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income-tax Officer Vs. Gwalior Textiles. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberI. T. APPEAL NOS. 1505 TO 1509 (ALL.) OF 1982 [ASSESSMENT YEARS 1973-74 TO 1977-78]
Reported in[1986]17ITD735(NULL)
Appellantincome-tax Officer
RespondentGwalior Textiles.
Excerpt:
.....registration of the firm had been satisfied in the present case. the aac on the submissions of the assessee held that the show-cause notice dated 16-10-1980 issued by the ito was in the nature of an intimation to the assessee and, therefore, rectification made on 27-11-1980 through the supplementary deed was well within time. this apart, section 186 can be called in aid if only the income-tax officer is satisfied that there was, during the previous year, no genuine firm, as opposed to a sham or bogus firm in existence as registered; hence, the order cancelling the registration could be sustained even under section 186(1). the court held that the order of the ito cancelling registration was sustainable both under section 154 as well as under section 186. 12. we have given our careful..........an afterthought and could not be acted upon. he also rejected the assessees claim that it was a genuine firm, as, according to him, the firm after having violated section 30 could not be accepted as a genuine firm. he, therefore, acting under section 186(1) of the 1961 act cancelled the registration already granted for the assessment year 1973-74. by similar orders, he also withdrew the renewal of registration granted for all the subsequent years.6. the assessee appealed to the aac. the aac accepted the assessees submissions that the non-mention of the share in the losses to be suffered by the adult partners was a mere typographical or technical mistake, which could not lead to the cancellation of the withdrawal of registration, which had already been granted, after careful.....
Judgment:
ORDER

Per Shri Prakash Narain, Accountant member - The common contention in all these appeals is that the AAC had erred in cancelling the orders of the ITO cancelling the registration of the firm earlier granted to it.

2. The assessee, which is a firm, is constituted under a partnership deed dated 19-1-1973. It consists of six partners, namely, Haji Jalaluddin, Ziauddin, Salahuddin, Alauddin, Mohd. Ansari and Km. Fatima Khatoon. Besides tow minors, namely, Abu Bakar and Imtiaz Ahmad had been admitted with the mutual consent of the partners to the benefits of the partnership under section 30 of the Indian Partnership Act, 1932. Clause (3) of this partnership deed is relevant which is reproduced below :

'That the partners shall share the profits and losses arising out of the partnership business in the ratios mentioned below :

1.

Haji Jalaluddin

0.15 paise in a rupee

2.

Ziauddin

0.10 paise in a rupee

3.

Salahuddin

0.15 paise in a rupee

4.

Alauddin

0.10 paise in a rupee

5.

Mohd. Ansari

0.15 paise in a rupee

6.

Km. Fatima Khatoon

0.15 paise in a rupee

7.

Abu Bakar (minor)

0.10 paise in a rupee, and

8.

Imtiaz Ahmad (minor)

0.10 paise in a rupee.'

3. The assessee-firm filed an application in Form No. 11/11A of the Income-tax Rules, 1962 for the assessment year 1973-74 on 27-3-1973. Its accounting year for the above assessment year was to end on 31-3-1973. The ITO found that application had been filed within the prescribed period of time and that all the legal formalities had also been complied with. He, accordingly, passed an order under section 185(1)(a) of the Income-tax Act, 1961 (the Act), granting registration to the assessee-firm. The order was passed by him on 17-7-1974. The renewal of registration was also allowed under section 184(7) of the Act for all the subsequent years now under appeal.

4. The ITO subsequently noticed, as would appear from clause (3) of the partnership deed quoted above, that even the minors had been required to share in the losses. Clause (30 stated the share of all the partners including the minors both in the profits and losses of the firm. He was, therefore, of the view that the firm was not entitled to the benefit of registration for the assessment year 1973-74 and consequently also for renewal of registration for the subsequent years. He, accordingly, issued a show cause notice to the assessee on 16-10-1980, requiring it to show cause as to why the registration already granted be not withdrawn. Apparently, he intended to proceed under section 186(1) of the Act. The assessee filed detailed reply on 27-11-1980 objecting to the proposed action by the ITO. It was submitted in this reply that all the requirements for grant of registration of the firm had been satisfied in the present case. It was also submitted that, in any case, omission of the shares of the adults in the losses in the partnership deed dated 19-1-1973 was a mere technical or typographical error, which did not justify withdrawal of registration already granted. In this connection, it was specifically pointed out that S/Shri A. Bakar and Imtiaz Ahmad had been admitted only to the benefits of partnership as was clear from the preamble of the deed and, therefore, they could in law, be not required to share in the losses of the firm. It was finally submitted that the mistake had already been rectified through a supplementary partnership deed dated 25-1-1973. A copy of this supplementary deed was also furnished to the ITO. According to this deed, the losses were to be shared by the adult partners in the following proportion :

1.

Haji Jalaluddin

0.25 paise in a rupee

2.

Ziauddin

0.10 paise in a rupee

3.

Salahuddin

0.15 paise in a rupee

4.

Alauddin

0.10 paise in a rupee

5.

