1. These appeals by the assessee relate to the assessment years 1974-75 and 1975-76. The only ground taken in the appeal is that the ITO and the AAC erred in holding that the assessee-firm is not entitled to registration as there is no genuine firm in existence.
2. An earlier order of the ITO refusing registration for the assessment year 1974-75 came up in appeal before this Tribunal. The order had been set aside by the AAC on the ground that after recording the statements of the partners, the ITO did not give any opportunity to the assessee before drawing an adverse inference that the partnership is not genuine. An appeal filed against this order by the department was dismissed by the Tribunal. The matter was, therefore, decided afresh by the ITO, after giving the assessee an opportunity to cross-examine the partners, whose statements were recorded. The ITO again came to the conclusion that the partnership is not genuine and this order has been confirmed by the AAC. Hence, the present appeals by the assessee.
Registration for the assessment year 1975-76 has been refused for the reasons set out in the order for the assessment year 1974-75.
3. The assessee-firm is carrying on the business of dealing in teak-wood. The main office is at Bulsar where the goods are kept. An office is being maintained at Bombay and it seems that the business is mostly carried on through dalals. The business of the firm is mostly carried on by Shri Mahesh D. Shah. There are five partners in the firm the first being Shri Mahesh D. Shah. The remaining partners are : Shri Jitendra D. Shah, Shri Jayendra D. Shah, Smt. Jasumati D. Shah, Smt.
Smita B. Shah. Shri Jitendra D. Shah aged 22 and Shri Jayendra D. Shah aged 20 are brothers of Shri Mahesh D. Shah. Smt. Jasumati D. Shah (wife of Shri Dalichand A. Shah) is the mother of Shri Mahesh D. Shah.
Smt. Smita D. Shah is the daughter-in-law of Smt. Jasumati D. Shah.
There is no dispute about the fact that all the other formalities of forming a partnership including the drawing up of instrument of partnership specifying the individual shares of the partners have been complied with. Registration has been refused only on the ground that the alleged arrangement between the partners is not genuine. The ITO came to this conclusion as, according to him the examination of the partners indicated that persons other than Shri Mahesh D. Shah knew practically nothing about the partnership business. The AAC came to the same conclusion. He held thus- Thus it is clear that a mere fact that the firm has complied with technical formalities does not entitle it to registration ipso facto. It is amply been brought out by the ITO that except for Mahesh D. Shah, the other partners are totally ignorant about the business activities of the firm and even about their capital in the firm as well as sources of the capital. It is surprising that the partners do not even know about the gifts which are stated to have been given to them and introduced as their capital in the firm. It is strange as to how the gift has been treated as complete even without there being formal acceptance of the same by the donees. It is further noticed that in the case of Smt. Smita D. Shah, she is not even aware that any of her ornaments had been sold which have been shown as such in her name. Thus from the above facts it is clear that the firm is not genuinely constituted and hence the ITO is fully justified in refusing registration to the firm for both the assessment years, i.e., 1974-75 and 1975-76.
4. In coming to the above conclusion, the ITO and the AAC relied upon the following circumstances which came out during the cross-examination of these partners. (They were originally examined by the ITO before the remand of the case by the AAC. Subsequently they were summoned again and the counsel for the assessee cross-examined them). Smt. Jasumati D.Shah is the wife of Shri Dalichand A. Shah. Shri Dalichand A. Shah is a partner in another firm known as Shah Brothers which is carrying on the business of cloth merchants, etc., in the same premises as the present firm. She had no knowledge about the details of the business. It seems she could not also mention the amounts realised by the sale of ornaments which, according to her was subsequently introduced as her capital in the firm. Similarly Shri Jitendra D. Shah, who was aged only 22, was not also able to mention the details of the business. He claimed to be attending the shop two or three times a day and remaining there for two or three hours. Although he stated that his capital came by transferring certain amounts from another account and also by a gift of Rs. 5,000 from his father, he could not give fuller details about the same. Shri Jayendra D. Shah, who was aged 20, was studying in the final year in an Engineering College at Andheri and was staying at the college hostel. He could not also give the details of the capital contribution and the particulars relating to the business. Smt. Smita D. Shah was 26 years old and has studied up to Inter Arts. She could not also give the details about the activities of the firm and the capital contribution.
