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TMI Blog1977 (10) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... specific clause for provision of capital by the partners but in cl. 6 it was provided that capital contributed by the parties shall carry no interest. The actual capital contributed by the partners was as under: Sewa Ram Rs. 8,500 Sham Sunder Rs. 5,000 Sunena Devi Nil Akki Devi Rs. 10,000 Hans Raj Rs. 10,000 Vijay Laxmi Rs. 18,000 3. For the previous year ending 31st March, 1972 relevant to the asst. yr. 1972-73, the firm applied for registration. For ascertaining whether the firm was genuine, the ITO required that all the partners should be produced for examination. All the partners except Smt. Vijay Laxmi were produced and their statements were recorded by the ITO. Smt. Vijay Laxmi filed an affidavit. Sewa Ram in his statement admitted that he was a partner having 18 per cent share and he had contributed 8,500 as capital. Sham Sunder who was a student of M.D. in Rajendra Medical College, Patiala, admitted that he was a partner in the assessee-firm and he had introduced Rs. 5,000 as his capital. He further stated that the said sum of Rs. 5,000 was given by his uncle Lala Banwari Lal (Phupha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66) 59 ITR 424 and Himalaya Engineering Co. vs. CIT (1965) 57 ITR 762. The AAC did not dispute the proposition of law laid down in these two judgments but he observed that certain partners are admitted into the partnership, without contributing the capital or skill, it certainly throws a doubt and rather a serious doubt and the inference that they are benamidars of the other partners to whom they are closely related would certain arise". Relying on the judgment in Polly vs. Driver, L.R. (1876 Ch. D. 458) which judgment is referred to at page 43 in the book "Firms and Income-tax" by N.S. Srinivasan, it was pleaded that there could be dormant partners who put in neither capita not skill and it was not quite accurate to say that all the partners must contribute labour, skill or capital. For purposes of this appeal, the AAC did not consider it necessary to decide whether contribution of capital or skill was a must for all the partners. The AAC however, observed that even when there was no contribution of capital or skill, there must be some other consideration like using the name or fame or the reputation of the persons. Relying on the judgment in Seth Ramnath Daga vs. CIT (1971) 82 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's appeal. The assessee is aggrieved by this order of the AAC. 5. The learned Counsel for the assessee took us through the order of the ITO and the AAC and submitted that there were two main reasons because of which the firm had been denied the benefit of registration. One reason was the absence of capital or skill by the partners and the second reason was suspicion that some of the partners were nominees or benamidars of Sewa Ram and Hans Raj, the two working partners. He referred to the Supreme Court Judgment in Dulichand Laxminarayan vs. CIT (1965) 28 ITR 535, 532 (SC) wherein s. 4 of the Partnership Act has been discussed and it has been explained that this section requires the presence of three elements, namely, (1) that three must be an agreement entered into by two or more persons; (2) that the agreement must be to share the profits of a business; and (3) that the business must be carried on by all or any of those persons acting for all. The submission made was that when s. 4 of the Partnership Act itself does not lay down that contribution of capital or skill was necessary for entering into a partnership, the ITO could not held the firm to be a non-genuine firm on the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as benamidar of Sewa Ram or Sunena Garg was benamidar of Hans Raj. He relied on the judgment in the Central Talkies Circuit, Matunga. In re (1941) 9 ITR 44 (Bom) and submitted that if a partnership was genuine and actually existed in the terms specified in the deed, the fact that it was formed with a view to diminish the incidence of taxation was not relevant. He relied on the judgments in Dhirajlal Girdharilal vs. CIT (1954 26 ITR 736 (SC) and CIT vs. Daulat Ram Rawatmull and submitted that the finding of the AAC that some of the partners were benamidars of the others was based partly on relevant and partly on irrelevant material. He submitted that the finding that some of the partners were nominees or benamidars of the two working partners was a vague finding. After agreeing with the ITO, the AAC had held that in any case Rajeev Kumar was benamidar of Sewa Ram and Sunena Garg was benamidar of Hans Raj. He also relied on the Supreme Court judgment in Umacharan Shaw Bros. vs. CIT (1959) 37 ITR 271 (SC) for the submission that the finding that some of the partners were benamidars of the two working partners was based on surmises and conjectures and mere suspicion could not take