Mohd. Ansari

0.25 paise in a rupee

6.

Km. Fatima

0.15 paise in a rupee

7.

Imtiaz Ahmad

8.

Abu Bakar

5. The ITO held that the partnership deed dated 19-1973 was invalid as it violated the provisions of section 30 of the Partnership Act. He also observed that the supplementary partnership deed dated 25-1-1973 was only an afterthought and could not be acted upon. He also rejected the assessees claim that it was a genuine firm, as, according to him, the firm after having violated section 30 could not be accepted as a genuine firm. He, therefore, acting under section 186(1) of the 1961 Act cancelled the registration already granted for the assessment year 1973-74. By similar orders, he also withdrew the renewal of registration granted for all the subsequent years.

6. The assessee appealed to the AAC. The AAC accepted the assessees submissions that the non-mention of the share in the losses to be suffered by the adult partners was a mere typographical or technical mistake, which could not lead to the cancellation of the withdrawal of registration, which had already been granted, after careful consideration by the ITO. He was also of the view that in any case, it was a defect in the partnership deed, which could be rectified under section 185(2) within a period of one month from the date of its intimation to the assessee. The AAC on the submissions of the assessee held that the show-cause notice dated 16-10-1980 issued by the ITO was in the nature of an intimation to the assessee and, therefore, rectification made on 27-11-1980 through the supplementary deed was well within time. Finally, he cancelled the orders of the ITO passed under section 186(1) and restored the original orders of the ITO granting registration and renewal of registration for different years.

7. The department is now in appeal before us. The learned departmental representative, in the first place, attacked the genuineness of the supplementary partnership deed dated 25-1-1973. He pointed out that the application for registration for the assessment year 1973-74 was filed before the ITO on 27-3-1973, which was accompanied only by the partnership deed 19-1-1973 and not by any supplementary partnership deed. His contention was that if in fact the supplementary partnership deed had been executed as claimed on 25-1-1973 itself, there was no reason why it should not have been filed on 27-3-1973 along with the application for registration for the above assessment year. He further submitted that there was no reason for not bringing this supplementary partnership deed to the notice of the ITO till 27-11-1980 if it was an existence. It was filed with him only when a show-cause notice was issued by the ITO on 16-10-1980 calling upon the assessee to show why registration already granted be not cancelled or withdrawn. He further submitted that once it was accepted that the supplementary partnership deed was not in existence during the assessment years under appeal, there was no question either holding that the shares of the adult partners in the losses, had been stated in the partnership deed or that there was only a mistake or defect in the deed, which had been rectified within the prescribed period of time in terms of section 185(2).

8. The learned counsel for the assessee, on the other hand, submitted that section 186(2) was not attracted to the case. He pointed out that admittedly this section applied only to a case where there was during the previous year no genuine firm in existence as registered. He argued that the finding of the ITO was that the partnership deed was invalid inasmuch as it did not specify the share of the adult partners in losses and not that the firm itself was not genuine. He argued that a genuine firm had come into existence amongst the adult partners, who had also with mutual consent admitted tow minors to the benefits of partnership and merely because there was an omission in the deed it was not sufficient to hold that it was not a genuine firm. In this connection, he referred to the decision of the Andhra Pradesh High Court in CIT v. Badjanapara Salt Co. 1974 Tax LR 19. In this case, minors were made full-fledged partners of the firm. It was in this connection that the Court had made the following observations :

'Section 186 of the Act no doubt provides for cancellation of registration; but this circumstance is certainly not sufficient to hold that the Income-tax Officer should act under this section alone and has no right to deny the benefit of section 184(7) of the Act when once a firm has been registered even if it should subsequently transpire that it was not entitled to be registered, not being a firm in the eye of law, as cancellation is only one of the several methods by means of which action could be taken against erring firms. This apart, section 186 can be called in aid if only the Income-tax Officer is satisfied that there was, during the previous year, no genuine firm, as opposed to a sham or bogus firm in existence as registered; and not when a firm was in fact in existence though it is not valid in law. The question whether a partnership is valid in law is distinct and separate from the question whether a genuine partnership exists in fact. The respondent firm, in the instant case, is a genuine not sham firm though it is not valid in law. It cannot, therefore, be said that the only course open to the Income-tax Officer was to have cancelled the registration of the firm acting under section 186 or that the Commissioner was not correct in directing him to reasses the firm treating it as an unregistered-firm by denying the benefits of section 184(7) to it.' (P. 24)

The contention of the learned counsel for the assessee, therefore, was that either because the minors were treated a full-fledged partners, as was the case before the Andhra Pradesh High Court or they were made liable to losses was was the case before us, it could not be held that the firm was not genuine or that it was sham or bogus firm. He contended that if it was a genuine firm, section 186(1) could not be applied even if registration may not have been correctly granted by the ITO because of some technical infirmities.

9. The counsel for the assessee next referred to a decision of Allahabad High Court in the case of Sheonath Prasad Motilal v. ITO : [1963]47ITR493(All) . It was held in this case that the mere fact that the instrument of partnership may not have existed during the accounting period relevant to the assessment year for which the registration is granted is not a ground for holding that no genuine firm was in existence and, therefore, rule 6 B of the Income-tax Rules, 1922 could not be applied for cancellation of registration. The above rule corresponds to section 186(1).

