1. The ITO, with whom the AAC agreed, cancelled the registration of the assessee-firm in respect of five assessment years 1973-74 to 1977-78 (both inclusive) on the ground that the firm did no business activity for these assessment years in question, Hence, the assessee appeals.
2. In respect of the assessment year 1977-78 there is also an assessment appeal, which is only consequential to cancellation.
3. The assessee-registered firm, which was constituted in 1964, was doing business in manufacture and sale of steel articles like security equipments, office equipments, franking machines and other steel products. Registration had been duly granted. Shri L. Alagappan, whose mother and wife are partners in the firm, was for some years the general manager of the firm. There was a general insurance agency in his name. Under some agreement between him and the firm to the effect that he is only a nominee for the firm, the commission which was earned in that line of business was being returned by the firm as its income from 1969 onwards and assessed on that basis. The assessee from the assessment year 1973-74 onwards stopped its business in steel products.
The only income returned and assessed thereafter is the insurance commission. The ITO, therefore, realised that as the firm had stopped its business in steel products and has only commission income from general insurance, it is not carrying on any business because the insurance business by its very nature is personal to Alagappan and that the partners are, therefore, not carrying on any business activity. So he cancelled the registration.
4. The case of the ITO, as seen from the revised assessment order for the assessment year 1977-78, is that the agency is in the name of Alagappan and the business itself is canvassed by him and that, therefore, the entire income was earned by his personal efforts and that the income in question is assessable only in the hands of Alagappan in his individual capacity. So, as provided in Section 186(3) of the Income-tax Act, 1961 ('the Act'), he revised the assessment on the assessee as an unregistered firm because of the compulsion contained in that section to treat it as unregistered firm for the assessment years 1973-74 to 1977-78. However, he also completed for the assessment year 1977-78 the revised assessment as an unregistered firm as a protective measure, where he stated that the correct assessment should be on Alagappan in his individual capacity. So the case of the department is that the firm was not carrying on any business activity from 1973-74 onwards because it stopped its activity in business in steel products and is simply returning income earned by some others as its income. The AAC has made it clearer still by stating that, for these years in which commission income alone is returned, the business activity is not carried on by all the partners or any of the partners concerned acting for all and that, therefore, no business is carried on by the firm for these years within the meaning of the Partnership Act.
5. The income-tax authorities are clearly wrong in the view they held.Section 186 is inapplicable to the case. There is a genuine firm in existence as before. It has not been dissolved. Nor has it undergone any change in the constitution. So there is a genuine firm in existence as registered. So long as there is a genuine firm in existence as registered, it is not permissible to invoke Section 186. That much is self-evident from a reading of Section 186.
6. We also fail to see how it could be said that the income is earned by the personal efforts of Alagappan and that, therefore, it is the income of Alagappan and that as a consequence, the firm is not carrying on any business activity. The income-tax authorities are certainly wrong in thinking that for a firm to carry on business, partners must earn the income by the sweat of their brow or they must indulge hard physical labour or some sort of physical activity. There is an agreement entered into between Alagappan and the firm, the genuineness of which is not disputed before us. That agreement provides that whereas the firm desires to take up insurance agency and that whereas it is not possible for a partnership to take up agency in the name of the partnership and that, therefore, Alagappan is to take up a licence in his individual name as nominee and transact the business in his name but for the benefit of the firm and that Alagappan had agreed to it. It is by virtue of this agreement, the insurance income was assessed in earlier years as income of the firm. The ITO for purposes of cancellation had examined Alagappan who also stated that he did business only on behalf of the firm. So long as the position that Alagappan is acting only for the firm is not disputed (and it is not disputed that that agreement is false, concocted or not acted upon or that it is not in existence or revoked for these years), it cannot be said that the firm is not carrying on the business activity. Alagappan is, therefore, acting under the control and direction of the partnership. The work is done under the supervision of the firm. That supervision, control and direction exercised by the firm constitute its business activity. When it is admitted that Alagappan is only a nominee of that supervision, control and direction is inherent and implied in the case. Instances of such activities of supervision, control and direction need not be cited, quoted or proved. That all stands proved by proper and legitimate inference drawn from the facts and circumstances of the case. So we hold that the firm is carrying on business activity, when the insurance commission was paid by the insurance company.
7. The departmental representative pointed out that Alagappan has stated in his sworn statement that no fresh policies were canvassed by him after 1971 and that the renewal commissions for the policies taken earlier were, however, being continued to be received by the firm.
Therefore, the departmental representative pointed out that all these insurance commisions were only renewal commissions. So he argued that after 1971 there is absolutely no business activity even by Alagappan and that, therefore, it was only a simple automatic accrual of income and reaping of the benefits of the work done in the past. The departmental representative is sadly mistaken. Even renewal requires canvassing and persuasion. So even renewal requires some little efforts. Otherwise the parties may not renew, They are not bound to renew. Renewal and the like are all certain voluntary acts. Some efforts or persuasion is necessary to make the party renew the policies. So even in the renewal there is evidence of business activity. So it is quite evident that as there is a genuine firm in existence as registered, Section 186(1) cannot be invoked at all and even if cessation or suspension of business activities or not carrying on business activity is a ground for cancellation, it cannot be done in this case as there is clear evidence of business activity of the firm even for all these assessment years. Hence, all appeals are allowed.
The cancellation of registration for these assessment years is hereby cancelled. The revised assessment for the assessment year 1977-78 also will be suitably modified.