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Addl. Commissioner of Income-tax Vs. Mardan Khan Rafiq Ahmad Khan - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 284 of 1974
Judge
Reported in[1978]115ITR559(All)
ActsIncome Tax Act, 1961 - Sections 184 and 185
AppellantAddl. Commissioner of Income-tax
RespondentMardan Khan Rafiq Ahmad Khan
Appellant AdvocateR.S. Dhawan, Adv.
Respondent AdvocateAshok Gupta, Adv.
Excerpt:
- - it, however, appears that in the books of accounts as well as in the returns, the partners distributed the profits in the ratio of 8 annas each. the tribunal being satisfied that the following two questions of law arose out of the tribunal's order, referred the same to this court......of 8 annas each. the ito held that as the profits were not distributed in accordance with the shares mentioned in the partnership deed, the firm was not a genuine one. accordingly, he heldthat the assessee was not entitled to the benefits of registration as a firm. the assessee took the matter in appeal before the aac, the aac also found that the partnership was not entered into with the intention of giving effect to the correct state of affairs. according to his opinion, it was sham. on this view, the appeal filed by the assessee was dismissed. the assessee, thereafter, preferred a second appeal before the tribunal. the tribunal allowed the appeal, set aside the orders of the subordinate authorities and gave the benefit of registration to the assessee-firm. aggrieved by the.....
Judgment:

K.C. Agrawal, J.

1. This reference relates to the assessment years 1965-66 and 1966-67. The assessec, Messrs. Mardan Khan Rafiq Ahmad, is a partnership firm consisting of Mardan Khan and his son, Rafiq Abmad. The firm consisting of the aforesaid two persons started the business from January 1, 1963. Subsequently, an instrument of partnership was executed on June 25, 1963. The shares of the partners in the profits and losses were mentioned in the ratio of 10 annas and 6 annas. It, however, appears that in the books of accounts as well as in the returns, the partners distributed the profits in the ratio of 8 annas each. The ITO held that as the profits were not distributed in accordance with the shares mentioned in the partnership deed, the firm was not a genuine one. Accordingly, he heldthat the assessee was not entitled to the benefits of registration as a firm. The assessee took the matter in appeal before the AAC, The AAC also found that the partnership was not entered into with the intention of giving effect to the correct state of affairs. According to his opinion, it was sham. On this view, the appeal filed by the assessee was dismissed. The assessee, thereafter, preferred a second appeal before the Tribunal. The Tribunal allowed the appeal, set aside the orders of the subordinate authorities and gave the benefit of registration to the assessee-firm. Aggrieved by the aforesaid order of the Tribunal, the CIT filed an application under Sub-section (1) of Section 256 for referring the questions mentioned in the application to this court. The Tribunal being satisfied that the following two questions of law arose out of the Tribunal's order, referred the same to this court.

'1. Whether, during the previous years relevant to the assessment years 1965-66 and 1966-67, there was in existence a genuine firm with the constitution specified in the partnership deed dated June 25, 1963, in view of the division of profits between the partners in the shares different from those specified in the instrument of partnership ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in allowing registration to the firm for the assessment year 1965-66 and continuation of registration for the assessment year 1966-67 on the basis of the partnership deed dated June 25, 1963?'

2. A review of the facts would show that the sole controversy in the present case was whether the assessee-firm could be considered to be a fake one simply because the shares of the partners in the profits were not distributed in accordance with the deed dated June 25, 1963, As stated above, the shares of partners in the profits and losses were mentioned as 10 annas of Mardan Khan and 6 annas that of Rafiq Khan, but in the account books the assessee instead of dividing the profits in accordance with the shares, mentioned above, divided them half and half. Although in the opinion of the ITO and the AAC the partnership deed was merely a device arrived at for the purposes of evading the income-tax, the Tribunal did not agree with this finding. The Tribunal found that the error in dividing the profits was occasioned due to the mistake committed by the munim of the firm. According to its view, the partnership, in fact, operated joint business but mistakably divided profits in equal shares instead of shares mentioned in the deed. The question whether the partnership was not entered into with the intention of giving effect to the correct state of affairs was one of fact. Since, in the opinion of the Tribunal, the omission to divide the profits in accordance with the shares defined in the partnership deed was only a mistake, it is not possible for us to say that the view taken by theTribunal that the firm was a genuine one was erroneous or incorrect. In the present case, the profits were, of course, divided but error was committed as to the share of each partner. In our view, therefore, the Tribunal was justified in allowing the registration to the firm for the first year and continuing its benefit for the rest of the years in question.

3. Consequently, we answer both the questions in the affirmative, in favour of the assessee and against the department. The assessee will be entitled to costs which are assessed at Rs. 200.


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