1. The Income-tax Appellate Tribunal, Indore, at the instance of the assessee, has made this reference under Section 256(1) of the I.T. Act, 1961, to answer the following question :
'Whether, on the facts and in the circumstances of the case, there was any material before the Tribunal for holding that no genuine firm had come into existence ?'
2. The facts giving rise to this reference as per the statement furnished by the Tribunal may be stated in brief thus : On the strength of a partnership deed executed on October 20, 1971 (annexure-E), between Smt. Darshandevi, w/o Shri Kailashchandra Agrawal, and Shri Rajendrakumar and Shri Ashok Kumar, sons of Shri Kailashchandra Agrawal, the assessee-firm, M/s. Mahavir Industrial Works, Indore, claimed registration of the firm under Section 185 of the I.T. Act, 1961, for the accounting years 1973-74 to 1976-77. The ITO examined the claim and found that Shri Kailashchandra, husband of Shrimati Darshandevi and father of the other two partners, who was given the general power of attorney dated October 25, 1971 (annexure-F), was the de facto proprietor of the assessee-firm and the assessee-firm was only a benami concern of Shri Kailashchandra. The ITO, therefore, held that the said firm was not genuine and was not entitled to the grant of registration for the accounting year 1973-74. The ITO, however, granted registration on a protective basis on the ground that Kailashchandra was not a partner in the firm. This order of the ITO was, however, cancelled by the Commissioner under Section 263 of the I.T. Act and he directed the ITO to pass a fresh order.
3. In pursuance to the directions of the Commissioner, the ITO examined the assessee's claim for registration. He examined Shri Kailashchandra and found that the three partners of the firm executed a general power of attorney on October 25, 1971, in favour of Kailashchandra and by virtue of the various clauses of the said general power of attorney, Kailashchandra was given absolute powers for the conduct of the business of the firm. The ITO, therefore, considering the statement of Kailashchandra as also the terms and conditions of the general power of attorney, came to the conclusion that in fact Kailashchandra was the proprietor of the business carried on in the name of M/s. Mahavir Industrial Works, Indore, and that no genuine partnershipfirm had been brought into existence as claimed by the assessee. He, therefore, refused to grant registration to the firm as claimed, took the status as a firm not entitled to registration and, at the same time, held that Kailashchandra was the sole proprietor of the business and subjected the entire income to tax in his personal assessments.
4. Against the findings of the ITO, the assessee went in appeal and before the AAC it was argued that the general power of attorney in favour of Kailashchandra was given to enable the manager to negotiate contracts with the Government and public sector undertakings. It was also pointed out that in the said power of attorney it was nowhere stated that the partners were divested of their own rights in the firm and that it was clear that Kailashchandra will not be in a position to tamper with the fundamental constitution of the firm and the partners' rights in its assets. The AAC accepted the contention of the assessee, cancelled the ITO's order under Section 185 of the I.T. Act and directed him to allow registration to the said firm.
5. Aggrieved by the order of the AAC, the Department filed an appeal before the Tribunal which after considering the contentions of the parties came to the conclusion that no genuine firm came into existence and the entire business was being run by Kailashchandra Agrawal as the sole proprietor of the firm. It is in these circumstances that this reference has been made to this court at the instance of the assessee.
6. The decision in this case will affect the decision in Misc. Civil Case No. 211 of 1983 (Kailashchandra Agrawal v. CIT) in which on the basis of the finding that Kailashchandra was the proprietor of the business carried on in the name of M/s. Mahavir Industrial Works, Indore, subjected the entire income to tax in his personal assessments.
7. Sub-section (1) of Section 184 of the I.T. Act. deals with registration of firms according to which an application for registration of a firm for the purposes of the Act may be made to the ITO on behalf of any firm if, (i) the partnership is evidenced by an instrument, and (ii) the individual shares of the partners are specified in that instrument. In the present case, admittedly, there is a written deed of partnership dated October 20, 1971, duly signed by the partners and the individual shares of the partners have also been specified therein according to which the individual share of Darshandevi is 50 per cent. and that of the other two partners, namely, her sons, is 25 per cent. each. Therefore, the necessary ingredients are satisfied in this case.
8. Section 185 of the said Act deals with the procedure on receipt of application of which Sub-section (1) provides that-
'(1) On receipt of an application for the registration of a firm, the Income-tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and-
(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year;
(b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm.
