9911796707
TMI Blog1984 (12) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... m was clearly in violation of the provisions of section 47 of the Indian Trusts Act, 1882. In other words, according to the ITO, the trustees by joining the firm had delegated their power to manage the trust property to other persons who were partners in the said firm, which was not authorised by the aforesaid provisions of the Indian Trusts Act. Therefore, the act of joining as partner by the trustees in terms of the trust deed was illegal, contrary to law and against public policy. Such action on part of trustees would result in injury to the interest of the beneficiaries. Therefore, there was no legal and valid partnership which could be said to have come into existence. In this view of the matter, therefore, the ITO declined to continue registration to the assessee-firm for the assessment year 1976-77 and for the same reasons, he cancelled registration granted for the assessment year 1975-76. 2. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). It was pointed out to him at the outset that the ITO having granted registration for the assessment year 1975-76, it was not proper or open to him to decline to grant continuation of registra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the instant case and the decisions of the Tribunal, referred to earlier, clearly support the view canvassed by the assessee. In this view of the matter, he held that the decision of the ITO that there was no genuine firm in existence, was not justified. The Commissioner (Appeals) also observed that qua partnership, the trustees were individuals and they were required to distribute the income or apply the income for the benefit of the beneficiaries, in accordance with the trust deed after their share of profit in the firm was determined. Therefore, there was nothing wrong in the claim for registration applied for by the assessee and in this view of the matter, therefore, the Commissioner (Appeals) vacated the order for the respective years cancelling registration/continuation of registration for the respective years under appeal. 3. Being aggrieved, the revenue has come up in appeal before us. It may be stated that in course of hearing before us, apart from the decision in the case of Gautam Sarabhai (A-5) Trust, reliance was placed on the recent decision of the Tribunal in the case of ITO v. Mahor [IT Appeal No. 2268 (Ahd.) of 1982, dated 28-10-1983]. It may be stated that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trust or the partnership are different and distinct and, therefore, there was no reason to induct the provisions of the Indian Trusts Act, in order to determine the validity or genuineness of the firm. Shri Malik, in reply, referred to the decision of the Tribunal in Leenky [IT Appeal No. 227 (Ahd.) of 1976-77, dated 26-8-1978] and Shri Patel, in reply, pointed out that the said decision was rightly distinguished by the Commissioner (Appeals). 4. We have considered the rival submissions. As pointed out earlier, the controversy is fairly covered by the decisions of the Tribunal, referred to earlier, particularly the last mentioned decision in Mahor's case. Distinction sought to be placed on behalf of the revenue before us and very forcefully argued by Shri Malik, loses sight of the basic issue relating to the obligation of the trustees under the Indian Trusts Act and the rights and obligations of a partner under the Indian Partnership Act, 1932. The concept of dual capacity is well recognised in the case of CIT v. Bagyalakshmi Co. [1965] 55 ITR 660 (SC). Now while considering the question of registration, one has to look at the deed of partners and the application of registr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to grant registration to the appellate firm for the assessment years 1975-76 and 1976-77. 3. The facts in short are that originally, the ITO has allowed the registration for the assessment year 1975-76. Subsequently, the order was cancelled by order under section 186(1) of the Income-tax Act, 1961 (' the Act '). The reasons given by the ITO were that the partnership firm did not carry on any business during the year and, therefore, no valid partnership had come into existence. The second reason given by the ITO was that the firm was constituted of seven partners who represent seven different discretionary trusts and the trustees had no power under their trust deeds to join partnership on behalf of the trusts. Therefore, there was a breach of trust in formation of the partnership. The partnership lacks the principle of agency and had no legal force and such a partnership in violation of the Indian Trusts Act, could not be allowed registration. 4. