1. There was an HUF consisting of the assessee, Purushottam, his brother, Shridhar, and their mother, Laxmibai, which carried on the business of money-lending and plying of trucks, and the family own house property. The two coparceners, Purushottam and Shridhar, in their individual capacity are themselves assessee. According to the assessee, the two coparceners thought of carrying on a new business consisting of cotton oil extraction and the said business was commenced with effect from January 8, 1967. Admittedly, there is no partnership document but a registration certificate under the Sales Tax Act has been obtained in the name of the alleged firm. No doubt, later on, a partnership deed has been executed on December 25, 1968, which is, however, not material for the purposes of the assessment for the assessment year 1969-70, the accounting year of the assessee being from Diwali to Diwali. In the instant case, the accounting year ended in October, 1968. The assessment of the HUF was completed on February 6, 1970. However, the ITO came to know about the business in cotton and oil extraction which was carried on in the name and style 'M/s. P.M. Shukla and S. M. Shukla'. The assessment of the HUF was, therefore, reopened and the income of Rs. 28,625 from the new business in cotton and oil extraction started in the name of the alleged firm was added to the income of the HUF. So far as the capital of the alleged firm is concerned, it came out of the funds of the HUF. For the first year ending November 2, 1967, the HUF advanced from time to time an amount of Rs. 67,500 and the closing debit balance in the books of the HUF was Rs. 40,250.
2. The ITO held that there was no evidence to show that there was an independent agreement between the brothers, much less an instrument of partnership, to carry on business as partners, and the whole business was financed from the funds of the HUF. He further found that there could not be a partnership between the karta representing the HUF, and a coparcener of the same HUF in his individual capacity in respect of the family property brought into the partnership. The ITO took the view that the credits, if any, in the name of the individual members in the books of the HUF having merged with the resources of the HUF it was really the HUF which has financed the firm and not the partners. Thus, the profits of the firm, according to the ITO, necessarily belonged to the HUF. The view taken by the ITO was confirmed by the AAC. The assessee, therefore, filed an appeal before the Tribunal.
3. Since on the footing that the assessee-HUF had not shown the income of the new business, a notice to show cause why penalty should not be levied for concealment of income was issued and as the minimum penalty livable under the Act exceeded Rs. 1,000, the ITO referred the matter to the IAC. The IAC in the penalty proceedings took the view that the assessee had failed to disclose the income which properly belonged to the HUF because the HUF had advanced funds to the firm from its own cash and consequently he levied a penalty of Rs. 28,825, holding that the Explanation to s. 271(1)(c) was attracted. Against the order of penalty a separate appeal was preferred and both the appeals were disposed of by the Tribunal by a common order. With regard to the merits of the contention that the income which was being brought to tax in the reassessment proceedings did not belong to the HUF, the Tribunal recorded a finding that there was no genuine partnership firm at all and that the HUF was the financier of the new business and not the partners, and observed thus : 'having regard to the facts and circumstances of the case, we hold that the funds for the new business came from the HUF and that there was no genuine partnership and, therefore, the income that was derived from cotton and oil extraction by an alleged firm in fact belonged to the HUF and not to the coparceners in their individual capacities'. The additions made by the ITO and the AAC were, therefore, upheld.
4. Dealing with the appeal against the order of penalty, the Tribunal found that since the income in fact belonged to the HUF and not to the coparceners in their individual capacities, there was a failure to disclose the income from the cotton and oil extraction business in the books of account of the HUF and that the penalty was rightly attracted. Arising out of this common order in both the appeals, the following two questions have been referred at the instance of the assessee to this court under s. 256(1) of the I.T. Act :
'1. Whether, on the facts and in the circumstances of the case, the income from oil extraction and cotton business could be included in the hands of the HUF ?