10. On behalf of the department, among others, reference was made to a decision of the Gauhati High Court in Mahabir Prasad Kishanlal & Co. v. CIT as also to the decision of the Andhra Pradesh High Court itself in CIT v. Sri Ramakrishna Motor Transport : [1983]144ITR797(AP) . The first case was of a partnership firm, in which some minors were also admitted. The partnership deed provided that each partner would have equal share in the partnership business and the profits and losses of the firm would be divided equally between the partners. Registration and renewal of registration were granted. Subsequently, the ITO cancelled the registration under section 186(1). It was held that the partnership deed had sought to make the minors full partners. The agreement of partnership was, therefore, contrary to the relevant provisions of the Indian Contract Act and Indian Partnership Act and was invalid. It was further held that the ITO had jurisdiction to cancel the registration of firm under section 186(1). The Court also observed as under :

'.... To come to a decision whether there is or is not a genuine firm in existence the Income-tax Officer is required to consider the validity of the deed of partnership. If such a deed of partnership is invalid in law offending any of the provisions of the Indian Contract Act or the Indian Partnership Act, 1932, the Income-tax Officer may legally hold that the registration was obtained without there being a firm in existence and such registration is liable to be cancelled in exercise of powers under rule 6B.' (P. 471)

11. In the second case a minor represented by his mother was admitted as a full-fledged partner in a firm and was made liable for losses. The ITO granted registration following the earlier decision of Madras High Court in Jakka Devayya & Sons v. CIT : [1952]22ITR264(Mad) . This decision was subsequently overruled by the Supreme Court in CIT v. Dwarkadas Khetan & Co. : [1961]41ITR528(SC) . In view of the decision of the supreme Court, the ITO initiated proceedings under section 154 of the Act and cancelled the registration. It was held that since the minor had been admitted as a full-fledged partner, the grant of registration to the firm was illegal. Hence, the order cancelling the registration could be sustained even under section 186(1). The Court held that the order of the ITO cancelling registration was sustainable both under section 154 as well as under section 186.

12. We have given our careful thought to the entire matter. We agree with the submissions of the learned departmental representative that the genuineness of the supplementary deed of partnership dated 25-1-1973 is open to grave doubt. If this deed had, in fact, been executed and come into existence on 25-1-1973, there was no reason why it should not have been filed along with the application for registration for the assessment year 1973-74 on 27-3-1973, or at least along with the renewal of registration applications for subsequent years and the assessee would not have waited to file it before the ITO till 27-11-1980 after the receipt of show-cause notice from the ITO on 16-10-1980. It becomes clear that the assessee became conscious only after the receipt of the above show-cause notice and somehow or other managed to draft a supplementary deed with back date and filed it before the ITO on 27-11-1980. After we have held that the supplementary partnership deed was not a genuine document till 27-11-1980, it is idle to think that it could remove any defect, if at all there was one, in the partnership deed dated 19-1-1973 during the previous years relevant for the assessment years 1973-74 to 1977-78. That will completely demolish the arguments accepted by the AAC in support of the assessees case. We also agree with the submission of the learned departmental representative that section 186(1) is applicable to the case. It is no doubt correct that there are certain observations as quoted above in the judgment of the Andhra Pradesh High Court in the case of Badjanapara Salt Co. (supra) which suggest that there is some difference between the validity of a partnership deed and the genuineness of the partnership. However, the subsequent decision of the same High Court in Sri Ramakrishna Motor Transports case (supra) has clarified the issue fully. It has laid down that in the circumstances, an order cancelling registration could also be sustained under section 186(1). This was also the view taken by the Gauhati High Court in the case of Mahabir Prasad Kishanlal & Co. (supra), which was followed by the Andhra Pradesh High Court in the above case. Both these cases are almost directly on the point and cover the issue before us.

13. The Supreme Court in the case of Mandyala Govindu & Co. v. CIT : [1976]102ITR1(SC) has held that the ITO must be in a position to ascertain the shares of the partners in the losses even if section 26A of the Indian Income-tax Act, 1922 did not require the shares in the losses to be satisfied in the instrument of partnership. In a case, where the minds are admitted to the partnership and there is no clause in the deed of partnership specifying the proportion in which the adult partners are to share the losses, the firm would not be entitled to registration. It is this principle which governs the present case. We, therefore, hold that the AAC had gone wrong in law in directing the ITO to allow the benefit of registration to the assessee-firm for the assessment year 1973-74 and the renewal of registration for the other years.

14. At the time of hearing, it was suggested by the counsel for the assessee that the shares in losses of the adult partners had been specified in the application for registration submitted in Form No. 11. That application could not be placed before us by either side. However, that is entirely a different issue, which does not arise out of the facts placed before us. The assessee will of course be free to approach the ITO, if any such thing is found on facts and the ITO will deal with the matter in accordance with law.

15. In the result, all the appeals are allowed.


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