reference to statement of third partner Shri Atul H. Patel, the Assessing Officer observed that he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in not taking into account statement made during the course of assessment proceedings, but relied upon only on the statement made during the course of search. The learned CIT (Appeals) observed that the Assessing Officer has not brought sufficient material on record to show that business of the assessee was benami business of Shri H.J. Patel. According to the learned CIT (Appeals), irrelevant factors were taken into account by the Assessing Officer to deny registration to the firm. He observed that in a partnership, there are working as well as financial partners. Therefore, it could not be concluded that business of partnership was benami business of a working partner on the ground that affairs were being managed by the said partner. The Assessing Officer did not doubt the capital contribution of other partners which was quite adequate. The other partners had shared the profit and made withdrawals in the different years. 8.2 The learned CIT (Appeals) further observed that income considered to belong to Shri H.J. Patel has actually been enjoyed by other partners as per agreement between them. He further held that Assessing Officer should have given due weightage to the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led by one or more of the working partners. Accordingly, it was directed that income of Atul Shopping Centre be assessed in the hands of the firm as constituted. 10. The learned Judicial Member did not agree with the view expressed by the learned Accountant Member and wrote a separate proposed order expressing the view that the assessee was not a genuine firm and as such was rightly denied registration. He further agreed with the view that other alleged partners were benamidars of Shri A.H. Patel. The learned Judicial Member's conclusion was based on the statements of three partners recorded by the authorised officers during the course of search proceedings. In those statements, none of them knew (1) names of other partners of the firm; (2) their respective capital investments and source from which investments were made; (3) their profit sharing ratio; and (4) details of business activities of the firm. Shri A.H. Patel, partner, did not know even what was the business of the firm and from where it was carried on. Subsequent statements of these partners in which these persons gave proper answers were only tutored and unreliable statements. The heavy onus lay on these partners to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts under section 4 of the Partnership Act to constitute a partnership in law are: (i) there must be an agreement to share the profits or losses of the business; and (ii) the business must be carried on by all the partners or any of them acting for all. There is implicit in the second requirement the principle of agency. Control and management of the business of a firm can be left by agreement between the parties in the hands of one partner to be exercised on behalf of all the partners." [Emphasis supplied] 11.1 The other conditions for getting registration for a firm under the Income-tax Act are stated by the Hon'ble Supreme Court in the case of Agarwal Co. v. CIT [1970] 77 ITR 10 as follows:- "The conditions of registration prescribed in this section and the relevant rules are: (1) on behalf of the firm, an application should be made to the Income-tax Officer by such person and at such times and containing such particulars, being in such form and verified in such manner as are prescribed by the Rules; (2) the firm should be constituted under an instrument of partnership; (3) the instrument must specify the individual shares of the partners; and (4) the partnership must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. That in his view was no ground for refusing registration because sleeping partners might be ignorant of the details of partnership. This would not constitute evidence for finding that partnership was not genuine. For above view, the learned Accountant Member relied upon decision of Hon'ble Madhya Pradesh High Court in the case of United Patel Construction Co. as also on decision of Hon'ble Supreme Court in the case of K.D. Kamath Co. 11.4 The learned Judicial Member did not dispute that three partners were sleeping partners. He further agreed "that the sleeping partners or inactive partners do not indulge or interfere in the day-to-day affairs of the partnership business", but the learned Judicial Member did not agree "that the sleeping partners are not even aware of their capital contribution; their own sharing ratio; the sharing ratio of other partners; the main business activity of the firm; the place from where the firm's business is carried on and so on and so forth." He was not prepared to accept that sleeping partners did not have knowledge of basic or rudimentary matters of the partnership. These views led to the point of difference between the learned Member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continued it." 11.7 From the above, it is clear that she did not know much about the affairs of the firm, but she did give the name of the firm in which she was a partner and that construction of "Atul Apartment" was the business of the partnership. She further stated that other details were known to her husband. She did not deny that she was a partner. In my considered view, from the above statement, it cannot be inferred that Smt. Meenaben D. Manek was not partner of the concern. It is a matter of common knowledge that in India, Hindu ladies are not very advanced and in most of the cases their business and properties are looked after by their parents, husband or adult son. The inference that she was a benamidar of Shri H.J. Patel is far fetched and could not be drawn from the material on record. 11.8 For the statement of other two partners, I would like to rely on the observations of the Assessing Officer which are as follows:- "The second partner Lalit Bhanjibhai is a resident of Rajkot. During 132 proceedings carried out at his residence, statement under section 131 was recorded on 30-8-1988. He stated that he did not know about his share in the firm and the name of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artnership. The Assessing Officer has recorded no finding that what Shri Patel had violated any term or condition of the partnership agreement. In other words, there is no suggestion that agreement other than the one incorporated in the instrument of partnership was in operation. There is further no finding that Shri H.J. Patel was acting beyond the express or implied powers possessed by a partner to act for the partnership. 11.10 In the case of K.D. Kamath Co. , Shri K.D. Kamath who was proprietor of the business before it was converted into partnership, had the power even to remove a working partner. Admittedly, he was in full control of the partnership business, but these circumstances were not considered to be destructive of the partnership relationship which existed between the parties to the agreement. Likewise, in the case of Steel Bros. Co. Ltd. v. CIT [1958] 33 ITR 1, one of the questions that arose before the Hon'ble Supreme Court was whether the fact that control and management of the business was in the hands of one of the persons when there were three partners was not against the element of partnership. Their Lordships of the Hon'ble Supreme Court answered the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce and draw an inference that firm was not genuine. In my view, the partnership firm had satisfied all the conditions of partnership and requirement of getting registration under the Income-tax Act. The firm was entitled to registration. With above observations, I agree with the view expressed by the learned Accountant Member. 12. Let this case be placed before a regular Bench for an appropriate order disposing of the case. ORDER Per Shri B.M. Kothari, Accountant Member- The Revenue has raised several grounds in this appeal which have been elaborately discussed in the order proposed by Shri B.L. Chhibber, the learned Accountant Member. Thereafter, a dissenting order was passed by the Hon'ble Judicial Member Shri Abdul Razack vide order dated 20th June, 1995. He agreed with the finding given by the learned Accountant Member in relation to restoration of the matter to the file of the Assessing Officer in relation to the addition made on the basis of report of the Assistant Valuation Officer (AVO) of the Department and which addition came to be made by the Assessing Officer in terms of section 69 of the Act. He also agreed and endorsed the direction given by the learned Accou ..... 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