5. At this stage, it will be useful to refer to the ruling relied upon by the learned counsel for the assessee. In CIT v. Gokaldas Hukumchand  11 ITR 462 (Bom.), the assessee and his minor son were partners in a firm. Subsequently a second firm was started in which the assessee was not a partner but his two minor sons were partners along with others. The firm was registered under Section 26A of the Indian Income-tax Act, 1922. But the income of the minor sons received from the second firm was treated by the department as the income of the assessee. The department relied upon some other circumstances to show that actually the minor sons were nominees of their father. It was held by the Bombay High Court that the facts relied upon by the department did not afford any evidence on which they could properly come to the conclusion either that the assessee was a partner in the second firm or that the minor sons of the assessee were mere nominees of their father.
In Krishna Flour Mills v. CIT  44 ITR 581 (SC) a person entered into a partnership with his wife and brother-in-law. There was evidence to show that the wife and the brother-in-law had contributed their own shares in the capital. It was not suggested that there were no good reasons for taking the wife and the brother-in-law as partners and the books of account were not shown to be false. The Tribunal took the view that the partnership consisting of the wife and the brother-in-law must be necessarily suspect and held that the firm was not genuine. It was held by the Supreme Court that on the materials on record the inference of the Tribunal was unreasonable and not justified either by partnership law or common human experience.
In United Patel Construction Co. v. CIT  59 ITR 424 (MP), it was held by the Madhya Pradesh High Court that a partnership may comprise some member known as a dormant or sleeping partner, who is not generally interested in the conduct of the business and who could not be expected to be aware of the details of the partnership business, but it cannot be reasonably inferred from his ignorance about the details that the partnership was not genuine and that the fact that one of the partners had not withdrawn his share of the profits and allowed them to accumulate is also no ground for inferring that the partnership was not genuine. The position has been summarised thus at pages 1016 and 1017 of Kanga and Palkhivala's Law and Practice of Income-tax, 7th edition, Vol. 1.
There may be no fraud or mala fides on the part of the taxpayers, yet even a simulate arrangement may justify a refusal to recognise the firm. But bare suspicion will not be sufficient to justify the inference of fact that a partnership is not genuine as the Supreme Court pointed out in Umacharan Shaw v. CIT  37 ITR 271. The mere fact that a former employee or a relative is taken up as a partner, or that he does not bring in any capital, or that a partner occupies a dominant position and is in control of the business, or that a sleeping partner is ignorant about the details of the partnership and has not withdrawn his share of profits, or that no notice of partnership is given to the constituents of the business or to the bank, or that the firm is not registered under the Partnership Act, or that no separate capital account is opened, or that the partners who are former members of the disrupted Hindu family continue to live and mess together- Murlidhar Kishangopal v. CIT  50 ITR 628-would not constitute evidence for a finding that the partnership is not genuine. If the partnership is genuine and actually exists in the terms specified in the deed, the fact that it was formed with a view to diminishing the incidence of taxation, or that there is a wrong recital in the partnership deed regarding the date of its execution or the reason for forming the partnership or the business carried on by it, or that all the businesses carried on are not mentioned in the deed, or that a partner may have brought the capital from his joint family or from another firm in which he is a partner is irrelevant and would not justify a refusal to register the firm.
6. The stand of the department seems to be that the partners are actually benamidars for Shri Mahesh D. Shah who is actually carrying on the business. This aspect is now covered by the Explanation to Section 185(1) which, among other things, provides that a firm shall not be 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, a benamidar of another partner to whom he does not stand in the relationship of spouse or minor child. To take advantage of the Explanation, the department must positively show that the capital of the remaining partners actually came from Shri Mahesh D. Shah and that the profits are also finding their way to his. There is absolutely no evidence to support any such inference.
7. It now remains to be considered whether the firm cannot be said to be genuine because the remaining partners are not actively taking part in the conduct of the business or that they are not very much conversant with financial details thereof. It appears to us that considering the close relationship between the parties, it is only natural that the conduct of the business would have been left entirely in the hands of Shri Mahesh D. Shah. Similarly, the partners would not have been so meticulous about the financial transactions as no strangers have been associated with the partnership. It will not, therefore, be proper to come to the conclusion that the firm is not genuine merely on the basis of the inadequate knowledge of the other partners about the working of the firm. It is settled law that a mere suspicion could not be sufficient to justify the inference of the fact that the partnership is not genuine. The position would have been different if there were reliable materials to show that the remaining partners were mere benamidars for Shri Mahesh D. Shah. As already pointed out there are no materials justifying such an inference. Thus, on a consideration of the evidence and circumstances, we find that the ITO was not justified in holding that the partnership is not genuine and in refusing registration to the same.