Explanation.--For the purposes of this section and Section 186, a firm shall not he regarded as a genuine firm if any partner of the firm was, in relation to the whole or any part of his share in the income or property of the firm, at any time during the previous year, a benamidar-
(a) of any other partner to whom the first-mentioned partner does not stand in the relationship of a spouse or minor child ; or
(b) of any person, not being a partner of the firm, and any of the other partners knew or had reason to believe that the first-mentioned partner was such benamidar and such knowledge or belief had not been communicated by such other partner to the Income-tax Officer in the prescribed manner, '
9. In the present case, the ITO as also the Income-tax Appellate Tribunal felt that because Kailashchandra has been given unlimited powers by the partners in the general power of attorney which they have executed, he is the de facto proprietor of the said partnership firm and, therefore, he is a benamidar. They also took this fact into consideration that previously Kailashchandra had been an employee of the said firm from 1956 to 1964 that in 1964 he became a partner with 40 per cent. share along with his wife, Darshandevi, and in this status he continued as a partner up to October 20, 1971, that after October 20, 1971, Kailashchandra chose to become manager of the concern after withdrawing himself from the partnership and allowed his sons to become partners. Thus, Kailashchandra withdrew himself from the front line of action and kept himself in the background so that he could plan and execute the business from behind and that by virtue of the general power of attorney, the entire business of the partnership firm was entrusted to Kailashchandra who was to decide everything including the fact from whom the purchases were to be made and to whom the sales were to be made. They also relied on the testimony of Kailashchandra wherein he has stated that his wife never directed him in the matter of sales and purchases and that he carried on all routine tasks and no complicated matter ever arose. On the basis of these facts, it was found that no genuine firm had been brought into existence.
10. Shri G.M. Chaphekar, learned counsel for the assessee, M/s Mahavir Industrial Works, Indore, contended that neither the ITO nor the Tribunal has given any finding that the amount invested in the said partnership for carrying on its business was not invested by the lady partner, namely, Darshandevi, nor is there any finding that profits or income derived from the business of the said partnership was used only by Kailashchandra as the manager of the said partnership firm. He also submitted that previously when he was a partner in the said firm in which the capital was invested by the other partner, Darshandevi, his wife, the partnership was treated and registered as a genuine one even though the actual business was carried on by Kailashchandra. He, therefore, submitted that, in the absence of any finding that the capital invested in the said partnership firm was that of Kailashchandra, the question of treating him as a benamidar did not arise because in the case of a benamidar there must be some evidence and material on record to indicate that in fact the investment made actually belongs to Kailashchandra in the name of his sons or wife who are partners in the present firm and, consequently, merely on the basis of the general power of attorney, it could not be assumed and concluded that, the said Kailashchaudra was the sole proprietor of the said partnership firm and that, therefore, the partnership firm is not a genuine one.
11. The learned counsel for the assessee also submitted that under the provisions of the Contract Act as also under the provisions of the Partnership Act, it is not necessary that each partner should physically carry on the business of the firm and that they have the authority to appoint a manager who can look after the affairs of the firm but that docs not mean that by appointing such a manager they lose their control over the affairs of the partnership business, because if they have the right and authority to give a general power of attorney to their manager, they have also the right and authority to revoke and cancel the said power of attorney and, therefore, by no stretch of imagination, in the absence of any other material on record, it could be held that the said partnership firm was not a genuine firm.
12. The learned counsel for the assesses in support of his submission placed reliance on the decisions in CIT v. Sivakasi Match Exporting Co. : 53ITR204(SC) and CIT v. A. Abdul Rahim and Co. : 55ITR651(SC) , which are decisions of the Supreme Court prior to the amendment made in Section 185 of the I.T. Act by which an Explanation was added to that section on the basis of these two decisions. He, therefore, submitted that even on the basis of the Explanation added to this section, in the absence, of any material on record, there was no justification for holdingthat the said firm is not a genuine firm and in support of his submission he placed reliance on the decisions in United Patel Construction Co, v. CIT : 59ITR424(MP) , Nagaland Liquor Stores v. CIT and K.D. Kamath and Co. v. CIT  82 ITR 687, which fully support the case of the petitioner-assessee.
13. As against this, the learned counsel for the Revenue, Shri R. C. Mukati, relying on Kumar Financing Corporation v. CIT : 122ITR192(Cal) , and also relying on the wordings of the Explanation added to Section 185 of the I.T. Act, 1961, contended that as the general power of attorney has given unlimited and sweeping powers to the manager, Kailashchandra, as is clear from the terms and conditions thereof as also from the testimony of Kailashchandra, this material in itself was sufficient to come to the conclusion that the assessee-firm is not a genuine firm.
14. After hearing the learned counsel and after going through the case-law cited as also the necessary papers, we have reached the conclusion that the reference must be answered in favour of the assessee and against the Department. The deed of partnership suggests that the two male members are the working partners and the capital is invested by the lady partner in whose name the business was carried on till the assessment year 1972-73. It is also clear, as was argued, that the power of attorney was given to enable the manager to negotiate the contracts with the Government and public sector undertakings and that the terms and conditions of the power of attorney nowhere indicate that the partners are divested of their own rights in the said firm, but on the contrary Clause (6) of the said document makes it clear that Kailashchandra Agrawal will not be in a position to tamper with the fundamental constitution of the firm and the partners' rights in its asset. Thus there is no material on record on the basis of which it could be legitimately inferred that Kailashchandra was the de facto proprietor of the said partnership firm.
15. As a result of the aforesaid discussion, our answer to the questionreferred is that there was no material before the Tribunal for holding that no genuine firm had come into existence. The reference is answered accordingly with no order as to costs.