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). The Commissioner (Appeals) has considered the Tribunal's orders and has taken the view that even though the trustees had joined the partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness. Investment is different from business. Where the trust deed gives a discretion to invest the trust money at interest on securities, the trustee can only invest in proper securities, In this case the trustees are not authorised to enter into partnership for the purpose of business. Partnership is always involved in a business, while investment simpliciter does not involve business. The trustees in this case are authorised only to invest the trust money in shares, stocks, debentures, deposits, etc., but the trustees are not authorised to run the business from the trust fund or to enter in to a partnership firm. Therefore, it is a clear violation of provisions of the trust deed. Now the question remains whether this action of the trustees, for which they are empowered under the trust deed, is void or voidable. In case of voidable, the beneficiaries may only be persons who can challenge the action of the trustees, but in case of void agreement even beneficiaries have no right to rectify the agreement entered into by the trustees. In this case the trustees have entered into partnership by contribution of capital of trust fund and thereby allowed the strangers to deal with the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : " Whether the Commissioner (Appeals) has erred in directing the ITO to grant registration to the appellate firm for the assessment years 1975-76 and 1976-77 ?" THIRD MEMBER ORDER Per Dr. V. Balasubramanian, Vice President --- Under a partnership deed dated 26-6-1973, seven persons joined together to carry on the business of money-lending and traders, etc., specified in clause 1 of the deed. The partnership deed provided that each one of these persons acted not on his own, but as a representative of a trust created by a duly made trust deed. Thus, the partner first mentioned, that Smt. Shyama G. Sarabhai represented Sarladevi Sarabhai, Trust No. 1 created by trust deed dated 28-3-1960. Dr. Ambalal Sarabhai represented Sarladevi Sarabhai D., Trust No. 2 created by the trust deed dated 28-3-1960 and so on. The assessee-firm applied for registration for the assessment year 1975-76, which was granted by the ITO. For the assessment year 1976-77, an application for continuation of the registration was put in. While considering this application, the ITO came to the conclusion that there was no genuine firm in existence, since the trustees rather than individuals had joined as pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r decision, he directed reversal of the Commissioner (Appeals)'s order. The point of difference between the two learned Members is phrased as under : " Whether the Commissioner (Appeals) has erred in directing the ITO to grant registration to the appellate firm for the assessment years 1975-76 and 1976-77 ?" 3. The learned counsel for the department has pointed out that the decision in Gautam Sarabhai (A-5) Trust's case does not cover the case at all. It related to the individual's appeal and the issue therein was whether there was transfer of capital, etc., in the case. No question of registration or genuineness of the firm was involved. The decision in Mahor's case was also not relevant. More than that this latter decision has relied on the former decision in Gautam Sarabhai (A-5) Trust's case. Since the issues in both the appeals were entirely different from each other, according to the learned counsel, Mahor's case was not correctly decided at all. In Gautam Sarabhai (A-5) Trust's case a particular view was taken on the question of transfer. This view has been reversed by the Hon'ble Gujarat High Court in Kartikey V. Sarabhai's case. On the contrary, the learned counsel h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the present case. Support for this proposition, according to the learned counsel, obtains in the Supreme Court decisions in CIT v. A. Abdul Rahim Co. [1965] 55 ITR 651 and Bagyalakshmi Co.'s case. Analogically, reference is made to the decision of the Gujarat High Court in L. Chhotalal Co. v. CIT [1984] 19 Taxman 169 where the well settled law that there is no impediment in a HUF or similar entities becoming partners in the firm, has been stressed. My attention is drawn also to the decision of the Supreme Court in the case of Charandas Haridas v. CIT [1960] 39 ITR 202. According to the learned counsel, section 47 has no application to the present case. That section deals with the delegation of the trusts in a particular case. This section itself provides by way of exceptions for delegation of specific powers in appropriate case. Section 20 of the Indian Trusts Act also does not apply. The partnership by itself, therefore, cannot be held as illegal, opposed to public policy or in any way contrary to law. Registration has, therefore, to be granted and continued for the subsequent year. 6. In my view, neither factually nor as a matter of law can the genuineness of the par ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