2. Whether, on the facts and in the circumstances of the case, penalty for concealment of income was exigible ?'
5. Shri Thakar on behalf of the assessee has, with reference to the first question, argued that the conclusion drawn by the authorities that the income from oil extraction and cotton business belonged to the HUF is mainly based on the finding that it was the HUF which had financed the business. The learned counsel wanted to contend that it was not necessary that the partners who wanted to form a partnership must necessarily reduce the terms of the partnership to writing and that it was permissible for the two coparceners, Purushottam and Shridhar, to do separate business by forming a partnership independent of the HUF. A reading of the order of the Tribunal would show that the Tribunal has founds as a fact that the partnership was not a genuine partnership firm at all. That finding has to be accepted for the purpose of the present reference.
6. Once we accept that finding, that the two partners did not form a partnership, and admittedly the amounts for the purposes of the new business came from the joint family funds, the business and necessarily the income therefrom, would belong to the HUF. It is not in dispute that even according to the assessee certain amounts were first credited by the two brothers in the accounts books of the HUF and the amount required for the new business was advanced out of these amounts after they had withdrawn a part of the funds of the HUF. All the authorities have found in fact that the business was financed by withdrawing cash from the account of the HUF. Now, once the story of the alleged partnership is negatived and the money for the business is accepted as having been made available by the HUF, it is difficult to see what other inference is reasonably possible except that the business which is carried on by the two brothers in the name of the alleged partnership firm belongs to the HUF. The fact that the two brothers have been able to secure registration from the S.T. authorities does not necessarily conclude the matter with regard to the alleged partnership and it was open to the I.T. authorities to go into the question as the whether the story of a partnership firm put up by the two brothers had any substance in it. On the facts found, therefore, it is clear that the income from the business of oil extraction and cotton could be included only in the hands of the HUF.
7. Coming to the second question which turns on the legality of the order of penalty, the learned counsel has vehemently contended that on facts there was no concealment of income at all. The argument is that the returns of the two brothers which was submitted to the same ITO clearly included the income which they claimed to have derived from their share of the income of the alleged partnership. Thus, according to the learned counsel, it was fully disclosed by the two brothers as to what they had earned by way of income from the new business of cotton and oil extraction. Thus, according to the learned counsel, there was question of any concealment. In our view, this contention is not justified. The proceedings for penalty are being taken against the assessee-HUF. Admittedly, the assessee-HUF had not disclosed the income from the new business in its return. The conduct of the assessee shown that the income which properly belonged to the HUF was intended to the passed off as income of the two coparceners who claimed that they had formed themselves into a partnership firm. On the finding that the partnership was not genuine at all, the fact that the income from the new business was not disclosed as income of the HUF but was intended to be passed off as income of the partners of a bogus firm or a firm which was not existing, was clearly, in our view, a device to evade the tax which was otherwise payable by the HUF. The whole conduct of the two brothers who constituted the HUF along with their mother was intended to prevent the income from the new business from being taxed in the hands of the HUF. If this was done in a manner permissible in law, the charge of concealment could not have been made against the assessee. But when a bogus partnership firm is being put up, it clearly shows that this was done with the object of avoiding the payment of income-tax which the assessee was otherwise liable to pay. The inference of concealment could clearly haves been drawn from the facts of the present case, which, in our view, the Tribunal and the IAC have also correctly drawn.
8. At one stage, it was argued by the learned counsel that later on the two brothers along with two other persons have formed themselves in to a partnership and not only that, the partnership has also been registered with the department and, therefore, the finding that there was no partnership at all could not form the basis of an order of penalty. In the proceedings for the assessment year in question we are really not concerned with the fact that a genuine partnership has been formed later on after two other persons have been taken as partners. We are concerned with the state of the circumstances in the relevant assessment year, and the fact of subsequent registration of the partnership by the department cannot do away with the element of concealment which is inherent in the nature of the affairs sought to be presented in that assessment year.
9. In the view which we have taken, both the questions will be answered against the assessee. Accordingly, question No. 1 is answered in the affirmative and against the assessee and question No. 2 in the affirmative and against the assessee. The assessee to pay the costs of this reference.