th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he firm but that did not mean that taking all the circumstances and factors cumulatively, such an inference could never be drawn. He pointed out that the judgments of the Supreme Court in Dhirajlal Girdharilal and Daulat Ram Rawatmull were not relevant because there was no irrelevant material on the basis of which the AAC did not accept the assessee's contention that the firm was genuine firm. He also relied on the Punjab and Haryana High Court judgment in Kanayalal Ramchand (ITR No. 45 of 1975). He finally sought permission to urge a legal ground which was not taken before the AAC. The submission made was that as the guardian of the minor Rajeev Kumar had not signed the partnership deed, he could not be admitted to the benefits of partnership. For this submission, he relied on the Allahabad High Court Judgment in Addl. CIT vs. Uttam Kumar Promod Kumar (1974 97 ITR 730 (All). He this pleaded that the order of the AAC should be confirmed. 7. The learned Counsel for the assessee, in reply, submitted that after the judgment of the Allahabad High Court in Uttam Kumar Promod Kumar, the CBDT had issued a Circular No. F. No. 210/13/74-I.T. (A.II) dt. 19th March, 1976 directing that an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position that where a minor was admitted to the benefits of partnership, it was not necessary for such admission to be evidence by any body on behalf of the minor and even if it was so evidenced in view of the Supreme Court judgment in Mohanlal Sadhu Ram's (1965) 57 ITR 415 (SC) case it would not amount to the minor being admitted to the partnership unreservedly. To avoid practical difficulties, the CBDT issued a circular dt. 19th March, 1976 that the completed assessments should not be disturbed by cancelling registrations already granted. It was further directed that an opportunity should be given to the concerned assessees to make necessary attestations or to amend the partnership deeds and registration should be cancelled only where this needful was not done. It is common ground that the partnership deed dt 22nd Oct., 1971 in the present case has not been signed by the guardian of the minor. The deed was executed on 22nd Oct., 1971 when it was not considered necessary to obtain the signatures of the guardian of the minor on the deed. The Allahabad High Court Judgment id dt. 20th Oct., 1973. Even though the aforesaid circular was issued on 19th March, 1976 the assessee was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s like Sunena Garg and Rajeev Kumar (minor) did not contribute any capital will not be a valid ground for holding that the firm is not a genuine firm. The authorities in Himalya Engg. Co. vs. CIT and CIT vs. Central India Agencies (1974 Tax LR 899) support our finding that when no share capital was contributed by some of the partners, the firm could not be held to be non-genuine. The admitted position in this case is that Sewa Ram and Hans Raj are working partners and the others are sleeping partners. The law permits sleeping partners to be partners of a firm and the firm cannot also be denied the benefit of registration merely because some of the partners are sleeping partners. An objection has also been taken that the shares allotted to different partners are disproportionate to the capital contributed by them. The capital contribution and the allotment of shares is a matter to be decided by the partners themselves and merely because the shares allotted are not in proportion to the capital investment, the firm cannot be held to be a non-genuine firm. 10. The main reason for holding that the firm is non-genuine firm is that Sham Sunder and Rajeev Kumar are benamidars of Sewar R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not properly proved. (ii) Ram Chand was an old man of 72 years and had retired from service in 1962. His bank Pass Books were not produced. (iii) The share given to Ram Chand was disproportionate to his investment. (iv) Ram Chand never drew his share of the "profit from the firm". (v) Though the partnership deed was written on 26th Oct., 1971, dissolution deed was not produced. (vi) Though the partnership deed was written on 26th Oct., 1969, profit was said to be devided from 1st April., 1969 (vii) Kanhaya Lal raised several loans both during the previous year and the current years. Though the Tribunal had held that the Sub-partnership was a genuine partnership, the High Court reversed the Tribunal's order. The facts of that case are entirely different. In our opinion, that judgment does not help the Revenue in any manner. 12. The learned Departmental Representative had relied on the judgment in Dhanji Lalji In that case there was a recital in the deed of partnership that DL converted his proprietary business into a partnership business became DL found it difficult to manage such a large volume of business and, therefore, he decided to take in the three ..... 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